New Rules

For maximum prosperity...

Wed, 30 Dec 2009 05:00:00 -0800

...feed the web first.

Arriving at standards is often easier said than done. Standard-making is a torturous, bickering process every time. And the end result is universally condemned--since it is the child of compromise. But for a standard to be effective, its adoption must be voluntary. There must be room to dissent by pursuing alternative standards at any time.

Standards play an increasingly vital role in the new economy. In the industrial age, relatively few products demanded standards. You didn't need a consensual network to make a chair and table. If you obeyed some basic ergonomic conventions--make table height 30 inches--you were on your way. Those industrial products that operated in networks--such as the electrical or transportation networks--demanded sophisticated standard-making. Anything plugged into the electrical grid had to be standard. Automobiles manufactured by separate factories shared standards on such things as axle width, fuel mixtures, placement of turn signals, not to mention the many standards of road construction and signage.

All information and communication products and services demand extensive consensus. Participants at both ends of any conversation have to understand each other's language. Multiply one conversation by a billion, factor in a thousand different media choices, and then start to count three-way, four-way, n-way conversations, and the amount of consensus-setting skyrockets.

The final stage in the life cycle of networks...

Tue, 29 Dec 2009 05:00:00 -0800

...is the embedded phase, where one standard is so widely accepted that it becomes embedded in the fabric of the technology and is thereafter nearly impossible to dislodge--at least as long as the network exists. Regular 110-volt AC power is well embedded at this point (although, as the power grid becomes global, there could be some surprises). ASCII text is likewise deeply embedded--at least for phonetic languages. Some of the conventions of voice dial tone are so ubiquitous worldwide as to be permanent.

In any phase of innovation--prestandard, fluid, or embedded--standards are valuable because they hasten innovation. Agreements are constraints on uncertainty. The constraints of a standard solidify one pathway out of many, allowing further innovation and evolution to accelerate along that stable route. So central is the need to cultivate certainty that organizations must make the common standard their first allegiance. As standards are established, growth takes off.

Networks in the fluid phase...

Thu, 24 Dec 2009 05:00:00 -0800

...have a different dynamic. The plethora of choices in the prestandard phase gradually reduces to two or three. Allegiances are mobile, and drift over time. During this period, networks demand the strongest commitment to their survival. Participants have to feed the web of their choice first, and the narrowing of choices allows substantial investment to spur rapid growth. The effects of plentitude and increasing returns kick in--more breeds more. Feeding the web on any of several standards still produces gains for all participants. Yet it is inevitable that only one standard will ultimately prevail while the other ones fail. The uncertainty level is nearly as high as during the prestandard phase, but the risks for being wrong are greater. Anyone who remembers the demise of 8-track audiotapes will appreciate the perils of this painful stage. Today such networks as digital photographs and desktop operating systems are in this fluid phase: Several well-established standards vie for ultimate dominance. Choose wisely!

The prestandard phase...

Tue, 22 Dec 2009 05:00:00 -0800

...is the most exciting. This period is marked by tremendous innovation, high hopes, and grand ambition. "Aha!" ideas flow readily. Since there are no experts, everyone can compete, and it seems as if everyone does. Easy entry into the field draws myriad players. For instance, when telephone networks began, there were few standards and many contenders. In 1899, there were 2,000 local telephone firms in the American telephone network, many of them running with their own standards of transmission. In a similar vein, in the 1890s, electricity came in a variety of voltages and frequencies. Each local power plant chose one of many competing standards for electrical power. Transportation networks, ditto. As late in the railroad era as 1880, thousands of railway companies did not share a universal gauge.

Two examples of networks in the prestandard stage today are online video and e-money. You have the choice of many competing protocols with equal prospects. With both domains, the uncertainty level is high, but the consequences of being wrong are minimal. Little is locked in, so it's easy to change.

In the network economy a firm's primary focus...

Fri, 18 Dec 2009 05:00:00 -0800

...shifts from maximizing the firm's value to maximizing the network's value.

