The Digital Revolution gets all the headlines
these days. But turning slowly beneaththe fast-forward turbulence, steadily driving
the gyrating cycles of cool
technogadgets and gotta-haves, is a much more
profound revolution - the Network
Economy.
This emerging new economy represents a tectonic
upheaval in our commonwealth, a social shift that reorders our lives more
than mere hardware or software ever can. It has its own distinct opportunities and its
own new rules. Those who play by the new
rules will prosper; those who ignore them
will not.
The advent of the new economy was first noticed
as far back as 1969, when Peter
Drucker perceived the arrival of knowledge
workers. The new economy is often
referred to as the Information Economy, because
of information's superior role
(rather than material resources or capital)
in creating wealth.
I prefer the term Network Economy, because
information isn't enough to explain
the discontinuities we see. We have been awash
in a steadily increasing tide of
information for the past century. Many successful
knowledge businesses have been built on information capital, but only recently
has a total reconfiguration of
information itself shifted the whole economy.
The grand irony of our times is that the era
of computers is over. All the major
consequences of stand-alone computers have
already taken place. Computers have
speeded up our lives a bit, and that's it.
In contrast, all the most promising technologies
making their debut now are chiefly
due to communication between computers - that
is, to connections rather than to
computations. And since communication is the
basis of culture, fiddling at this level
is indeed momentous.
And fiddle we do. The technology we first invented
to crunch spreadsheets has
been hijacked to connect our isolated selves
instead. Information's critical
rearrangement is the widespread, relentless
act of connecting everything to
everything else. We are now engaged in a grand
scheme to augment, amplify,
enhance, and extend the relationships and
communications between all beings and
all objects. That is why the Network Economy
is a big dealThe new rules governing this global restructuring
revolve around several axes.
First, wealth in this new regime flows directly from
innovation, not optimization; that is, wealth is not gained by perfecting the known,
but by imperfectly seizing the
unknown. Second, the ideal environment for
cultivating the unknown is to nurture
the supreme agility and nimbleness of networks.
Third, the domestication of the
unknown inevitably means abandoning the highly
successful known - undoing the
perfected. And last, in the thickening web
of the Network Economy, the cycle of
"find, nurture, destroy" happens faster and
more intensely than ever before.
The Network Economy is not the end of history.
Given the rate of change, this
economic arrangement may not endure more than
a generation or two. Once
networks have saturated every space in our
lives, an entirely new set of rules will
take hold. Take these principles, then, as
rules of thumb for the interim.
1. The Law of Connection
Embrace dumb power
The Network Economy is fed by the deep resonance
of two stellar bangs: the
collapsing microcosm of chips and the exploding
telecosm of connections. These
sudden shifts are tearing the old laws of
wealth apart and preparing territory for
the emerging economy.
As the size of silicon chips shrinks to the
microscopic, their costs shrink to the
microscopic as well. They become cheap and
tiny enough to slip into every - and
the key word here is every - object we make.
The notion that all doors in a building
should contain a computer chip seemed ludicrous
10 years ago, but now there is
hardly a hotel door without a blinking, beeping
chip. Soon, if National
Semiconductor gets its way, every FedEx package
will be stamped with a
disposable silicon flake that smartly tracks
the contents. If an ephemeral package
can have a chip, so can your chair, each book,
a new coat, a basketball. Thin slices
of plastic known as smart cards hold a throwaway
chip smart enough to be your
banker. Soon, all manufactured objects, from
tennis shoes to hammers to lamp
shades to cans of soup, will have embedded
in them a tiny sliver of thought. And
why not?
The world is populated by 200 million computers.
Andy Grove of Intel happily
estimates that we'll see 500 million of these
by 2002. Yet the number of
noncomputer chips now pulsating in the world
is 6 billion! They are already
embedded in your car and stereo and rice cooker.
Because they can be stamped
out fast and cheap, like candy gumdrops, these
chips are known in the industry as
"jelly beans." And we are in the dawn of a
jelly bean explosion: there'll be 10
billion grains of working silicon by 2005, a billion
not long after. Someday each of
them may be as smart as an ant, dissolved into
our habitat.
As we implant a billion specks of our thought
into everything we make, we are also
connecting them up. Stationary objects are
wired together. The nonstationary rest -
that is, most manufactured objects - will
be linked by infrared and radio, creating a
wireless web vastly larger than the wired
web. It is not necessary that each
connected object transmit much data. A tiny
chip plastered inside a water tank on
an Australian ranch transmits only the telegraphic
message of whether it is full or
not. A chip on the horn of each steer beams out
his pure location, nothing more:
"I'm here, I'm here." The chip in the gate at the
end of the road communicates only
when it was last opened: "Tuesday."
The glory of these connected crumbs is that
they don't need to be artificially
intelligent. Instead, they work on the dumb
power of a few bits linked together.
Dumb power is what you get when you network
dumb nodes into a smart web. It's
what our brains do with dumb neurons and what
the Internet did with dumb
personal computers. A PC is the conceptual
equivalent of a single neuron housed in
a plastic case. When linked by the telecosm
into a neural network, these dumb PC
nodes created that fabulous intelligence called
the World Wide Web. It works in
other domains: dumb parts, properly connected,
yield smart results.
