STRATEGIES

Move technology to invisibility.

As technology becomes ubiquitous it also becomes invisible. The more chips proliferate, the less we will notice them. The more networking succeeds, the less we'll be aware of it.

In the early 1900s, at the heroic stage of the industrial economy, motors were changing the world. Big, heavy motors ran factories and trains and the gears of automation. If big motors changed work, they were sure to change the home, too. So the 1918 edition of the Sears, Roebuck catalog featured the Home Motor--a five-pound electrical beast that would "lighten the burden of the home." This single Home Motor would supply all the power needs of a modern family. Also for sale were plug-ins that attached to the central Home Motor: an egg beater device, a fan, a mixer, a grinder, a buffer. Any job that needed doing, the handy Home Motor could do. Marc Weiser, a scientist at Xerox, points out that the electric motor succeeded so well that it became invisible. Eighty years later nobody owns a Home Motor. We have instead dozens of micro-motors everywhere. They are so small, so embedded, and so common that we are unconscious of their presence. We would have a hard time just listing all the motors whirring in our homes today (fans, clocks, water pumps, video players, watches, etc.). We know the industrial revolution succeeded because we can no longer see its soldiers, the motors.

Computer technology is undergoing the same disappearance. If the information revolution succeeds, the standalone desktop computer will eventually vanish. Its chips, its lines of connection, even its visual interfaces will submerge into our environment until we are no longer conscious of their presence (except when they fail). As the network age matures, we'll know that chips and glass fibers have succeeded only when we forget them. Since the measure of a technology's success is how invisible it becomes, the best long-term strategy is to develop products and services that can be ignored.

If it is not animated, animate it.

Just as the technology of writing now covers almost everything we make (not just paper), so too the technologies of interaction will soon cover all that we make (not just computers). No artifact will escape the jelly bean chip; everything can be animated. Yet even before chips reach the penny price, objects can be integrated into a system as if they are animated. Imagine you had a million disposable chips. What would you do with them? It's a good bet that half of the value of those chips could be captured now, with existing technology, by creating a distributed swarmlike intelligence using such dumb power.

If it is not connected, connect it.

As a first step, every employee of an institution should have intimate, easy, continuous access to the institution's medium of choice--email, voicemail, radio, whatever. The benefits of communication often don't kick in until ubiquity is approached; aim for ubiquity. Every step that promotes cheap, rampant, and universal connection is a step in the right direction.

Distribute knowledge.

Use the minimal amount of data to keep all parts of a system aware of one another. If you operate a parts warehouse, for example, your system needs to be knowledgeable of each part's location every minute. That's done by barcoding everything. But it needs to go further. Those parts need to be aware of what the system knows. The location of parts in a warehouse should shift depending on how well they sell, what kind of backlog a vendor forecasts, how their substitutes are selling. The fastest-moving items (which will be a dynamic list) may want to be positioned for easier picking and shipping. The items move in response to the outside--if there is a system to spread the info.

Get machines to talk to one another directly. Information should flow laterally and not just into a center, but out and between as well. The question to ask is, "How much do our products/services know about our business?" How much current knowledge flows back into the edges? How well do we inform the perimeter, because the perimeter is the center of action.

If you are not in real time, you're dead.

Swarms need real-time communication. Living systems don't have the luxury of waiting overnight to process an incoming signal. If they had to sleep on it, they could die in their sleep. With few exceptions, nature reacts in real time. With few exceptions, business must increasingly react in real time. High transaction costs once prohibited the instantaneous completion of thousands of tiny transactions; they were piled up instead and processed in cost-effective batches. But no longer. Why should a phone company get paid only once a month when you use the phone every day? Instead it will eventually bill for every call as the call happens, in real time. The flow of crackers off grocery shelves will be known by the cracker factory in real time. The weather in California will be instantly felt in the assembly lines of Ohio. Of course, not all information should flow everywhere; only the meaningful should be transmitted. But in the network economy only signals in real time (or close to it) are truly meaningful. Examine the speed of knowledge in your system. How can it be brought closer to real time? If this requires the cooperation of subcontractors, distant partners, and far-flung customers, so much the better.

