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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
O’Reilly Media
● Providing learning for almost 40 years
● Trends called – Open Source, Web
2.0, Maker Movement, Big Data
● 500 employees, thousands of
contributors
● 5,000+ enterprise clients, 2.3m
platform users globally
● 17 global technology events serving
20k individuals and 1,000 sponsor
companies
Change the world
by spreading the knowledge of innovators
O’Reilly’s Platform-Centered Learning Ecosystem
Safari
(learning
platform)
Conferences/
Foo Camps
Live Training
Books
Video
Jupyter
Notebooks
Expert
Network
Materials for reference
and learning
Immersive learning
experiences with
industry experts
Cutting edge idea forums
Digital platform for
on-demand learning
across modalities.
Books, video,
synchronous and
asynchronous
online learning
Our ecosystem matches
thousands of learning providers
with millions of customers
Tim O’Reilly
@timoreilly
• O’Reilly AI Conference
• Strata: The Business of Data
• JupyterCon
• O’Reilly Open Source Summit
• Maker Faire
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• …
• 40,000+ ebooks
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of video training
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exchange
• Commercial internet
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• 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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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
  • 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
  • 13. What happens when there’s only one queue?
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  • 17. And what happens when there’s only one price for everything?
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  • 19. 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.
  • 20. Algorithms have become a battleground The takeaway: You have to think far more broadly about security and trust in the networked age.
  • 21. We are all living and working inside a machine
  • 22.
  • 23. “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”
  • 24. An Amazon warehouse is a human-machine hybrid
  • 25. “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
  • 26. 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.
  • 27. 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
  • 28. 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.
  • 29. Why simply adding an app doesn’t change the game for taxis
  • 30. The takeaway: You can’t just add an app or buy a startup and hope to compete
  • 31. 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!
  • 32. M&A within a platform ecosystem, rather than to compete with it
  • 33. How might this play out For Uber and Lyft? For Airbnb? For Facebook or Google?
  • 34. In 2018, we still think that we can organize our companies in old ways but do new things
  • 35. “Doing digital is not the same as being digital.” Josh Bersin, Deloitte
  • 36. How is this possible? McDonalds 440,000 employees, 68 million monthly users Snap ~300 employees, 100 million monthly users
  • 37. “My grandfather wouldn’t recognize what I do as work.” – Hal Varian
  • 38. 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
  • 39. 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/
  • 41. 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
  • 42. The takeaway: You can’t just do a digital acquisition and expect it to transform your company
  • 43. In 2018, we still pretend that growth goes on forever
  • 44. Growth goes on forever?
  • 46. 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
  • 47. 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
  • 48. It’s very hard to beat an entrenched platform at its own game
  • 49. 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?
  • 50. 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
  • 52. The takeaway: think about how acquisitions will add value to your network, not just to your company
  • 53. Pay attention to your “hackers” – they predict your future marketplace
  • 54. ?? ?
  • 55. The great opportunity of the 21st century is to use our newfound cognitive tools to build better networked marketplaces
  • 56. 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.
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  • 58. 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
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  • 60. 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.
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  • 62. “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
  • 63. “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
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  • 65. The takeaway: There are many opportunities to apply platform thinking besides “winner takes all.”
  • 66. In 2018, we believe that technology replaces people
  • 67. “…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?”
  • 68. Will there really be nothing left for people to do? Is there really nothing left for humans to do?
  • 69.
  • 70. 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
  • 71. 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
  • 72. What happened when Amazon added 45,000 robots
  • 73. “Truck driver shortage projected to triple within a decade, if nothing changes”
  • 74. Jeff Bezos calls this “the flywheel”
  • 75. “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)
  • 76. This is the master design pattern for applying technology: Do more. Do things that were previously impossible.
  • 77. Acquired in 2012, Kiva is a key part of Amazon’s business model, not just an add-on
  • 78. The best acquisitions anticipate the future. They don’t chase it.
  • 79. This was a network-enabling acquisition 51% statistic
  • 80. The Augmented Worker Neo: “Can you fly that thing?” Trinity: “Not yet.”
  • 81. Uber’s app isn’t quite what Trinity’s got, but…
  • 82. “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
  • 84. WeWork Acquires The Flatiron School Like Kiva (Amazon Robotics), this is a network-enabling acquisition!
  • 85. The takeaway: acquire or partner to supercharge the skills of your employees and of your network
  • 86. 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
  • 87. O’Reilly Media ● Providing learning for almost 40 years ● Trends called – Open Source, Web 2.0, Maker Movement, Big Data ● 500 employees, thousands of contributors ● 5,000+ enterprise clients, 2.3m platform users globally ● 17 global technology events serving 20k individuals and 1,000 sponsor companies
  • 88. Change the world by spreading the knowledge of innovators
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  • 94. O’Reilly’s Platform-Centered Learning Ecosystem Safari (learning platform) Conferences/ Foo Camps Live Training Books Video Jupyter Notebooks Expert Network Materials for reference and learning Immersive learning experiences with industry experts Cutting edge idea forums Digital platform for on-demand learning across modalities. Books, video, synchronous and asynchronous online learning Our ecosystem matches thousands of learning providers with millions of customers
  • 95. 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