A trillion dumb chips connected into a hive
mind is the hardware. The software that
runs through it is the Network Economy. A
planet of hyperlinked chips emits a
ceaseless flow of small messages, cascading
into the most nimble waves of
sensibility. Every farm moisture sensor shoots
up data, every weather satellite
beams down digitized images, every cash register
spits out bit streams, every
hospital monitor trickles out numbers, every
Web site tallies attention, every
vehicle transmits its location code; all of this is
sent swirling into the web. That
tide of signals is the net.
The net is not just humans typing at each other
on AOL, although that is part of it
too and will be as long as seducing the romantic
and flaming the idiotic are
enjoyable. Rather, the net is the collective
interaction spun off by a trillion objects
and living beings, linked together through
air and glass.
This is the net that begets the Network Economy.
According to MCI, the total
volume of voice traffic on global phone systems
will be superseded by the total
volume of data traffic in three years. We're
already on the way to an expanded
economy full of new participants: agents,
bots, objects, and machines, as well as
several billion more humans. We won't wait
for AI to make intelligent systems;
we'll do it with the dumb power of ubiquitous computing
and pervasive
connections.
The whole shebang won't happen tomorrow, but
the trajectory is clear. We are
connecting all to all. Every step we take
that banks on cheap, rampant, and
universal connection is a step in the right
direction. Furthermore, the surest way to
advance massive connectionism is to exploit
decentralized forces - to link the
distributed bottom. How do you make a better
bridge? Let the parts talk to each
other. How do you improve lettuce farming?
Let the soil speak to the farmer's
tractors. How do you make aircraft safe? Let
the airplanes communicate among
themselves and pick their own flight paths.
In the Network Economy, embrace dumb power.
2 The Law of Plentitude
More gives more
Curious things happen when you connect all
to all. Mathematicians have proven that
the sum of a network increases as the square
of the number of members. In other
words, as the number of nodes in a network
increases arithmetically, the value of
the network increases exponentially. Adding
a few more members can dramatically
increase the value for all members.
Consider the first modern fax machine that
rolled off the conveyor belt around
1965. Despite millions of dollars spent on
its R&D, it was worth nothing. Zero. The
second fax machine to roll off immediately
made the first one worth something.
There was someone to fax to. Because fax machines
are linked into a network,
each additional fax machine sliding down the
chute increases the value of all the
fax machines operating before it.
So strong is this network value that anyone
purchasing a fax machine becomes an
evangelist for the fax network. "Do you have
a fax?" fax owners ask you. "You
should get one." Why? Your purchase increases
the worth of their machine. And
once you join the network, you'll begin to
ask others, "Do you have a fax (or email, or Acrobat software, etc)?" Each additional
account you can persuade onto the
network substantially increases the value
of your account.
When you go to Office Depot to buy a fax machine,
you are not just buying a
US$200 box. You are purchasing for $200 the
entire network of all other fax
machines and the connections between them
- a value far greater than the cost of all the separate machines.
The fax effect suggests that the more plentiful things become, the more valuable theybecome. But this notion directly contradicts two of the most fundamental axioms weattribute to the industrial age.
First hoary axiom: Value came from scarcity;
diamonds, gold, oil, and college
degrees were precious because they were scarce.
Second hoary axiom: When things were made plentiful,
they became devalued;
carpets no longer indicated status when they
could be woven by the thousands on
machines.
The logic of the network flips these industrial
lessons upside down. In a Network
Economy, value is derived from plentitude,
just as a fax machine's value increases in
ubiquity. Power comes from abundance. Copies
(even physical copies) are cheap.
Therefore, let them proliferate.
Instead, what is valuable is the scattered
relationships - sparked by the copies - that
become tangled up in the network itself. And
the relationships rocket upward in
value as the parts increase in number even
slightly. Windows NT, fax machines,
TCP/IP, GIF images, RealAudio - all born deep
in the Network Economy - adhere
to this logic. But so do metric wrenches,
triple-A batteries, and other devices that
rely on universal standards; the more common
they are, the more it pays you to
stick to that standard.
In the future, cotton shirts, bottles of vitamins,
chain saws, and the rest of the
industrial objects in the world will also
obey the law of plentitude as the cost of
producing an additional copy of them falls
steeply, while the value of the network
that invents, manufactures, and distributes
them increases.
In the Network Economy, scarcity is overwhelmed
by shrinking marginal costs.
Where the expense of churning out another
copy becomes trivial (and this is
happening in more than software), the value
of standards and the network booms.
In the Network Economy, more gives more.
3 The Law of Exponential Value
Success is nonlinear
The chart of Microsoft's cornucopia of profits
is a revealing graph because it mirrors
several other plots of rising stars in the
Network Economy. During its first 10 years,
Microsoft's profits were negligible. Its profits
rose above the background noise only
around 1985. But once they began to rise,
they exploded.
Federal Express experienced a similar trajectory:
years of minuscule profit
increases, slowly ramping up to an invisible
threshold, and then surging skyward in a
blast sometime during the early 1980s.
The penetration of fax machines likewise follows
a tale of a 20-year overnight
success. Two decades of marginal success,
then, during the mid-1980s, the number
of fax machines quietly crosses the point
of no return - and the next thing you know,
they are irreversibly everywhere.
The archetypical illustration of a success
explosion in a Network Economy is the
Internet itself. As any old-time nethead will
be quick to lecture you, the Internet was
a lonely (but thrilling!) cultural backwater
for two decades before it hit the media
radar. A graph of the number of Internet hosts
worldwide, starting in the 1960s,
hardly creeps above the bottom line. Then,
around 1991, the global tally of hosts
suddenly mushrooms, exponentially arcing up
to take over the world.
