5 The Law of Increasing Returns

Make virtuous circles

The prime law of networking is known as the law of increasing returns. Value explodes with membership, and the value explosion sucks in more members, compounding the result. An old saying puts it more succinctly: Them that’s got shall get.

We see this effect in the way areas such as Silicon Valley grow; each new successful start-up attracts other start-ups, which in turn attract more capital and skills and yet more start-ups. (Silicon Valley and other high tech industrial regions are themselves tightly coupled networks of talent, resources, and opportunities.)

The law of increasing returns is far more than the textbook notion of economies of scale. In the old rules, Henry Ford leveraged his success in selling cars to devise more efficient methods of production. This enabled Ford to sell his cars more cheaply, which created larger sales, which fueled more innovation and even better production methods, sending his company to the top. While the law of increasing returns and the economies of scale both rely on positive feedback loops, the former is propelled by the amazing potency of net power, and the latter isn’t. First, industrial economies of scale increase value linearly, while the prime law increases value exponentially – the difference between a piggy bank and compounded interest.

Second, and more important, industrial economies of scale stem from the herculean efforts of a single organization to outpace the competition by creating value for less. The expertise (and advantage) developed by the leading company is its alone. By contrast, networked increasing returns are created and shared by the entire network. Many agents, users, and competitors together create the network’s value. Although the gains of increasing returns may be reaped unequally by one organization over another, the value of the gains resides in the greater web of relationships.

Huge amounts of cash may pour toward network winners such as Cisco or Oracle or Microsoft, but the supersaturated matrix of increasing returns woven through their companies would continue to expand into the net even if those particular companies should disappear.

Likewise, the increasing returns we see in Silicon Valley are not dependent on any particular company’s success. As AnnaLee Saxenian, author of Regional Advantage, notes, Silicon Valley has in effect become one large, distributed company. “People joke that you can change jobs without changing car pools,” Saxenian told Washington Post reporter Elizabeth Corcoran. “Some say they wake up thinking they work for Silicon Valley. Their loyalty is more to advancing technology or to the region than it is to any individual firm.”

One can take this trend further. We are headed into an era when both workers and consumers will feel more loyalty to a network than to any ordinary firm. The great innovation of Silicon Valley is not the wowie-zowie hardware and software it has invented, but the social organization of its companies and, most important, the networked architecture of the region itself – the tangled web of former jobs, intimate colleagues, information leakage from one firm to the next, rapid company life cycles, and agile email culture. This social web, suffused into the warm hardware of jelly bean chips and copper neurons, creates a true Network Economy.

The nature of the law of increasing returns favors the early. The initial parameters and conventions that give a network its very power quickly freeze into unalterable standards. The solidifying standards of a network are both its blessing and its curse – a blessing because from the de facto collective agreement flows the unleashed power of increasing returns, and a curse because those who own or control the standard are disproportionately rewarded.

But the Network Economy doesn’t allow one without the other. Microsoft’s billions are tolerated because so many others in the Network Economy have made their collective billions on the advantages of Microsoft’s increasing-returns standards.

In a Network Economy, life is tricky for consumers, who must decide which early protocol to support. Withdrawing later from the wrong network of relationships is painful – but not as painful as companies who bet their whole lives on the wrong one. Nonetheless, guessing wrong about conventions is still better than ignoring network dynamics altogether. There is no future for hermetically sealed closed systems in the Network Economy. The more dimensions accessible to member input and creation, the more increasing returns can animate the network, the more the system will feed on itself and prosper. The less it allows these, the more it will be bypassed.

The Network Economy rewards schemes that allow decentralized creation and punishes those that don’t. An automobile maker in the industrial age maintains control over all aspects of the car’s parts and construction. An automobile maker in the Network Economy will establish a web of standards and outsourced suppliers, encouraging the web itself to invent the car, seeding the system with knowledge it gives away, engaging as many participants as broadly as possible, in order to create a virtuous loop where every member’s success is shared and leveraged by all.

In the Network Economy, make virtuous circles.

Рубрики: | Дата публикации: 12.07.2010

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