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Networks and the Next Economy

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Slides from my talk at the Price Waterhouse Coopers Deals Exchange conference on April 26, 2018. I talk about algorithmically manage, internet-scale networks and how they are changing the very nature of the economy, the shape of companies, and the competencies that are required for 21st century success. There are many similar themes to other talks, but this is tailored to a business audience, and very specifically to one concerned with how to do M&A in an age of dominant platforms.

Published in: Technology

Networks and the Next Economy

  1. Networks and the Next Economy Tim O’Reilly @timoreilly oreilly.com wtfeconomy.com PWC Deals Exchange April 26, 2018
  2. How is the economy changing? What are the implications for business? What does technology now make possible that was previously impossible? What work needs doing? Why aren’t we doing it? wtfeconomy.com
  3. We have to let go of the maps that are steering us wrong In 1625, we thought California was an island
  4. In 2018, we still think in terms of standalone firms. We need to think about every company as if it is a network
  5. Networks and the Nature of the Firm “The existence of high transaction costs outside firms led to the emergence of the firm as we know it, and management as we know it….The reverse side of Coase’s argument is as important: If the (transaction) costs of exchanging value in the society at large go down drastically as is happening today [because of networks], the form and logic of economic and organizational entities necessarily need to change! The mainstream firm, as we have known it, becomes the more expensive alternative.”Esko Kilpi
  6. If we want to understand the future of business and the economy, we have to understand networked platforms
  7. Gradually, then suddenly
  8. Gradually, then suddenly Large segments of the economy are governed not by free markets but by centrally managed platform monopolies
  9. Gradually, then suddenly Artificial Intelligence and algorithmic systems are everywhere, in new kinds of partnerships with humans
  10. In 2018, we still believe in the “invisible hand” of free markets
  11. Internet-scale networked platforms managed by algorithm are fundamentally changing the economic equation and the very nature of markets
  12. The invisible hand at work
  13. What happens when there’s only one queue?
  14. And what happens when there’s only one price for everything?
  15. The algorithms decide “who gets what – and why” Markets are outcomes. A better designed marketplace can have better outcomes. But it can be enormously disruptive for existing participants.
  16. Algorithms have become a battleground The takeaway: You have to think far more broadly about security and trust in the networked age.
  17. We are all living and working inside a machine
  18. “The Uber app is the drivers’ workplace, as much as the city where they’re driving is. Each decision about its interface structures drivers’ interactions with Uber the company as well as Uber the transportation marketplace.” Alexis Madrigal, The Atlantic, “Uber Drivers are About to Get a New Boss”
  19. An Amazon warehouse is a human-machine hybrid
  20. “A business model is the way that all of the parts of a business work together to create competitive advantage and customer value.” - Dan and Meredith Beam
  21. Who Do You Want Your Customers to Become? Henry Ford didn’t just rethink the automobile and the factory, he rethought the work week, and the reasons why people might want to drive.
  22. A Business Model Map of Uber  A magical app that lets drivers and passengers find each other in real time  A networked marketplace of drivers and passengers  Customers who trust that they don’t have to drive their own car  Augmented workers able to join the market as and when they wish  A matching market managed by algorithm
  23. What makes an app “magical”? 1. It seems unbelievable at first. 2. It changes the way the world works, so that the unbelievable comes to seem inevitable and normal. 3. It results in an ecosystem of new services, jobs, business models, and industries.
  24. Why simply adding an app doesn’t change the game for taxis
  25. The takeaway: You can’t just add an app or buy a startup and hope to compete
  26. After a strong start, Walmart’s jet.com acquisition demonstrates how hard it is to compete with a market-leading network on its own terms. You have to take the entire business model into account!
  27. M&A within a platform ecosystem, rather than to compete with it
  28. How might this play out For Uber and Lyft? For Airbnb? For Facebook or Google?
  29. In 2018, we still think that we can organize our companies in old ways but do new things
