2: INCREASING RETURNS

Mono-sellers are actually desirable...

...in a network economy. Because of increasing returns and n² value, a single large pool is superior to many smaller pools. The network economy will breed mono-sellers with great fertility. What is intolerable in a network economy is "monovation"--depending upon a single source of innovation. The danger of monopolists in the network economy is not that they can raise prices but they can become monovationists. But there are ways to encourage "polyvation"--multiple sources of innovation--in a world of monopolists: by creating open systems, by moving key intellectual properties into the public domain, by releasing source code democratically. As we come to understand the importance of increasing returns and the other new rules of the network economy, we can expect shifts in our understanding of the role of market winners.

Industrial monopolies exploited simple economies of scale for their own benefit. Network effects are not about economies of scale, they are about value that is created above and beyond a single organization--by a larger network--and then returned to the parts, often unevenly. Because some portion of the value of a network firm so obviously comes from external sources, allegiance is often granted to external sources.

We see this in the way network effects govern the growth of Silicon Valley. Silicon Valley's success is external to any particular company's success, and so loyalty is external, too. As AnnaLee Saxenian, author of Regional Advantage, notes, Silicon Valley has in effect become one large, distributed company. People job-hop so frequently that folks "joke that you can change jobs without changing car pools. Some say they wake up thinking they work for Silicon Valley. Their loyalty is more to advancing technology or to the region than it is to any individual firm."

This trend seems likely to extend further. We are headed into an era when both workers and consumers will feel more loyalty to a network than to any ordinary firm. The great innovation of Silicon Valley is not the wowie-zowie hardware and software it has invented. Silicon Valley's greatest "product" is the social organization of its companies and, most important, the networked architecture of the region itself--the tangled web of former jobs, intimate colleagues, information leakage from one firm to the next, rapid company life cycles, and agile email culture. This social web, suffused into the warm hardware of jelly bean chips and copper neurons, creates a true network economy.