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.

Comments

[Kevin Farnham]

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.

[Thomas]

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