  30. “Doing digital is not the same as being digital.” Josh Bersin, Deloitte
  31. How is this possible? McDonalds 440,000 employees, 68 million monthly users Snap ~300 employees, 100 million monthly users
  32. “My grandfather wouldn’t recognize what I do as work.” – Hal Varian
  33. Many of today’s workers are programs. Developers are actually their managers. Every day, they are inspecting the performance of their workers and giving them instruction (in the form of code) about how to do a better job
  34. How Amazon Became a Platform “[Jeff’s] Big Mandate went something along these lines: 1) All teams will henceforth expose their data and functionality through service interfaces. 2) Teams must communicate with each other through these interfaces. 3) There will be no other form of interprocess communication allowed: no direct linking, no direct reads of another team’s data store, no shared-memory model, no back-doors whatsoever. The only communication allowed is via service interface calls over the network. 4) It doesn’t matter what technology they use. HTTP, Corba, Pubsub, custom protocols — doesn’t matter. Bezos doesn’t care. 5) All service interfaces, without exception, must be designed from the ground up to be externalizable. That is to say, the team must plan and design to be able to expose the interface to developers in the outside world. No exceptions. 6) Anyone who doesn’t do this will be fired.” Steve Yegge, in http://siliconangle.com/furrier/2011/10/12/google-engineer-accidently- shares-his-internal-memo-about-google-platform/
  35. Two-pizza teams
  36. The lessons of technology are also lessons for the organization of the business “Services not only represent a software structure but also the organizational structure.” Werner Vogels, Amazon CTO
  37. The takeaway: You can’t just do a digital acquisition and expect it to transform your company
  38. In 2018, we still pretend that growth goes on forever
  39. Growth goes on forever?
  40. “Doughnut Economics” Kate Raworth
  41. Fitness Landscapes The way in which genes contribute to the survival of an organism can be viewed as a landscape of peaks and valleys. Through a series of experiments, organisms evolve towards fitness peaks, adapted to a particular environment, or they die out. Image source: http://evolution.berkeley.edu/evolibrary/article/side_0_0/complexnovelties_02
  42. Technology also has a fitness landscape In my career, I’ve watched a number of migrations to new peaks, and I’d like to share with you some observations about what happened, and why. And then we’ll talk about some lessons for companies like Google, but also for the overall economy. Apple Personal Computer Big Data and AI Smartphones
  43. It’s very hard to beat an entrenched platform at its own game
  44. The Rules for Success Change  IBM fitness function: Maximize competitive advantage by control over hardware  Microsoft fitness function: Maximize competitive advantage by control over software  Google fitness function: Maximize competitive advantage by control over data and marketplaces  Apple fitness function: Maximize competitive advantage by integrated control of hardware, software, and marketplace.  In each case, companies playing by the old rules lost. Or did they?
  45. Generosity takes us to the next peak Tim Berners-Lee, 1990 The World Wide Web Linus Torvalds, 1991 Linux Big Data and AI Tim Berners-Lee, 1990 The World Wide Web Linus Torvalds, 1991 Linux
  46. Generous or “Long-term greedy”?
  47. The takeaway: think about how acquisitions will add value to your network, not just to your company
  48. Pay attention to your “hackers” – they predict your future marketplace
  49. ?? ?
  50. The great opportunity of the 21st century is to use our newfound cognitive tools to build better networked marketplaces
  51. A language for networked marketplaces Network effect: the value of a network is proportional to the square of the number of possible connections Scale effect: bigger is better (but not always) Feedback effect: the more data you collect from the marketplace, the more you can learn, and the better the services you can provide Two-sided market: different classes of users being matched up: searchers and advertisers, drivers and passengers, homes and renters.
  52. Asymptotic Networks “The reason Lyft is able to compete with Uber is that even if they have fewer drivers in many cities, both platforms are still able to guarantee a ride with an average wait time of 4 minutes. Neither can improve by adding more drivers to a city.” James Currier
  53. Market Networks In a market network, you’re not connecting a simple marketplace of buyers and sellers, but also connecting them with intermediaries and service providers. A Market Network combines elements of a professional network, an online marketplace, and SaaS tools.
