Networks and the Next Economy
Tim O’Reilly @timoreilly oreilly.com wtfeconomy.com PWC Deals Exchange April 26, 2018

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

We have to let go
of the maps that are steering us wrong In 1625, we thought California was an island

In 2018, we still think
in terms of standalone firms. We need to think about every company as if it is a network

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

If we want to understand
the future of business and the economy, we have to understand networked platforms

Gradually, then suddenly

Gradually, then suddenly Large segments
of the economy are governed not by free markets but by centrally managed platform monopolies

Gradually, then suddenly Artificial Intelligence
and algorithmic systems are everywhere, in new kinds of partnerships with humans

In 2018, we still believe
in the “invisible hand” of free markets

Internet-scale networked platforms managed by
algorithm are fundamentally changing the economic equation and the very nature of markets

The invisible hand at work

What happens when there’s only
one queue?

And what happens when there’s
only one price for everything?

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.

Algorithms have become a battleground
The takeaway: You have to think far more broadly about security and trust in the networked age.

We are all living and
working inside a machine

“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”

An Amazon warehouse is a
human-machine hybrid

“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

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.

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

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.

Why simply adding an app
doesn’t change the game for taxis

The takeaway: You can’t just
add an app or buy a startup and hope to compete

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!

M&A within a platform ecosystem,
rather than to compete with it

How might this play out
For Uber and Lyft? For Airbnb? For Facebook or Google?

In 2018, we still think
that we can organize our companies in old ways but do new things

“Doing digital is not the
same as being digital.” Josh Bersin, Deloitte

How is this possible? McDonalds
440,000 employees, 68 million monthly users Snap ~300 employees, 100 million monthly users

“My grandfather wouldn’t recognize what
I do as work.” – Hal Varian

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

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/

Two-pizza teams

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

The takeaway: You can’t just
do a digital acquisition and expect it to transform your company

In 2018, we still pretend
that growth goes on forever

Growth goes on forever?

“Doughnut Economics”
Kate Raworth

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

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

It’s very hard to beat
an entrenched platform at its own game

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?

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

Generous or “Long-term greedy”?

The takeaway: think about how
acquisitions will add value to your network, not just to your company

Pay attention to your “hackers”
– they predict your future marketplace

?? ?

The great opportunity of the
21st century is to use our newfound cognitive tools to build better networked marketplaces

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.

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

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.

“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

“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

The takeaway: There are many
opportunities to apply platform thinking besides “winner takes all.”

In 2018, we believe that
technology replaces people

“…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?”

Will there really be nothing
left for people to do? Is there really nothing left for humans to do?

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

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

What happened when Amazon added
45,000 robots

“Truck driver shortage projected to
triple within a decade, if nothing changes”

Jeff Bezos calls this “the
flywheel”

“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)

This is the master design
pattern for applying technology: Do more. Do things that were previously impossible.

Acquired in 2012, Kiva is
a key part of Amazon’s business model, not just an add-on

The best acquisitions anticipate the
future. They don’t chase it.

This was a network-enabling acquisition
51% statistic

The Augmented Worker Neo: “Can
you fly that thing?” Trinity: “Not yet.”

Uber’s app isn’t quite what
Trinity’s got, but…

“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

LinkedIn acquires Lynda.com Acquire accelerated
learning!

WeWork Acquires The Flatiron School
Like Kiva (Amazon Robotics), this is a network-enabling acquisition!

The takeaway: acquire or partner
to supercharge the skills of your employees and of your network

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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