Count on more being different.

A handful of sand grains will never form an avalanche no matter how hard one tries to do it. Indeed one could study a single grain of sand for a hundred years and never conclude that sand can avalanche. To form avalanches you need millions of grains. In systems, more is different. A network with a million nodes acts significantly different from one with hundreds. The two networks are like separate species--a whale and an ant, or perhaps more accurately, a hive and an ant. Twenty million steel hammers swinging in unison is still 20 million steel hammers. But 20 million computers in a swarm is much, much more than 20 million individual computers.

Do what you can to make "more." In a network the chicken-and-egg problem can hinder growth at first--there's no audience because there is no content, and there is no content because there is no audience. Thus, the first efforts at connecting everything to everything sometimes yield thin fruit. At first, smart cards look no different from credit cards--just more inconvenient. But more is different; 20 million smart cards is a vastly different beast than 20 million credit cards.

It's the small things that change the most in value as they become "more." A tiny capsule that beeps and displays a number, multiplied by millions: the pager system. What if all the Gameboys or Playstations in the world could talk to one another? What if all the residential electric meters in a city were connected together into a large swarm? If all the outdoor thermometers were connected, we would have a picture of our climate a thousand times better than we have ever had before.

The ants have shown us that there is almost nothing so small in the world that it can't be made larger by embedding a bit of interaction in many copies of it, and then connecting them all together.

The game in the network economy will be to find the overlooked small and figure out the best way to have them embrace the swarm.

Create feedback loops.

Networks sprout connections and connections sprout feedback loops. There are two elementary kinds of loops: Self-negating loops such as thermostats and toilet bowl valves, which create feedback loops that regulate themselves, and self-reinforcing loops, which are loops that foster runaway growth such as increasing returns and network effects. Thousands of complicated loops are possible using combinations of these two forces. When internet providers first started up, most charged users steeper fees to log on via high-speed modem; the providers feared speedier modems would mean fewer hours of billable online time. The higher fees formed a feedback loop that subsidized the provider's purchase of better modems, but discouraged users from buying them. But one provider charged less for high speed. This maverick created a loop that rewarded users to buy high-speed modems; they got more per hour and so stayed longer. Although it initially had to sink much more capital into its own modem purchases, the maverick created a huge network of high-speed freaks who not only bought their own deluxe modems but had few alternative places to go at high speed. The maverick provider prospered. As a new economy business concept, understanding feedback is as important as return-on-investment.

Protect long incubations.

Because the network economy favors the nimble and quick, anything requiring patience and slowness is handicapped. Yet many projects, companies, and technologies grow best gradually, slowly accumulating complexity and richness. During their gestation period they will not be able to compete with the early birds, and later, because of the law of increasing returns, they may find it difficult to compete as well. Latecomers have to follow Drucker's Rule--they must be ten times better than what they hope to displace. Delayed participation often makes sense when the new offering can increase the ways to participate. A late entry into the digital camera field, for instance, which offered compatibility with cable TV as well as PCs, could make the wait worthwhile.

It's a hits game for everyone.

In the network economy the winner-take-all behavior of Hollywood hit movies will become the norm for most products--even bulky manufactured items. Oil wells are financed this way now; a few big gushers pay for the many dry wells. You try a whole bunch of ideas with no foreknowledge of which ones will work. Your only certainty is that each idea will either soar or flop, with little in between. A few high-scoring hits have to pay for all the many flops. This lotterylike economic model is an anathema to industrialists, but that's how network economies work. There is much to learn from long-term survivors in existing hits-oriented business (such as music and books). They know you need to keep trying lots of things and that you don't try to predict the hits, because you can't.

Two economists proved that hits--at least in show biz--were unpredictable. They plotted sales of first-run movies between May 1985 and January 1986 and discovered that "the only reliable predictor of a film's box office was its performance the previous week. Nothing else seemed to matter--not the genre of the film, not its cast, not its budget." The higher it was last week, the more likely it will be high this week--an increasing returns loop fed by word of mouth recommendations. The economists, Art De Vany and David Walls, claim these results mirror a heavy duty physics equation known as the Bose-Einstein distribution. The fact that the only variable that influenced the result was the result from the week before, means, they say, that "the film industry is a complex adaptive system poised between order and chaos." In other words, it follows the logic of the net: increasing returns and persistent disequilibrium.