  54. “We wouldn’t be able to build defensibility from our supply- side relationships purely on the basis of a Marketplace Network Effect, because it was in the interests of the real estate agents to syndicate their listings through every possible channel…. So we created an XML feed standard … This prevented brokers from having to go through the hassle of posting them manually to every channel, and soon our competitors had adopted the same XML standards for their sites as well.” And, after 2009, when the real estate market collapsed, ”to scale [a] new monetization strategy targeting smaller customers, we set to work creating cost-effective marketing and lead generation products for the individual real estate agents.” Pete Flint
  55. “Once they get some traction, platforms survive either because:  They achieve critical mass in a market with network effects. They are the default place to go—this is why Craigslist, Airbnb, ebay, Etsy, and other places with most of the inventory thrive.  They provide a tool set ecosystem. The product or service has certain functions that buyer and seller need (escrow, analytics, a CRM, etc.) that the marketplace can provide with an economy of scale that beats everyone doing it themselves.” Alistair Croll
  56. The takeaway: There are many opportunities to apply platform thinking besides “winner takes all.”
  57. In 2018, we believe that technology replaces people
  58. “…47 percent of jobs are “at risk” of being automated in the next 20 years.” Carl Frey and Michael Osborne, Oxford University “The Future of Employment: How Susceptible Are Jobs to Computerisation?”
  59. Will there really be nothing left for people to do? Is there really nothing left for humans to do?
  60. Dealing with climate change Rebuilding our infrastructure Feeding the world Ending disease Resettling refugees Caring for each other Educating the next generation Enjoying the fruits of shared prosperity
  61. This is what technology wants “Prosperity in human societies is best understood as the accumulation of solutions to human problems. We won’t run out of work until we run out of problems.” Nick Hanauer
  62. What happened when Amazon added 45,000 robots
  63. “Truck driver shortage projected to triple within a decade, if nothing changes”
  64. Jeff Bezos calls this “the flywheel”
  65. “I’ve just invested in an AI startup that will put 30% of call center workers out of a job.” (A VC who shall remain nameless)
  66. This is the master design pattern for applying technology: Do more. Do things that were previously impossible.
  67. Acquired in 2012, Kiva is a key part of Amazon’s business model, not just an add-on
  68. The best acquisitions anticipate the future. They don’t chase it.
  69. This was a network-enabling acquisition 51% statistic
  70. The Augmented Worker Neo: “Can you fly that thing?” Trinity: “Not yet.”
  71. Uber’s app isn’t quite what Trinity’s got, but…
  72. “In order to fully reap the benefits of a changing economy—and sustain growth over the long-term—businesses will need to increase the earnings potential of the workers who drive returns, helping the employee who once operated a machine learn to program it. They must improve their capacity for internal training and education to compete for talent in today’s economy and fulfill their responsibilities to their employees.” Just-in-time learning is a 21st century competency Larry Fink, CEO, Blackrock
  73. LinkedIn acquires Lynda.com Acquire accelerated learning!
  74. WeWork Acquires The Flatiron School Like Kiva (Amazon Robotics), this is a network-enabling acquisition!
  75. The takeaway: acquire or partner to supercharge the skills of your employees and of your network
  76. PROFICIENT/HIGH PERFORMERS Use self-directed discovery for problem-solving, and nonlinear instruction to acquire new skills. Require high-quality, relevant content with depth and breadth. NEED THE FUNDAMENTALS Learn basics through comprehensive, sequential (linear) instruction. Require structured, highly curated content. STRUCTURE CONTENT STRUCTURAL LITERACY LOW-LEVEL KNOWLEDGE Professional Skills Development Framework HIGH-LEVEL KNOWLEDGE Fluency Awareness Identification
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  80. Tim O’Reilly @timoreilly • O’Reilly AI Conference • Strata: The Business of Data • JupyterCon • O’Reilly Open Source Summit • Maker Faire • Foo Camp • … • 40,000+ ebooks • Tens of thousands of hours of video training • Live training • Millions of customers • A platform for knowledge exchange • Commercial internet • Open source software • Web 2.0 • Maker movement • Government as a platform • AI and The Next Economy Founder & CEO, O’Reilly Media Partner, O’Reilly AlphaTech Ventures Board member, Code for America Co-founder, Maker Media

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