Web 2.0 isn’t about the Internet

I spoke on a panel at the Communications Group on 28 November.

The panel featured Chris Seth, Ajit Jaokar and Nic Brisbourne on the topic of Web 2.0. As I had to speak last, I quickly mashed up some ideas so I could say something different.

Here is a moderately amended version of those remarks.

Web 2.0 is
not about the internet
. Well, it isn’t just about the Internet.

It is about
a ‘new mode of production with exciting economics’. What do I mean by that?

Take a
quick walk down memory lane and look at the history of industrial organisation.
You started with the sole trader, the blacksmith working on his own clanking
out a horseshoe or hammering out a sword. You then moved towards partnerships
particularly for trading and expeditionary businesses but the structure of
industrial production broadly speaking didn’t change until the 17th century
with the arrival of the joint stock company. This was the firm raised money
from shareholders and as a structure it was appealing because it allowed you to
spread risk across many different ventures.

It was this
form of organisation which powered the industrial revolution allowing capital
to be deployed effectively and firms to reach an efficient point of scale. And
this led to the growth of verticalisation: firms which owned industries soup to
nuts. Many of the great industrial firms of their time, like the Ford Motor
company, took this shape. When Ford rolled out the Model T just before World
War I, the company grew its own rubber trees, refined its own steel and even
built and ran railroads to deliver cars. (see The New Industrial Revolution by Bernstein for more details.)

Firms
didn’t just go deep. They also started to go very wide. ITT is a great example
of this. By the 1970s it owned Hostess Twinkies, built televisions and ran
hotels–the Sheraton group. It wasn’t a great way to organise a firm but great
work if you could be a manager.

We’re
familiar with this form of industrial organisation because it is the one which
we have grown up with.

Which takes
us to some point at the end of the last century where many industries are
disaggregating deverticalising. Take the semiconductor industry. We think of
Intel as the prime player–which it is–and it is vertically integrated. But if
you look elsewhere in the industry the real growth is in the new unbundled
value chain. You have fabless design firms like Xilinx, foundries which
specialise in making wafers and the chips, like United, and then distributors
like Arrow and Avnet. By 2010 this will be a $50bn industry taking 30% of the
market share in the semiconductor space.


Why are they disaggregating? They are disaggregating because the costs of
interoperability have diminished. Communications makes it easier to connect
with suppliers and partners. Trade is cheaper. And talent is everywhere.

And this
brings us to Web 2.0. Web 2.0 is really about disaggregation, unbundling and
rebundling of resources. (Umair Haque introduced me to this terminology). The same trends we are seeing in other industries but
at a faster pace, marching to the beat of internet time. So if you are an
Internet company today you focus on what you do well and draw in resources from
other players via APIs to build a complete offering for your customers.

So let’s
get back to this idea of a new mode of production. What is a mode of
production?

It is the
way in which resources are organises in order to produce something. For most of
recent history the co-ordination of production took two forms. One was the
market: I wanted you to write me a contract, you would say "I’ll do this
for $200" and I’d say ‘fine." The other was the firm where we
organised resources internally according to management fiat. Managers figured
out between themselves and amongst their staff how to deploy resources.
Ronald Coase won a Nobel prize for this insight. Scientism arrived in
management during the last 19th and early 20th centuries and Business Schools
aimed to instil toolkits and methodologies to make management more consistent,
efficient and effective.

But what we
are starting to see is a new form of co-ordination, mostly emerging on the Web
but visible in other industries as well. This is what American academic Yochai
Benkler has called commons-based peer production. It is what we see in open
source, wikipedia content, in Piczo or in Lego.

What
happens is the orchestration of people with very different moods and
motivations to create something valuable. We are unlocking a hidden consumer
surplus through this orchestration of resources. In fact, the great thing is we
don’ t need to know or care about your motivations. We just need to know that
there are lots of them of you other there with different motivations and that
we have a way of breaking down the work into small enough chunks (and then be
able to rebundle and recombine them.)