Check for externalities.

The initial stages of exponential growth looks as flat as any new growth. How can you detect significance before momentum? By determining whether embryonic growth is due to network effects rather than to the firm's direct efforts. Do increasing returns, open systems, n² members, multiple gateways to multiple networks play a part? Products or companies or technologies that get slightly ahead--even when they are second best--by exploiting the net's effects are prime candidates for exponential growth.

Coordinate smaller webs.

The fastest way to amp up the worth of your own network is to bring smaller networks together with it so they can act as one larger network and gain the total n² value. The internet won this way. It was the network of networks, the stuff in between that glued highly diverse existing networks together. Can you take the auto parts supply network and coordinate it with the insurance adjusters network plus the garage repair network? Can you coordinate the intersection of hospital records with standard search engine technology? Do the networks of county property deed databases, U.S. patents, and small-town lawyers have anything useful in common? Three thousand members in one network are far more powerful than one thousand members in three networks.

Touch as many nets as you can.

Because the value of an action in the network economy multiplies exponentially by the number of networks that action flows through, you want to touch as many other networks as you can reach. This is plentitude. You want to maximize the number of relations flowing to and from you, or your service or product. Imagine your creation as being born inert, like a door nail off a factory conveyor belt. The job in the network economy is to link the nail to as many other systems as possible. You want to adapt it to the contractor system by making it a standard contractor size so that it fits into standard air-powered hammers. You want to give it a SKU designation so it can be handled by the retail sales network. It may want a bar code so it can be read by a laser-read checkout system. Eventually, you want it to incorporate a little bit of interacting silicon, so it can warn the door of breakage, and take part in the smart house network. For every additional system the nail is a part of, it gains in value. Best of all, the systems and all their members also gain in value from every nail that joins.

And that's just for a stick of iron. More complex objects and services are capable of permeating far more systems and networks, thus greatly boosting their own value and the plentiful value of all the systems they touch.

Maximize the opportunities of others.

In every aspect of your business (and personal life) try to allow others to build their success around your own success. If you run a hotel, what can you do to permit others--airlines, luggage retailers, tour guides--to be part of your network? Rather than viewing their dependency on your success as a form of parasitism, or worse, as a rip-off, understand this tight coupling as sustenance. You want to entice others to create services centered around the customer attention you have won, or to supply add-ons to your product, or even, if it is a new-fangled idea, to create legal imitations. This is a counter-intuitive stance at first, but it plays right into the logic of the net. A small piece of an expanding pie is the biggest piece of all. Software is especially primed to work this way. The programmers who created the hit game Doom deliberately made it easy to modify. The results: Hundreds of other gamers issued versions of Doom that were vastly better than the original, but that ran on the Doom system. Doom boomed and so did some of the derivatives. The software economy is full of such examples. Third-party templates for spreadsheets, word processors, and browsers make profits for both the third-party vendor and the host system. It takes only a bit of imagination to see how the leveraging of opportunities also works in domains outside of software. When confronted with a fork in the road, if all things are equal, go down the path that makes the opportunities of others plentiful.

Don't pamper commodities...

...let them flow. The cost of replicating anything will continue to go down. As it does, the primary cost will be developing the first copy, and then getting attention to it. No longer will it be necessary to coddle most products. Instead they should be liberated to flow everywhere. Let's take pharmaceuticals, especially genetically bio-engineered pharmaceuticals. The cost of little pills in the drug store can be hundreds of times greater than what they cost to produce in quantity, yet many drugs are priced expensively in order to recoup their astronomical development costs. Pharmaceutical companies treat and price their drugs as scarcities. One can expect, however, that in the future, as drug design becomes more networked, more data-driven, more computer mediated, and as drugs themselves become smarter, more adaptive, more animated, the competitive advantage will go to those companies that let "copies" of the drug flow in plentitude. For example, a highly evolved bioengineered headache relief drug may be sold for a few dollars on a "take as much as you need" basis. The company makes its profits when you pay it handsomely for tailoring that drug specifically for your DNA and your body. Once designed, you pay almost nothing for additional refills. Indeed there are already a few start-up biotech companies headed this way. The field is called parmacogenomics. They are heeding the call of plentitude.

