Members Prosper as the Net Prospers

The distinguishing characteristic of networks is that they contain no clear center and no clear outside boundaries. Within a network everything is potentially equidistant from everything else. Therefore the first thing the network economy reforms is our identity. The vital distinction between the self (us) and the nonself (them)–once exemplified by the fierce loyalty of the organization man in the industrial era–becomes less meaningful in a network economy. The only “inside” now is whether you are on the network or off.



Individual allegiance moves away from firms…

…and toward networks and network platforms.

Are you Windows or are you Mac?

This shift to network loyalty makes the potential of any network we might want to join a key issue. Is the network waxing or waning? Is the upside potential meager or tremendous? Is the network open or closed?

When given the choice between closed or open systems, consumers show a fierce enthusiasm for open architectures. They choose the open again and again because an open system has more potential upside than a closed one. There are more sources from which to recruit members and more nodes with which to intersect.

Identifying the preferred network to do business in is now a major chore for firms. Because more and more of a firm’s future lies in its networks, firms must evaluate a network’s relative open- and closedness, its circulation, its ability to adapt. Consultant John Hagel says, “A web limits risk. It allows companies to make irreversible investments in the face of technological uncertainty. Companies in a web enjoy expanding sourcing and distribution options, while their fixed investment and skill requirements fall.”



As the destiny of firm and web intertwine…

…the health of the matrix becomes paramount.

Maximizing the value of the net itself soon becomes the number one strategy for a firm. For instance, game companies will devote as much energy to promoting the platform–the tangle of users, game developers, and hardware manufacturers–as they do to their games. For unless their web thrives, they die. This represents a momentous change–a complete shift in orientation. Formerly, employees of a firm focused their attention on two loci: the firm itself and the marketplace.

The prosperity of a firm is directly linked to the prosperity of its network. As the platform or standard it operates on flourishes, so does the firm.

Now there is a third horizon to consider: the network. The network consists of subcontractors, vendors and competitors, emerging standards for exchanges, the technical infrastructure of commerce, and the web of consumers and clients.

Commerce networks can be thought of as ecologies. Economist Brian Arthur states: “Players compete not by locking in a product on their own but by building webs–loose alliances of companies organized around a mini-ecology–that amplify positive feedbacks to the base technology.”

During certain phases of growth, feeding the network is as important as feeding the firm. Some firms that already have large market shares (such as Intel, which owns 80% of the PC processor market) channel money, through minority investments, to younger firms whose success will strengthen the market for their products, directly or indirectly. They feed the web because it is good business.



In the network economy a firm’s primary focus…

…shifts from maximizing the firm’s value to maximizing the network’s value.

Not every network demands the same investment. The music CD standard and web of suppliers is well entrenched by now. The new DVD video standard is not. A publishing company issuing music on a CD has to devote less energy to making sure the CD platform flourishes than does a movie company issuing their film on a DVD. The film company must devote substantial resources to ensuring the spread and survival of this emerging platform. They’ll work with the hardware manufacturers, maybe share costs of advertising by seeding the platform logo in their own ads, send reps to technical committees, and cooperate with other film studios in getting the new format accepted. The music company doesn’t need to make as heavy an investment with CDs. But they do need to make investments into new networks if they try to deliver music online–because online delivery is still in its embryonic phase.

Every network technology follows a natural life cycle, roughly broken into three stages:

    * Prestandard
    * Fluid
    * Embedded

A firm’s strategy will depend on what phase a network is in.



The prestandard phase…

…is the most exciting. This period is marked by tremendous innovation, high hopes, and grand ambition. “Aha!” ideas flow readily. Since there are no experts, everyone can compete, and it seems as if everyone does. Easy entry into the field draws myriad players. For instance, when telephone networks began, there were few standards and many contenders. In 1899, there were 2,000 local telephone firms in the American telephone network, many of them running with their own standards of transmission. In a similar vein, in the 1890s, electricity came in a variety of voltages and frequencies. Each local power plant chose one of many competing standards for electrical power. Transportation networks, ditto. As late in the railroad era as 1880, thousands of railway companies did not share a universal gauge.

Two examples of networks in the prestandard stage today are online video and e-money. You have the choice of many competing protocols with equal prospects. With both domains, the uncertainty level is high, but the consequences of being wrong are minimal. Little is locked in, so it’s easy to change.