Each of these curves (I owe Net Gain author
John Hagel credit for these four
examples) is a classic template of exponential
growth, compounding in a nonlinear
way. Biologists know about exponential growth;
such curves are almost the
definition of a biological system. That's
one reason the Network Economy is often
described more accurately in biological terms.
Indeed, if the Web feels like a
frontier, it's because for the first time
in history we are witnessing biological growth
in technological systems.
At the same time, each of the above examples
is a classic model of the Network
Economy. The compounded successes of Microsoft,
FedEx, fax machines, and the
Internet all hinge on the prime law of networks:
value explodes exponentially with
membership, while this value explosion sucks
in yet more members. The virtuous
circle inflates until all potential members
are joined.
The subtle point from these examples, however,
is that this explosion did not ignite
until approximately the late 1980s. Something
happened then. That something was
the dual big bangs of jelly bean chips and
collapsing telco charges. It became
feasible - that is, dirt cheap - to exchange
data almost anywhere, anytime. The net,
the grand net, began to nucleate. Network
power followed.
Now that we've entered the realm where virtuous
circles can unfurl overnight
successes in a biological way, a cautionary
tale is in order. One day, along the
beach, tiny red algae blooms into a vast red
tide. Then, a few weeks later, just when
the red mat seems indelible, it vanishes.
Lemmings boom and disappear. The same
biological forces that amplify populations
can mute them. The same forces that feed
on each other to amplify network presences
into powerful overnight standards can
also work in reverse to unravel them in a
blink. Small beginnings can lead to large
results, while large disturbances have only
small effects.
In the Network Economy, success is nonlinear.
4 The Law of Tipping Points
Significance precedes momentum
There is yet one more lesson to take from these
primeval cases of the Network
Economy. And here, another biological insight
will be handy. In retrospect, one can
see from these expo-curves that a point exists
where the momentum was so
overwhelming that success became a runaway
event. Success became infectious, so
to speak, and spread pervasively to the extent
that it became difficult for the
uninfected to avoid succumbing. (How long
can you hold out not having a phone?)
In epidemiology, the point at which a disease
has infected enough hosts that the
infection moves from local illness to raging
epidemic can be thought of as the tipping
point. The contagion's momentum has tipped
from pushing uphill against all odds to
rolling downhill with all odds behind it.
In biology, the tipping points of fatal diseases
are fairly high, but in technology, they seem
to trigger at much lower percentages of
victims or members.
There has always been a tipping point in any
business, industrial or network, after
which success feeds upon itself. However,
the low fixed costs, insignificant marginal
costs, and rapid distribution that we find
in the Network Economy depress tipping
points below the levels of industrial times;
it is as if the new bugs are more
contagious - and more potent. Smaller initial
pools can lead to runaway dominance.
Lower tipping points, in turn, mean that the
threshold of significance - the period
before the tipping point during which a movement,
growth, or innovation must be
taken seriously - is also dramatically lower
than it was during the industrial age.
Detecting events while they are beneath this
threshold is essential.
Major US retailers refused to pay attention
to TV home-shopping networks during
the 1980s because the number of people watching
and buying from them was
initially so small and marginalized that it
did not meet the established level of retail
significance. Instead of heeding the new subtle
threshold of network economics, the
retailers waited until the alarm of the tipping
point sounded, which meant, by
definition, that it was too late for them
to cash in.
In the past, an innovation's momentum indicated
significance. Now, in the network
environment, significance precedes momentum.
Biologists tell a parable of the lily leaf,
which doubles in size every day. The day
before it completely covers the pond, the
water is only half covered, and the day
before that, only a quarter covered, and the
day before that, only a measly eighth.
So, while the lily grows imperceptibly all
summer long, only in the last week of the
cycle would most bystanders notice its "sudden"
appearance. But by then, it is far
past the tipping point.
The Network Economy is a lily pond. The Web,
as one example, is a leaf doubling
in size every six months. MUDs and MOOs, Teledesic
phones, wireless data ports,
collaborative bots, and remote solid state
sensors are also leaves in the network lily
pond. Right now, they are just itsy-bitsy
lily cells merrily festering at the beginning of
a hot network summer.
In the Network Economy, significance precedes momentum.
5 The Law of Increasing Returns
Make virtuous circles
The prime law of networking is known as the
law of increasing returns. Value
explodes with membership, and the value explosion
sucks in more members,
compounding the result. An old saying puts
it more succinctly: Them that's got shall
get.
We see this effect in the way areas such as
Silicon Valley grow; each new
successful start-up attracts other start-ups,
which in turn attract more capital and
skills and yet more start-ups. (Silicon Valley
and other high tech industrial regions
are themselves tightly coupled networks of
talent, resources, and opportunities.)
The law of increasing returns is far more than
the textbook notion of economies of
scale. In the old rules, Henry Ford leveraged
his success in selling cars to devise
more efficient methods of production. This
enabled Ford to sell his cars more
cheaply, which created larger sales, which
fueled more innovation and even better
production methods, sending his company to
the top. While the law of increasing
returns and the economies of scale both rely
on positive feedback loops, the former
is propelled by the amazing potency of net
power, and the latter isn't. First,
industrial economies of scale increase value
linearly, while the prime law increases
value exponentially - the difference between
a piggy bank and compounded interest.
Second, and more important, industrial economies
of scale stem from the herculean
efforts of a single organization to outpace
the competition by creating value for less.