Not every network demands the same investment. The music CD standard and web of suppliers is well entrenched by now. The new DVD video standard is not. A publishing company issuing music on a CD has to devote less energy to making sure the CD platform flourishes than does a movie company issuing their film on a DVD. The film company must devote substantial resources to ensuring the spread and survival of this emerging platform. They'll work with the hardware manufacturers, maybe share costs of advertising by seeding the platform logo in their own ads, send reps to technical committees, and cooperate with other film studios in getting the new format accepted. The music company doesn't need to make as heavy an investment with CDs. But they do need to make investments into new networks if they try to deliver music online--because online delivery is still in its embryonic phase.

Every network technology follows a natural life cycle, roughly broken into three stages:

    * Prestandard
    * Fluid
    * Embedded

A firm's strategy will depend on what phase a network is in.

As the destiny of firm and web intertwine...

Tue, 15 Dec 2009 05:00:00 -0800

...the health of the matrix becomes paramount.

Maximizing the value of the net itself soon becomes the number one strategy for a firm. For instance, game companies will devote as much energy to promoting the platform--the tangle of users, game developers, and hardware manufacturers--as they do to their games. For unless their web thrives, they die. This represents a momentous change--a complete shift in orientation. Formerly, employees of a firm focused their attention on two loci: the firm itself and the marketplace.

The prosperity of a firm is directly linked to the prosperity of its network. As the platform or standard it operates on flourishes, so does the firm.

Now there is a third horizon to consider: the network. The network consists of subcontractors, vendors and competitors, emerging standards for exchanges, the technical infrastructure of commerce, and the web of consumers and clients.

Commerce networks can be thought of as ecologies. Economist Brian Arthur states: "Players compete not by locking in a product on their own but by building webs--loose alliances of companies organized around a mini-ecology--that amplify positive feedbacks to the base technology."

During certain phases of growth, feeding the network is as important as feeding the firm. Some firms that already have large market shares (such as Intel, which owns 80% of the PC processor market) channel money, through minority investments, to younger firms whose success will strengthen the market for their products, directly or indirectly. They feed the web because it is good business.

Individual allegiance moves away from firms...

Fri, 11 Dec 2009 05:00:00 -0800

...and toward networks and network platforms.

Are you Windows or are you Mac?

This shift to network loyalty makes the potential of any network we might want to join a key issue. Is the network waxing or waning? Is the upside potential meager or tremendous? Is the network open or closed?

When given the choice between closed or open systems, consumers show a fierce enthusiasm for open architectures. They choose the open again and again because an open system has more potential upside than a closed one. There are more sources from which to recruit members and more nodes with which to intersect.

Identifying the preferred network to do business in is now a major chore for firms. Because more and more of a firm's future lies in its networks, firms must evaluate a network's relative open- and closedness, its circulation, its ability to adapt. Consultant John Hagel says, "A web limits risk. It allows companies to make irreversible investments in the face of technological uncertainty. Companies in a web enjoy expanding sourcing and distribution options, while their fixed investment and skill requirements fall."

Members Prosper as the Net Prospers

Wed, 09 Dec 2009 10:43:29 -0800

The distinguishing characteristic of networks is that they contain no clear center and no clear outside boundaries. Within a network everything is potentially equidistant from everything else. Therefore the first thing the network economy reforms is our identity. The vital distinction between the self (us) and the nonself (them)--once exemplified by the fierce loyalty of the organization man in the industrial era--becomes less meaningful in a network economy. The only "inside" now is whether you are on the network or off.

Pinpoint where value is being given out...

Fri, 04 Dec 2009 05:00:00 -0800

...for free now, and then follow up. The next netscape, the next yahoo, the next microsoft is already up and running, and they are giving their stuff away for free. Find them, and hitch your wagon to their star. Look for the following tricks: charges only for ancillaries, as-if-free behavior, memberships, and outright generosity. If they are using the free to play off network effects, they are the real mccoys.

The ancillary market is the market.