Networks in the fluid phase…

…have a different dynamic. The plethora of choices in the prestandard phase gradually reduces to two or three. Allegiances are mobile, and drift over time. During this period, networks demand the strongest commitment to their survival. Participants have to feed the web of their choice first, and the narrowing of choices allows substantial investment to spur rapid growth. The effects of plentitude and increasing returns kick in–more breeds more. Feeding the web on any of several standards still produces gains for all participants. Yet it is inevitable that only one standard will ultimately prevail while the other ones fail. The uncertainty level is nearly as high as during the prestandard phase, but the risks for being wrong are greater. Anyone who remembers the demise of 8-track audiotapes will appreciate the perils of this painful stage. Today such networks as digital photographs and desktop operating systems are in this fluid phase: Several well-established standards vie for ultimate dominance. Choose wisely!



The final stage in the life cycle of networks…

…is the embedded phase, where one standard is so widely accepted that it becomes embedded in the fabric of the technology and is thereafter nearly impossible to dislodge–at least as long as the network exists. Regular 110-volt AC power is well embedded at this point (although, as the power grid becomes global, there could be some surprises). ASCII text is likewise deeply embedded–at least for phonetic languages. Some of the conventions of voice dial tone are so ubiquitous worldwide as to be permanent.

In any phase of innovation–prestandard, fluid, or embedded–standards are valuable because they hasten innovation. Agreements are constraints on uncertainty. The constraints of a standard solidify one pathway out of many, allowing further innovation and evolution to accelerate along that stable route. So central is the need to cultivate certainty that organizations must make the common standard their first allegiance. As standards are established, growth takes off.



For maximum prosperity…

…feed the web first.

Arriving at standards is often easier said than done. Standard-making is a torturous, bickering process every time. And the end result is universally condemned–since it is the child of compromise. But for a standard to be effective, its adoption must be voluntary. There must be room to dissent by pursuing alternative standards at any time.

Standards play an increasingly vital role in the new economy. In the industrial age, relatively few products demanded standards. You didn’t need a consensual network to make a chair and table. If you obeyed some basic ergonomic conventions–make table height 30 inches–you were on your way. Those industrial products that operated in networks–such as the electrical or transportation networks–demanded sophisticated standard-making. Anything plugged into the electrical grid had to be standard. Automobiles manufactured by separate factories shared standards on such things as axle width, fuel mixtures, placement of turn signals, not to mention the many standards of road construction and signage.

All information and communication products and services demand extensive consensus. Participants at both ends of any conversation have to understand each other’s language. Multiply one conversation by a billion, factor in a thousand different media choices, and then start to count three-way, four-way, n-way conversations, and the amount of consensus-setting skyrockets.



In the network economy, ever-less energy…

…is needed to complete a single transaction, but ever-more effort is needed to agree on what pattern the transaction should follow.

Thus “feeding the web first” increases in necessity. Businesses can expect to devote great intellectual capital on formulating, negotiating, deciding, forecasting, and adhering to emerging standards. The question “Which platform do we back?” will not be confined to PCs. It will be asked in regard to calendars, cars, accounting principles, and even currencies.



As more of the economy migrates to intangibles…

…more of the economy will require standards.

But consumers will groan under the load of decisions. There is a yin-yang tradeoff in the new economy. The yin, or positive side, is that consumers keep most of the gains in productivity that are earned by technology. Competition is so severe, and transactions so “friction-free,” that most of each cycle’s betterment goes not to corporate profits but to consumers in the form of cheaper prices and higher quality.

The yang, or downside, is that consumers have a never-ending onslaught of decisions to make about what to buy, what standard to join, when to upgrade or switch, and whether backward compatibility is more important than superior performance. The fatigue of sorting out options and allegiances, or recovering from them, is underappreciated at the moment, but will mount. The joy of the new economy is that the next version is almost free; the bane is that no one wants the hassle of upgrading to it, even if you pay them to do it.

The fatigue will only worsen. The net is a possibility factory, churning out novel opportunities by the screenful. Unharnessed, this explosion can drown the unprepared. Standardizing choices helps tame the debilitating abundance of competing possibilities. This is why the most popular sites on the web today are meta-sites that sort the abundance and point you to the best.

Since the network economy is so new, we as a society have paid little attention to how standards are created and how they grow. But we should notice, because once implemented, a successful standard tends to remain forever. And standards themselves shape behavior.


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-- KK

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