The expertise (and advantage) developed by
the leading company is its alone. By
contrast, networked increasing returns are
created and shared by the entire
network. Many agents, users, and competitors
together create the network's value.
Although the gains of increasing returns may
be reaped unequally by one
organization over another, the value of the
gains resides in the greater web of
relationships.
Huge amounts of cash may pour toward network
winners such as Cisco or Oracle
or Microsoft, but the supersaturated matrix
of increasing returns woven through
their companies would continue to expand into
the net even if those particular
companies should disappear.
Likewise, the increasing returns we see in
Silicon Valley are not dependent on any
particular company's success. As AnnaLee Saxenian,
author of Regional
Advantage, notes, Silicon Valley has in effect
become one large, distributed
company. "People joke that you can change
jobs without changing car pools,"
Saxenian told Washington Post reporter Elizabeth
Corcoran. "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."
One can take this trend 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, but 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.
The nature of the law of increasing returns
favors the early. The initial parameters
and conventions that give a network its very
power quickly freeze into unalterable
standards. The solidifying standards of a
network are both its blessing and its curse
- a blessing because from the de facto collective
agreement flows the unleashed
power of increasing returns, and a curse because
those who own or control the
standard are disproportionately rewarded.
But the Network Economy doesn't allow one without
the other. Microsoft's billions
are tolerated because so many others in the
Network Economy have made their
collective billions on the advantages of Microsoft's
increasing-returns standards.
In a Network Economy, life is tricky for consumers,
who must decide which early
protocol to support. Withdrawing later from
the wrong network of relationships is
painful - but not as painful as companies
who bet their whole lives on the wrong
one. Nonetheless, guessing wrong about conventions
is still better than ignoring
network dynamics altogether. There is no future
for hermetically sealed closed
systems in the Network Economy. The more dimensions
accessible to member
input and creation, the more increasing returns
can animate the network, the more
the system will feed on itself and prosper.
The less it allows these, the more it will be
bypassed.
The Network Economy rewards schemes that allow
decentralized creation and
punishes those that don't. An automobile maker
in the industrial age maintains
control over all aspects of the car's parts
and construction. An automobile maker in
the Network Economy will establish a web of
standards and outsourced suppliers,
encouraging the web itself to invent the car,
seeding the system with knowledge it
gives away, engaging as many participants
as broadly as possible, in order to create
a virtuous loop where every member's success
is shared and leveraged by all.
In the Network Economy, make virtuous circles.
6 The Law of Inverse Pricing
Anticipate the cheap
One curious aspect of the Network Economy would
astound a citizen living in
1897: The very best gets cheaper each year.
This rule of thumb is so ingrained in
our contemporary lifestyle that we bank on
it without marveling at it. But marvel we
should, because this paradox is a major engine
of the new economy.
Through most of the industrial age, consumers
experienced slight improvements in
quality for slight increases in price. But
the arrival of the microprocessor flipped the
price equation. In the information age, consumers
quickly came to count on
drastically superior quality for less price
over time. The price and quality curves
diverge so dramatically that it sometimes
seems as if the better something is, the
cheaper it will cost.
Computer chips launched this inversion, as
Ted Lewis, author of The Friction Free
Economy, points out. Engineers used the supreme
virtues of computers to directly
and indirectly create the next improved version
of computers. By compounding our
learning in this fashion, we got more out
of less material. So potent is compounding
chip power that everything it touches - cars,
clothes, food - falls under its spell.
Indirectly amplified learning by shrinking
chips enabled just-in-time production
systems and the outsourcing of very high tech
manufacturing to low-wage labor -
both of which lowered the prices of goods
still further.
Today, shrinking chip meets exploding net.
Just as we leveraged compounded
learning in creating the microprocessor, we
are leveraging the same multiplying
loops in creating the global communications
web. We use the supreme virtues of
networked communications to directly and indirectly
create better versions of
networked communications.
Almost from their birth in 1971, microprocessors
have lived in the realm of inverted
pricing. Now, telecommunications is about
to experience the same kind of plunges
that microprocessor chips take - halving in
price, or doubling in power, every 18
months - but even more drastically. The chip's
pricing flip was called Moore's Law.
The net's flip is called Gilder's Law, for
George Gilder, a radical technotheorist who
forecasts that for the foreseeable future
(the next 25 years), the total bandwidth of
communication systems will triple every 12
months.
The conjunction of escalating communication
power with shrinking size of jelly bean
nodes at collapsing prices leads Gilder to
speak of bandwidth becoming free. What
he means is that the price per bit transmitted
slides down an asymptotic curve
toward the free. An asymptotic curve is like
Zero's tortoise: with each step forward,
the tortoise gets closer to the limit but
never actually reaches it. An asymptotic price
curve falls toward the free without ever touching
it, but its trajectory closely
paralleling the free is what becomes important.
In the Network Economy, bandwidth is not the
only thing headed this way.
Mips-per-dollar calculations head toward the
free. Transaction costs dive toward
the free. Information itself - headlines and
stock quotes - plunges toward the free.
Indeed, all items that can be copied, both
tangible and intangible, adhere to the law
of inverted pricing and become cheaper as
they improve. While it is true that
automobiles will never be free, the cost per
mile will dip toward the free. It is the
function per dollar that continues to drop.
For consumers, this is heaven. For those hoping
to make a buck, this will be a cruel
world. Prices will eventually settle down
near the free (gulp!), but quality is
completely open-ended at the top. For instance,
all-you-can-use telephone service
someday will be essentially free, but its
quality can only continue to ascend, just to
keep competitive.
