Four Superpowers to Outperform in the Network Economy (Part 3)
This is Part 3 of a four article analysis on the network economy by FABERNOVEL, adapted from GAFAnomics Season 2 by our analyst Kevin Echraghi. You can jump to: Part 1, Part 2 or Part 4.
GAFAnomics [ga-fɑː-nom-iks], noun:
A modern, networked, economic system spurred by the eponymic GAFA (Google, Amazon, Facebook, Apple) but also encompassing Unicorns, Chinese tech giants and all other companies changing our lives through computer technology.
GAFAnomics companies organize value flows very efficiently inside their proprietary networks, giving them indisputable competitive advantages. But that can’t explain alone their success and their limitless growth.
So what’s their secret sauce?
We discovered that thanks to their unique structure, networked companies exhibit 4 superpowers: they’re magnetic, infinite, real-time and intimate. These powers give them leverage to grow their user base, capture value where it can be found regardless of its order of magnitude and redistribute it in accordance with each user’s needs. We believe these superpowers are the cornerstones of GAFAnomics companies’ power and that they can be replicated by legacy companies to revive their competitiveness in the network economy.
The Magnet Enterprise: Managing Very Small Units
Networked companies are able to detect, organize, and animate very small units of value. They leverage excess capacities and externally created value to capture and deliver micro deals. Their competitive advantage is to deal efficiently with billions of small transactions and to capture value created outside their walls.
1- Capturing and redistributing excess capacities
The Theory: Excess capacity is usually defined as a situation in which actual production is less than what is achievable for a firm (Investopedia). The same notion can be applied to individual goods and assets, and refers to the amount of time they are left unused. By being connected to individuals, networked companies can identify and exploit these excess capacities, creating a market for under-used assets.
One Example: By referencing and leveraging room’s excess capacities (= time where the room is not used i.e. empty), Airbnb can offer 1,4 million rooms on its platform, twice the number of rooms in Hilton Worldwide’s portfolio, at a nearly 0 marginal cost, when Hilton has to spend around $200K per room opening.
One Quote: “There is a new paradigm reinventing capitalism. […] When excess capacity is harnessed by the platform and different peers participate, a completely new dynamic is unleashed. […] This cycle of opening up excess capacity […] is the path to abundance.” — Robin Chase, ZipCar founder
2- Opening up to capture externally created value
The Theory: In his book New rules for the New Economy (1999), K. Kelly explains that a system’s viability depends on its capacity to create opportunities for others. Synergistic benefits strengthens and accelerates the adoption of a system, enhancing its value at the same time. The key question to ask is then: “Is it easy or difficult for others to invent something that plays off on your invention?” In the Network Economy, companies open part of their system. While maximising opportunities for others, they enrich their own system with greater applications and reduce R&D costs.
One Example: By leveraging developers’ value creation, the AppStore offers 1,5 million apps, increasing the value of Apple devices. It would have taken Apple 519,000 years of an in-house developer’s time to populate such a catalog itself. Crazy!
One Quote: “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.” — Kevin Kelly, Wired Co-founder
The Infinite Enterprise: Shooting for the 100% Profit Consumer
Networked companies use highly scalable software and services to achieve zero cost delivery once critical user mass is achieved. Thanks to network effects and zero marginal costs, they can grow indefinitely in revenue with minimal impact on costs. Their competitive advantage is speed of scale and profitability.
1- Network effects: mother of all growth
The Theory: Networked companies’ exceptional growth come from network effects: after reaching critical mass, the more they grow by linking entities (information, users, producers…) to their network, the more their network is attractive to other entities. Thus, networked companies’ growth is in perpetual acceleration, making them incredibly scalable.
One Example: Thanks to network effects, the value of Facebook’s network to advertisers increases faster than its number of users, thus boosting Facebook’s ad revenue. From 2010 to 2014, Facebook’s number of users has been multiplied by roughly 2.6 while its revenue grew 6.3 times bigger.
One Quote: “Technologies subject to strong network effects tend to exhibit long lead times followed by explosive growth. […] As the installed base of users grows, more and more users find adoption worthwhile. Eventually, the product achieves critical mass and takes over the market.” — Hal Varian, Google’s Chief Economist
2- Programmability: towards zero marginal cost
The Theory: The marginal cost represents the additional cost incurred by producing one additional unit of a product. For networked companies this cost is getting closer to 0 every year. There are 2 reasons for that. First, most of the goods or service they’re offering are non competitive: once an app has been developed, it can be provided to all consumers, there is no need to develop a new app for each customer. Second, networked companies have automatized most of their processes, giving them the ability to scale fast and increase their volume of production without having to extend their human capital and incur any more expenses.
One Example: Waze crowdsources data from users to offer traffic and navigation services. Any additional user is served at zero marginal through a simple duplicable app, and provides additional value to the whole community making Waze’s model profoundly scalable and infinite.