Why is this
possible? I think it is possible because of the three ubiquities.

The
ubiquity of computing power and storage; the ubiquity of networks and the
ubiquity of educated consumers. All of these create large pools of people
capable of orchestration–and yes broadband is effectively ubiquitous having
peaked past the 30% penetration level that makes these things fly. So what does
this mean? For piczo is means that you high highly attractive economics. Instead
of paying for journalists, you let the kidz create their own media experiences
for themselves and their friends. Who cares why they do it. The only thing that
matters is that they do it.

Let me give
you a real world example: Second Life is a virtual world. Linden Labs has
adopted a smart model. it simply provides and runs the world, users create all
the content and interactions. Earlier this year, before Second Life’s growth
had kicked in, BCG estimated that residents had created the equivalent of $250m
of stuff in Second Life
. That is $250m Linden Labs would have had to spend on
programmers  and designers had its residents not created houses, cars and
giant sharks. But it hasn’t had to: we’ve done it for them. That is attractive
economics.

This is disaggregation
and rebundling at a different scale but disaggregation and rebundling it is.

Web 2.0 is
an example of the wider changes in industrial organisation. Because it is zero
g, things happen quickly. But really world businesses like Fedex and DHL are
enabling physical mashups of the kind we see on the web. Because you can use
Fedex to fulfil, and talk to its simple API, you don’t need to be an
expert in fulfilment even if you ship physical products. Amazon is taking this to logical extremes with the Elastic Compute Cloud and its other webservices.

And this is
happening in Web 2.0. MySpace or Piczo don’t need to worry about photo hosting
because Photobucket or Rapidshare will do it for them. You can focus on just
what you need to do provided you understand where the value lies and you have
the discipline and mindset to stick to that.

What does
this mean?

It means a
bunch of changes for traditional firms. In particular: as a firm you need to
move from a mode of control to a mode of co-ordination. Managers are not used
to this: co-ordination with people with disparate motivations is a rare skill.
But the capability to co-ordinate these types of distributed resources will be
critical. You will need to do this well.

You also
need to understand and define the interfaces your firm has with the outside
world and understand what you are going to make available to third parties.

You need to
attack your current activities and think: what is it we do really really really
well? And what don’t we do well? What should we stop doing What should we
emphasise?

The truth
is that traditional firms, of the Alfred Sloan variety, have inculcated
culture, processes and talent around this old mode of operation which makes it
very hard to change. And that is what opens the door the slew of
entrepreneurial businesses we see today.

 

Coda: The following concluding remarks added on 2 December 2006

I did wander slightly off topic. I had really wanted to draw attention to the fact that many of the things that make web 2.0 businesses what they are, are occurring outside of the Internet business.  It is just they the blog spotlight doesn’t shine so brightly on them. Li and Fung, the trading firm, is written about extensively in both the Bernstein research note and in CK’s book The Future of Competition. Alibaba enables virtual manufacturing of almost anything. Rent-a-coder of coding services.
 

The point was to provide some broader history to our view of Web 2.0. To explain or suggest that what is going in isn’t necessarily part of some five year bubble (although it may be part of a local maxima of that type) but more closely aligned to fifty-one hundred year themes of organising productive capacity.

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2 Comments

  1. Posted December 8, 2006 at 8:06 pm | Permalink

    A very interesting post! I have been thinking along the same lines, that Web 2.0 represents a shift in economics and the beginning of a decades-long period of growth during which the new technologies will become woven into minute aspects of daily life, resulting in a complete transformation of the economy and society.

    I used the early automobile industry as my illustration. See my posts for Dec 7 and 8, at my URL, if you’re interested.

  2. Thomas
    Posted January 18, 2007 at 2:53 pm | Permalink

    Azeem, this is some brilliant thinking. Made me think; one has to understand the past before predicting the now and the future.
    One thing about the changes (especially) in media, through web2.0, social networks, UGC etc that bothers me is – what’s the importance of brand in building a successful venture?

    ta


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