So how will the telcos - and others - make
enough money for profit, R&D, and
system maintenance? By expanding what we consider
a telephone to be. Over time,
any invented product is on a one-way trip
over the cliff of inverted pricing and down
the curve toward the free. As the Network
Economy catches up to all manufactured
items, they will all slide down this chute
more rapidly than ever. Our job, then, is to
create new things to send down the slide -
in short, to invent items faster than they
are commoditized.
This is easier to do in a network-based economy
because the criss-crossing of
ideas, the hyperlinking of relationships,
the agility of alliances, and the nimble
quickness of creating new nodes all support
the constant generation of new goods
and services where none were before.
And, by the way, the appetite for more things
is insatiable. Each new invention
placed in the economy creates the opportunity
and desire for two more. While plain
old telephone service is headed toward the
free, I now have three phone lines just
for my machines and will someday have a data
"line" for every object in my house.
More important, managing these lines, the
data they transmit, the messages to me,
the storage thereof, the need for mobility,
all enlarge what I think of as a phone and
what I will pay a premium for.
In the Network Economy, you can count on the
best getting cheaper; as it does, it
opens a space around it for something new
that is dear. Anticipate the cheap.
7 The Law of Generosity
Follow the free
If services become more valuable the more plentiful
they are (Law #2), and if they
cost less the better and the more valuable
they become (Law #6), then the
extension of this logic says that the most
valuable things of all should be those that
are given away.
Microsoft gives away its Web browser, Internet
Explorer. Qualcomm, which
produces Eudora, the standard email program,
is given away as freeware in order
to sell upgraded versions. Some 1 million
copies of McAfee's antivirus software are
distributed free each month. And, of course,
Sun passed Java out gratis, sending its
stock up and launching a mini-industry of
Java app developers.
Can you imagine a young executive in the 1940s
telling the board that his latest idea
is to give away the first 40 million copies
of his only product? (It's what Netscape
did 50 years later.) He would not have lasted
a New York minute.
But now, giving away the store for free is
an applauded, level-headed strategy that
banks on the network's new rules. Because
compounding network knowledge
inverts prices, the marginal cost of an additional
copy (intangible or tangible) is near
zero. Because value appreciates in proportion
to abundance, a flood of copies
increases the value of all the copies. Because
the more value the copies accrue, the
more desirable they become, the spread of
the product becomes self-fulfilling. Once
the product's worth and indispensability is
established, the company sells auxiliary
services or upgrades, enabling it to continue
its generosity and maintaining this
marvelous circle.
One could argue that this frightening dynamic
works only with software, since the
marginal cost of an additional copy is already
near zero. That would misread the
universality of the inverted price. Made-with-atoms
hardware is also following this
force when networked. Cellular phones are
given away to sell their services. We
can expect to see direct-TV dishes - or any
object with which the advantages of
being plugged in exceed the diminishing cost
of replicating the object - given away
for the same reasons.
The natural question is how companies are to
survive in a world of generosity.
Three points will help.
First, think of "free" as a design goal for
pricing. There is a drive toward the free -
the asymptotic free - that, even if not reached,
makes the system behave as if it
does. A very small flat rate may have the
same effects as flat-out free.
Second, while one product is free, this usually
positions other services to be
valuable. Thus, Sun gives Java away to help
sell servers and Netscape hands out
consumer browsers to help sell commercial
server software.
Third, and most important, following the free
is a way to rehearse a service's or a
good's eventual fall to free. You structure
your business as if the thing that you are
creating is free in anticipation of where
its price is going. Thus, while Sega game
consoles are not free to consumers, they are
sold as loss leaders to accelerate their
eventual destiny as something that will be
given away in a Network Economy.
Another way to view this effect is in terms
of attention. The only factor becoming
scarce in a world of abundance is human attention.
Each human has an absolute limit
of only 24 hours per day to provide attention
to the millions of innovations and
opportunities thrown up by the economy. Giving
stuff away garners human attention,
or mind share, which then leads to market
share.
Following the free also works in the other
direction. If one way to increase product
value is to make products free, then many
things now without cost hide great value.
We can anticipate wealth by following the
free.
In the Web's early days, the first indexes
to this uncharted territory were written by
students and given away. The indexes helped
humans focus their attention on a few
sites out of thousands and helped draw attention
to the sites, so webmasters aided
the indexers' efforts. By being available
free, indexes became ubiquitous. Their
ubiquity quickly led to explosive stock values
for the indexers and enabled other
Web services to flourish.
So what is free now that may later lead to
extreme value? Where today is
generosity preceding wealth? A short list
of online candidates would be digesters,
guides, cataloguers, FAQs, remote live cameras,
Web splashes, and numerous
bots. Free for now, each of these will someday
have profitable companies built
around them. These marginal functions now
are not fringe; remember, for instance,
that in the industrial age Readers Digest
is the world's most widely read magazine,
that TV Guide is more profitable than the
three major networks it guides viewers to,
and that the Encyclopaedia Britannica began
as a compendium of articles by
amateurs - not too dissimilar from FAQs.
But the migration from ad hoc use to commercialization
cannot be rushed. One of
the law of generosity's corollaries is that
value in the Network Economy requires a
protocommercial stage. Again, wealth feeds
off ubiquity, and ubiquity usually
mandates some level of sharing. The early
Internet and the early Web sported
amazingly robust gift economies; goods and
services were swapped, shared
generously, or donated outright - actually,
this was the sole way to acquire things
online. Idealistic as this attitude was, it
was the only sane way to launch a
commercial economy in the emerging space.