Avoid proprietary systems.

Sooner or later closed systems have to open up, or die. If an online service requires dialing a special phone number to reach it, it's moribund. If it needs a special gizmo to read it, it's kaput. If it can't share what it knows with competing goods, it's a loser. Closed systems close off opportunities for others, making leverage points scarce. This is why the network economy--which is biased toward plenty--routes around closed systems. One could safely bet that America Online, WebTV, and Microsoft Network (MSN)--three somewhat closed systems--will eventually go entirely onto the open web, or disappear. The key issue in closed-versus-open isn't private versus public, or who owns a system; often private ownership can encourage innovation. The issue is whether it is easy or difficult for others to invent something that plays off your invention. The strategic question is simple: How easy is it for someone outside of the host company to contribute an advance to their system or product or service? Are the opportunities for participating in your own network scarce or plentiful?

Don't seek refuge in scarcity.

Every era is marked by the wealth of those who figure out what the new scarcity is. There will certainly be scarcities in the network economy. But far greater wealth will be made by exploiting the plentitude. To make sure you are not seeking refuge in scarcity, ask yourself this question: Will your creation thrive if it becomes ubiquitous? If its value depends on only a few using it, you should reconsider it in light of the new rules.

What can you give away?

This is the most powerful question in this book. You can approach this question in two ways: What is the closest you can come to making something free, without actually pricing it at zero? Or, in a true gesture of enlightened generosity, you can figure out how to part with something very valuable for no monetary return at all. If either strategy is pursued with intelligence, the result will be the same. The network will magnify the value of the gift. But giving something away is not usually easy. It must be the right gift, given in the proper context. To figure out what to give away, consider these questions:

• Is the freebie more than a silly premium, like the toy in a cereal box? There is no power in the gift unless it is crucial to your business.
• What virtuous circle will this freebie circulate in? Is it the loop you most need to amplify?
• In the long run, the unbounded support of a customer is more valuable than a fixed amount of their money. How will you eventually capture the support of customers if there is initially no flow of money?

Every organization harbors at least one creation--or potential creation--that can be liberated into "freedom." This is often an idea with problems, particularly with its price: Should it be $69.50 per minute or $6.50 per box? The answer sometimes is: It should be free. Even if the idea is never actualized, my experience is that the very act of contemplating the free will inevitably illuminate all kinds of beneficial attributes that were never visible before. "Free" has long been a taboo price point. Perhaps because it has been forbidden, many low-hanging fruit are waiting to be plucked by giving the free serious consideration.

Act as if your product or service is free.

Magazine publishers do this. The cover price on a magazine barely covers the cost of printing it, so publishers act as if they were giving it away (and some actually do). They make their money instead on advertising. Says pundit Esther Dyson, "The creator who immediately writes off the costs of developing content--as if it were valueless--is always going to win over the creator who can't figure out how to cover those costs." Memberships in serious discounters such as Cendant are also "as if free." Cendant "gives away" the merchandise very near the cost of manufacturing, as if the stuff were free. They make the bulk of their profits not from selling goods to its members--who get fantastic retail prices--but from selling $40 per year membership fees.

Invest in the first copy.

That is the only one that will hurt. The second copy and all thereafter will head toward the free, but the first will become increasingly more expensive and capital intensive. Gordon Moore, of Moore's Law fame, posed a second law: that the costs of inventing chips (that are halving in cost every 18 months) is doubling every three to four years. The up-front investment for research, design, and process invention for all complex endeavors are commanding a larger share of the budget, while the capital costs of subsequent copies diminishes.

Anticipate the cheap.

What would you do if your current offerings cost only one third what they cost today? They will someday soon, so create models that recognize this trend.