Tue, 01 Dec 2009 05:00:00 -0800

The software is free, but the manual is $10,000. That's no joke. Cygnus Solutions, based in Sunnyvale, California, rakes in $20 million per year in revenues selling support for free Unix-like software. Apache is free but you can buy support and upgrades from C2Net. Although Novell, the network provider, does sell network software, that's not what they are really selling, says Esther Dyson: "What Novell Inc. really is selling is its certified NetWare engineers, instructors, and administrators, and the next release of NetWare." One educational software exec admitted that his company's help line was actually an important profit center. Their main market was the ancillary products they sold for their flagship software, which they had a chance to do while helping customers.

Turn off the meter, charge for joining.

Mon, 23 Nov 2009 05:00:00 -0800

Flat or monthly fixed pricing is one way of pricing "as if free." Fees are paid, but there is no meter running. This tactic can be abused by the company (a la cable TV) or can be abused by the consumer (a la AOL). A flat fee is one type of subscription. Subscriptions are well-honed tools used by the soft world of magazines and theater, among others. Could subscriptions really apply to old order physical products, like say, food? The idea of subscribing to food is not so outlandish. Forty years ago subscriptions to milk were quite common. There were also subscriptions to bread and beer and other staples. Subscriptions tend to emphasize and charge for intangible values: regularity, reliability, first to be served, and authenticity, and work well in the arena of "as if free."

Anticipate the cheap.

Fri, 20 Nov 2009 13:21:10 -0800

What would you do if your current offerings cost only one third what they cost today? They will someday soon, so create models that recognize this trend.

Invest in the first copy.

Tue, 17 Nov 2009 05:00:00 -0800

That is the only one that will hurt. The second copy and all thereafter will head toward the free, but the first will become increasingly more expensive and capital intensive. Gordon Moore, of Moore's Law fame, posed a second law: that the costs of inventing chips (that are halving in cost every 18 months) is doubling every three to four years. The up-front investment for research, design, and process invention for all complex endeavors are commanding a larger share of the budget, while the capital costs of subsequent copies diminishes.

Act as if your product or service is free.

Thu, 12 Nov 2009 05:00:00 -0800

Magazine publishers do this. The cover price on a magazine barely covers the cost of printing it, so publishers act as if they were giving it away (and some actually do). They make their money instead on advertising. Says pundit Esther Dyson, "The creator who immediately writes off the costs of developing content--as if it were valueless--is always going to win over the creator who can't figure out how to cover those costs." Memberships in serious discounters such as Cendant are also "as if free." Cendant "gives away" the merchandise very near the cost of manufacturing, as if the stuff were free. They make the bulk of their profits not from selling goods to its members--who get fantastic retail prices--but from selling $40 per year membership fees.

What can you give away?

Mon, 09 Nov 2009 10:06:14 -0800

This is the most powerful question in this book. You can approach this question in two ways: What is the closest you can come to making something free, without actually pricing it at zero? Or, in a true gesture of enlightened generosity, you can figure out how to part with something very valuable for no monetary return at all. If either strategy is pursued with intelligence, the result will be the same. The network will magnify the value of the gift. But giving something away is not usually easy. It must be the right gift, given in the proper context. To figure out what to give away, consider these questions:

Is the freebie more than a silly premium, like the toy in a cereal box? There is no power in the gift unless it is crucial to your business.
What virtuous circle will this freebie circulate in? Is it the loop you most need to amplify?
In the long run, the unbounded support of a customer is more valuable than a fixed amount of their money. How will you eventually capture the support of customers if there is initially no flow of money?

Every organization harbors at least one creation--or potential creation--that can be liberated into "freedom." This is often an idea with problems, particularly with its price: Should it be $69.50 per minute or $6.50 per box? The answer sometimes is: It should be free. Even if the idea is never actualized, my experience is that the very act of contemplating the free will inevitably illuminate all kinds of beneficial attributes that were never visible before. "Free" has long been a taboo price point. Perhaps because it has been forbidden, many low-hanging fruit are waiting to be plucked by giving the free serious consideration.