The flaw that science fiction ace
William Gibson found in the Web - its capacity
to waste tremendous amounts of
time - was in fact, as Gibson further noted,
its saving grace. In a Network
Economy, innovations must first be seeded
into the inefficiencies of the gift economy
to later sprout in the commercial economy's
efficiencies.
It's a rare (and foolish) software outfit these
days that does not introduce its wares
into the free economy as a beta version in
some fashion. Fifty years ago, the notion
of releasing a product unfinished - with the
intention that the public would help
complete it - would have been considered either
cowardly, cheap, or inept. But in
the new regime, this precommercial stage is
brave, prudent, and vital.
In the Network Economy, follow the free.
8 The Law of the Allegiance
Feed the web first
The distinguishing characteristic of networks
is that they have no clear center and no
clear outer boundaries. The vital distinction
between the self (us) and the nonself
(them) - once exemplified by the allegiance
of the industrial-era organization man -
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 organizations
and toward networks and network platforms.
(Are you Windows or Mac?)
Thus, we see fierce enthusiasm from consumers
for open architectures. Users are
voting for maximizing the value of the network
itself. Companies have to play this
way, too. As consultant John Hagel argues,
a company's primary focus in a
networked world shifts from maximizing the
firm's value to maximizing the value of
the infrastructure whole. For instance, game
companies will devote as much energy
promoting the platform - the tangle of users,
developers, hardware manufactures,
etc. - as they do to their product. Unless
their web thrives, they die.
The net is a possibility factory, churning
out novel opportunities by the diskful. But
unless this explosion is harnessed, it will
drown the unprepared. What the computer
industry calls "standards" is an attempt to
tame the debilitating abundance of
competing possibilities. Standards strengthen
a network; their constraints solidify a
pathway, allowing innovation and evolution
to accelerate. So central is the need to
tame the choice of possibilities that organizations
must make the common standard
their first allegiance. Companies positioned
at the gateway to a standard will reap
the largest rewards. But as a company prospers,
so do those in its web.
A network is like a country. In both, the surest
route to raising one's own prosperity
is raising the system's prosperity. The one
clear effect of the industrial age is that the
prosperity individuals achieve is more closely
related to their nation's prosperity than
to their own efforts.
The net is like a country, but with three important differences:
1) No geographical or temporal boundaries exist Ñ relations flow 24 by 7 by 365.
2) Relations in the Network Economy are more
tightly coupled, more intense, more
persistent, and more intimate in many ways
than those in a country.
3) Multiple overlapping networks exist, with multiple overlapping allegiances.
Yet, in every network, the rule is the same.
For maximum prosperity, feed the web
first.
9 The Law of Devolution
Let go at the top
The tightly linked nature of any economy, but
especially the Network Economy's
ultraconnected constitution, makes it behave
ecologically. The fate of individual
organizations is not dependent entirely on
their own merits, but also on the fate of
their neighbors, their allies, their competitors,
and, of course, on that of the
immediate environment.
Some biomes in nature are shy of opportunities
for life. In the Arctic there are only a
couple of styles of living, and a species
had better get good at one of them. Other
biomes are chock full of opportunities, and
those possibilities are in constant flux,
appearing and retreating in biological time
as species jockey toward maximum
adaptability.
The rich, interactive, and highly plastic shape
of the Network Economy resembles a
biome seething with action. New niches pop
up constantly and go away as fast.
Competitors sprout beneath you and then gobble
your spot up. One day you are
king of the mountain, and the next day there
is no mountain at all.
Biologists describe the struggle of an organism
to adapt in this biome as a long climb
uphill, where uphill means greater adaptation.
In this visualization, an organism that is
maximally adapted to the times is situated
on a peak. It is easy to imagine a
commercial organization substituted for the
organism. A company expends great
effort to move its butt uphill, or to evolve
its product so that it is sitting on top,
where it is maximally adapted to the consumer
environment.
All organizations (profit and nonprofit alike)
face two problems as they attempt to
find their peak of optimal fit. Both are amplified
by a Network Economy in which
turbulence is the norm.
First, unlike the industrial arc's relatively
simple environment, where it was fairly
clear what an optimal product looked like
and where on the slow-moving horizon a
company should place itself, it is increasingly
difficult in the Network Economy to
discern what hills are highest and what summits
are false.
Big and small companies alike can relate to
this problem. It's unclear whether one
should strive to be the world's best hard
disc manufacturer when the mountain
beneath that particular peak may not be there
in a few years. An organization can
cheer itself silly on its way to becoming
the world's expert on a dead-end
technology. In biology's phrasing, it gets
stuck on a local peak.
The harsh news is that getting stuck is a certainty
in the new economy. Sooner,
rather than later, a product will be eclipsed
at its prime. While one product is at its
peak, another will move the mountain by changing
the rules.
There is only one way out. The organism must
devolve. In order to go from one
high peak to another, it must go downhill
first and cross a valley before climbing
uphill again. It must reverse itself and become
less adapted, less fit, less optimal.
This brings us to the second problem. Organizations,
like living beings, are
hardwired to optimize what they know and to
not throw success away. Companies
find devolving a) unthinkable and b) impossible.