One Quote: “Intense competition […] boosts productivity to the optimum point in which each additional unit introduced for sale approaches ‘near zero’ marginal cost. In other words the cost of actually producing each additional unit […] becomes essentially zero, making the product nearly free. » — Jeremy Rifkin, Economist and Author
The Real-time Enterprise: Instantly Tuning Value
Networked companies use real-time data feedback to instantly optimize market fit and improve products’ value. They use optimum management and work in perpetual beta to answer user needs in real-time. Their competitive advantage is instant fit-to-market.
1- Optimum management and behavioral economics
The Theory: By monitoring usage and aggregating huge amounts of data about consumers’ behavior, networked companies are able to understand the market in real time. Following their own econometricians and behavioral economists’ modellings, these actors adapt fast to the demand with the appropriate supply, adjusting market prices, returns and resource allocation. This type of techniques have been vastly used by hotels and transportation companies under the Yield Management concept. Networked companies extended the scope of application of Yield Management to all type of goods and services.
One Example: Gathering and analyzing massive data on consumers, vendors and competitors, Amazon readjusts its prices 2.500.000 times a day, while Walmart does it only 2000 times a day. This way, Amazon is always closer to the market than its competitors, lowering or increasing prices depending on the time of the year, and in regard to competitors’ prices.
One Quote: “I joined the company in 2002 and initially worked on the economics of the AdWords auction. […] I have also worked on query and revenue forecasting, advertiser behavior, ad effectiveness […] We have hundreds of statisticians, econometricians, data scientists, and other quantitative analysts at Google.” — Hal Varian, Chief Economist at Google
2- The perpetual beta and the technical surplus
The Theory: Traditional companies usually deliver finished products to their consumers, creating technical debt: as time goes, products decreasingly answer users’ needs. Networked companies create technical surplus instead by working in perpetual beta: delivering a first iteration of their products and services, they regularly add features according to the needs identified by listening to their users. Instantly delivering these improvements to their network, they always are on par with users’ evolving expectation and create a long-lasting relationship with them.
One Example: Google leverages its network to identify user needs and improve its products accordingly. You’ll never hear the company talk about V0, V1 or V2… Their products are in perpetual beta and improvements are implemented every day. In 2000, query monitoring revealed many users were typing in « Jennifer Lopez Grammy picture ». To meet users’ expectations, Google came up with the idea of adding a search engine for pictures to its core search engine: that’s how Google Images was born!
One Quote: “The open source dictum, “release early and release often » […] has morphed into an even more radical position, “the perpetual beta,” in which the product is developed in the open, with new features slipstreamed in on a monthly, weekly, or even daily basis. ” — Tim O’Reilly, Founder of O’Reilly Media
The Intimate Enterprise: Hospitality is the Norm
Networked companies use customer knowledge to fine-tune and personalize the experiences they deliver to each customer. Large-scale customization is at the heart of their products. Targeting and customizing their products to every single user, they create intimate long-lasting relationships.Their competitive advantage is customer hospitality and comfort.
1- Targeted is the new mass
The Theory: Nowadays, we produce more data in just two days than all the data produced since the beginning of mankind till 2003 ! In this ocean of information and options, users are always looking for solutions to identify the content that suits them the best. Thanks to their network of precisely identified data, their knowledge of users and their powerful algorithms, networked companies are able to accurately target users with appropriate content (products, information, advertising…), thus increasing the value of their products to users.
One Example: Based on user’s tastes, behaviors, apparent humor, and on the time of the day, Netflix tailors each viewing experience creating a unique catalog of movies for each user. 75% of the content consumed on Netflix is based on targeted recommendations.
One Quote: “Nowadays the problem is not information access but information overload. It is no accident that the most popular Websites belong to the search engines, those devices that allow people to find information they value and avoid the rest.” — Hal Varian, again!
2- Customized is the new standard
The Theory: Mass customization has been defined as the concept of “producing goods and services to meet individual customer’s needs with near mass production efficiency.” By providing platforms for creators to offer additional services and for users to pick and choose from, networked companies have made mass customization the new standard, at virtually no additional cost. Each of their user can customize their own experience, increasing their perceived usefulness of the products and services offered and creating long-lasting relationships with the company.
One Example: Every iPhone is the same when it exits production chains but becomes unique after its 30 first minutes of usage, depending on the apps downloaded by each user. The magic of mass customization!
One Quote: “I believe that in the long run, all credible large-scale Internet companies will provide […] platforms. Those that don’t, won’t be competitive with those that do, because those that do will give their users the ability to so easily customize and program as to unleash supernovas of creativity.” — Marc Andreessen, Founder of Netscape and A16Z
The 4 powers we uncovered above, all originate from network structures. So it seems safe to assume than any company wishing to benefit from the associated competitive advantages has to think and structure itself as a network.
But how can a company structure itself as a network ?
Spoiler: There are two main options: either connect to existing networks or creating your own. Read part IV