There is simply no room in the
enterprise for the concept of letting go -
let alone the skill to let go - of something
that is working, and trudge downhill toward
chaos.
And it will be chaotic and dangerous down below.
The definition of lower adaptivity
is that you are closer to extinction. Finding
the next peak is suddenly the next
life-or-death assignment. But there is no
alternative (that we know of) to leaving
behind perfectly good products, expensively
developed technology, and wonderful
brands and heading down to trouble in order
to ascend again in hope. In the future,
this forced march will become routine.
The biological nature of this era means that
the sudden disintegration of established
domains will be as certain as the sudden appearance
of the new. Therefore, there
can be no expertise in innovation unless there
is also expertise in demolishing the
ensconced.
In the Network Economy, the ability to relinquish
a product or occupation or
industry at its peak will be priceless. Let
go at the top.
10 The Law of Displacement
The net wins
Many observers have noted the gradual displacement
in our economy of materials
by information. Automobiles weigh less than
they once did and perform better. The
missing materials have been substituted with
nearly weightless high tech know-how
in the form of plastics and composite fiber
materials. This displacement of mass with
bits will continue in the Network Economy.
Whereas once the unique dynamics of the software
and computer industry
(increasing returns, following the free, etc.)
were seen as special cases within the
larger "real" economy of steel, oil, automobiles,
and farms, the dynamics of
networks will continue to displace the old
economic dynamics until network
behavior becomes the entire economy.
For example, take the new logic of cars as
outlined by energy visionary Amory
Lovins. What could be more industrial-age
than automobiles? However, chips and
networks can displace the industrial age in
cars, too. Most of the energy a car
consumes is used to move the car itself, not
the passenger. So, if the car's body and
engine can be diminished in size, less power
is needed to move the car, meaning the
engine can be made yet smaller, which means
that the car can be smaller yet, and so
on down the similar slide of compounded value
that microprocessors followed.
That's because smart materials - stuff that
requires increasing knowledge to invent
and make - are shrinking the steel.
Detroit and Japan have designed concept cars
built out of ultralightweight composite
fiber material weighing about 1,000 pounds,
powered by hybrid-electric motors.
They take away the mass of radiator, axle,
and drive shaft by substituting
networked chips. Just as embedding chips in
brakes made them safer, these
lightweight cars will be wired with network
intelligence to make them safer: a crash
will inflate the intelligence of multiple
air bags - think smart bubblepak.
The accumulated effect of this substitution
of knowledge for material in automobiles
is a hypercar that will be safer than today's
car, yet can cross the continental US on
one tank of fuel.
Already, the typical car boasts more computing
power than your typical desktop
PC, but what the hypercar promises, says Lovins,
is not wheels with lots of chips,
but a chip with wheels. A car can rightly
be view as headed toward becoming a
solid state module. And it will drive on a
road system increasingly wired as a
decentralized electronic network obeying the
Network Economy's laws.
Once we see cars as chips with wheels, it's
easier to imagine airplanes as chips with
wings, farms as chips with soil, houses as
chips with inhabitants. Yes, they will have
mass, but that mass will be subjugated by
the overwhelming amount of knowledge
and information flowing through it, and, in
economic terms, these objects will
behave as if they had no mass at all. In that
way, they migrate to the Network
Economy.
Nicholas "Atoms-to-Bits" Negroponte guesstimates
that the Network Economy will
reach $1 trillion by 2000. What this figure
doesn't represent is the scale of the
economic world that is moving onto the Internet
- that grand net of interconnected
objects - as the Network Economy infiltrates
cars and traffic and steel and corn.
Even if all cars aren't sold online right
away, the way cars are designed,
manufactured, built, and operated will depend
on network logic and chip power.
The question "How big will online commerce
be?" will have diminishing relevance,
because all commerce is jumping onto the Internet.
The distinctions between the
Network Economy and the industrial economy
will fade to the difference of
animated versus inert. If money and information
flow through something, then it's
part of the Network Economy.
In the Network Economy, the net wins. All transactions
and objects will tend to
obey network logic.
11 The Law of Churn
Seek sustainable disequilibrium
In the industrial perspective, the economy
was a machine that was to be tweaked to
optimal efficiency, and, once finely tuned,
maintained in productive harmony.
Companies or industries especially productive
of jobs or goods had to be protected
and cherished at all costs, as if these firms
were rare watches in a glass case.
As networks have permeated our world, the economy
has come to resemble an
ecology of organisms, interlinked and coevolving,
constantly in flux, deeply tangled,
ever expanding at its edges. As we know from
recent ecological studies, no balance
exists in nature; rather, as evolution proceeds,
there is perpetual disruption as new
species displace old, as natural biomes shift
in their makeup, and as organisms and
environments transform each other. So it is
with the network perspective:
companies come and go quickly, careers are
patchworks of vocations, industries
are indefinite groupings of fluctuating firms.
Change is no stranger to the industrial economy
or the embryonic information
economy; Alvin Toffler coined the term future
shock in 1970 as the sane response
of humans to accelerating change. But the
Network Economy has moved from
change to churn.
Change, even in its toxic form, is rapid difference.
Churn, on the other hand, is more
like the Hindu god Shiva, a creative force
of destruction and genesis. Churn topples
the incumbent and creates a platform ideal
for more innovation and birth. It is
"compounded rebirth." And this genesis hovers
on the edge of chaos.
Donald Hicks of the University of Texas studied
the half-life of Texan businesses for
the past 22 years and found that their longevity
has dropped by half since 1970.
That's change. But Austin, the city in Texas
that has the shortest expected life spans
for new businesses, also has the fastest-growing
number of jobs and the highest
wages. That's churn.
Hicks told his sponsors in Texas that "the
vast majority of the employers and
employment on which Texans will depend in
the year 2026 - or even 2006 - do not
yet exist." In order to produce 3 million
new jobs by 2020, 15 million new jobs
must be created in all, because of churn.
"Rather than considering jobs as a fixed
sum to be protected and augmented, Hicks argued,
the state should focus on
encouraging economic churning - on continually
re-creating the state's economy,"
writes Jerry Useem in Inc., a small- business
magazine that featured Hicks's report.
Ironically, only by promoting churn can long-term
stability be achieved.
This notion of constant churn is familiar to
ecologists and those who manage large
networks. The sustained vitality of a complex
network requires that the net keep
provoking itself out of balance. If the system
settles into harmony and equilibrium, it
will eventually stagnate and die.
Innovation is a disruption; constant innovation
is perpetual disruption. This seems to
be the goal of a well-made network: to sustain
a perpetual disequilibrium. As
economists (such as Paul Romer and Brian Arthur)
begin to study the Network
Economy, they see that it, too, operates by
poising itself on the edge of constant
chaos. In this chaotic churn is life-giving
renewal and growth.
The difference between chaos and the edge of
chaos is subtle. Apple Computer, in
its attempt to seek persistent disequilibrium
and stay innovative, may have leaned
too far off-balance and unraveled toward extinction.
Or, if its luck holds, after a
near-death experience in devolution it may
be burrowing toward a new mountain to
climb.
The dark side of churn in the Network Economy
is that the new economy builds on
the constant extinction of individual companies
as they're outpaced or morphed into
yet newer companies in new fields. Industries
and occupations also experience this
churn. Even a sequence of rapid job changes
for workers - let alone lifetime
employment - is on its way out. Instead, careers
- if that is the word for them - will
increasingly resemble networks of multiple
and simultaneous commitments with a
constant churn of new skills and outmoded
roles.
Networks are turbulent and uncertain. The prospect
of constantly tearing down
what is now working will make future shock
seem tame. We, of course, will
challenge the need to undo established successes,
but we'll also find exhausting the
constant, fierce birthing of so much that
is new. The Network Economy is so
primed to generate self-making newness that
we may find this ceaseless tide of birth
a type of violence.
Nonetheless, in the coming churn, the industrial
age's titans will fall. In a poetic
sense, the prime task of the Network Economy
is to destroy - company by
company, industry by industry - the industrial
economy. While it undoes industry at
its peak, it weaves a larger web of new, more
agile, more tightly linked
organizations between its spaces.
Effective churning will be an art. In any case,
promoting stability, defending
productivity, and protecting success can only
prolong the misery. When in doubt,
churn. In the Network Economy, seek sustainable
disequilibrium.
12 The Law of Inefficiencies
Don't solve problems
In the end, what does this Network Economy bring us?
Economists once thought that the coming age
would bring supreme productivity.
But, in a paradox, increasing technology has
not led to measurable increases in
productivity.
This is because productivity is exactly the
wrong thing to care about. The only ones
who should worry about productivity are robots.
And, in fact, the one area of the
economy that does show a rise in productivity
has been the US and Japanese
manufacturing sectors, which have seen about
a 3 to 5 percent annual increase
throughout the 1980s and into the 1990s. This
is exactly where you want to find
productivity. But we don't see productivity
gains in the misnamed catch-all category,
the service industry - and why would we? Is
a Hollywood movie company that
produces longer movies per dollar more productive
than one that produces shorter
movies?
The problem with trying to measure productivity
is that it measures only how well
people can do the wrong jobs. Any job that
can be measured for productivity
probably should be eliminated.
Peter Drucker has noted that in the industrial
age, the task for each worker was to
discover how to do his job better; that's
productivity. But in the Network Economy,
where machines do most of the inhumane work
of manufacturing, the task for each
worker is not "how to do this job right" but
"what is the right job to do?" In the
coming era, doing the exactly right next thing
is far more "productive" than doing the
same thing better. But how can one easily
measure this vital sense of exploration
and discovery? It will be invisible to productivity
benchmarks.
Wasting time and being inefficient are the
way to discovery. The Web is being run
by 20-year-olds because they can afford to
waste the 50 hours it takes to become
proficient in exploring the Web. While 40-year-old
boomers can't take a vacation
without thinking how they'll justify the trip
as being productive in some sense, the
young can follow hunches and create seemingly
mindless novelties on the Web
without worrying about whether they are being
efficient. Out of these inefficient
tinkerings will come the future.
In the Network Economy, productivity is not
our bottleneck. Our ability to solve
our social and economic problems will be limited
primarily by our lack of
imagination in seizing opportunities, rather
than trying to optimize solutions. In the
words of Peter Drucker, as echoed recently
by George Gilder, "Don't solve
problems, seek opportunities." When you are
solving problems, you are investing in
your weaknesses; when you are seeking opportunities,
you are banking on the
network. The wonderful news about the Network
Economy is that it plays right into
human strengths. Repetition, sequels, copies,
and automation all tend toward the
free, while the innovative, original, and
imaginative all soar in value.
Our minds will at first be bound by old rules
of economic growth and productivity.
Listening to the network can unloose them.
In the Network Economy, don't solve
problems, seek opportunities.