GAFAnomics Companies Operate as Networks (Part 2)
This is Part 2 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 3 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.
Google, Amazon, Facebook, Apple (GAFA) and their successors belong to a new economy, with its own rules and its own dynamic. A mature, commoditized, accelerating and growing economy. Actors of this new economy, the GAFAnomics companies, are reshuffling the cards, going after and defeating long-lasting industrial empires one after the other. Leaders of traditional companies need to understand the mechanisms at play and the unique structure of these new actors to plan for the future.
So what is at the core of these new businesses? How can they grow so fast?
In their collection of essays Breaking Smart, Marc Andreessen and Venkatesh Rao remind us that:
“In the networked world, [the three most desirable things] are connections, connections and connections”.
And this really seems to be the secret to this new breed of companies: they have structured themselves as networks that connect users, businesses, products and information to one another. This structure is at the core of GAFA and their mission statement.
Google was pretty clear about it:
“Basically, our goal is to organize the world’s information and to make it universally accessible and useful”.
And how did they do it? By connecting pieces of information to one another through their indexation algorithm (connections through citations between web pages is the corner stone of Google’s algorithm as they explain it in their original paper at paragraph 2.1) and allowing users to connect to these information through a simple search engine. With time Google enriched its pool of information users could connect to, adding images, locations and videos. It also allowed users to connect to each other through services like Gmail or Google+ and businesses to connect to users through AdWords. Androïd then is nothing more than an entry point to connect to the Google World.
Facebook also built a network of users, business, and information, with a clear mission in mind:
“Facebook […] was built to accomplish a social mission — to make the world more open and connected”
The same is true for Amazon and Apple.
GAFA built open networks of their own and made us enter the Network Economy, where connections have become the most valuable assets a company could want to own.
The network structure of this new economy was explored in the late 90’s by thought leaders, including Hal Varian, Google’s current Chief Economist (read here) and Kevin Kelly, Wired’s co-founder (read here). But search for recent analysis and you won’t find much to read, as if we’ve been paralyzed watching this new world unveil itself before our eyes.
One of the only recent insights about this matter was published last year in HBR under the title “What Airbnb, Uber and Alibaba have in common?”. Authors of the article classify companies in 4 categories:
- Asset Builders: These companies build, develop, and lease physical assets to make, market, distribute, and sell physical things. Examples include Ford, Wal-Mart, and FedEx.
- Service Providers: These companies hire employees who provide services to customers or produce billable hours for which they charge. Examples include United Healthcare, Accenture, and JP Morgan.
- Technology Creators: These companies develop and sell intellectual property such as software, analytics, pharmaceuticals, and biotechnology. Examples include Microsoft, Oracle, and Amgen.
- Network Orchestrators. These companies create a network of peers in which the participants interact and share in the value creation. They may sell products or services, build relationships, share advice, give reviews, collaborate, co-create and more. Examples include eBay, Red Hat, and Visa, Uber, Tripadvisor, and Alibaba.
Through extensive studies using this classification, the authors discovered that network orchestrators create more value than any other category:
This is some serious insight ! But some things still left us wondering: why do they create more value? What are their secrets? Where do their growth and adoption rates come from? How do they leverage this structure to improve day after day?
Here is what we found.
From the Value Chain to the Value Loop
First of all, companies that structure themselves around networks create value through a value loop, leaving the business school value chain behind. This is partly due to new markets, called multi-side markets, where clients of a company are both individuals and businesses. The study of these markets earned Jean Tirole his Nobel Prize in Economics. (Here’s the paper)
In the classical economy, value flows through a simple chain, from suppliers providing raw materials to the corporation (like Ford) that transforms them into products. The products are then sold to consumers, most of the time through retailers. This is typical from a concentrated economy, where most of the value is created at a single place, here the factories. Companies look to concentrate as much capital as possible (assets and human capital) to maximize value transformation. The company only captures value (money) when the transaction occurs but doesn’t capture any of the ongoing value (time, data, money) created by its products.
In the network economy, value is produced inside a value loop. Every unit of value created by products or users is captured by corporations, transformed, exploited to improve products and redistributed to interested users.
Let’s take Google for example:
- Google creates value for users by giving them access to an almost infinite and time-saving source of information.
- Google captures value from these users by aggregating data about their product usages. These pieces of information are exploited to improve the search engine as a whole and to tailor future research to users, thus increasing value creation. Google also captures users’ time in the form of attention.
- Google creates value for businesses by allowing them to connect with users. First naturally, by referencing their content, and creating a link between users and businesses through Google Search. Second, “artificially” by allowing businesses to advertise to targeted users through Adwords. In order to do so, Google exploits the data it had gathered about users and monetizes their attention.
- Google captures value from businesses by aggregating their content through indexation, thus increasing the value of its search engine. Indeed, Google is our main source of information, but doesn’t produce any of the information it gives access to.
This value loop allows companies to create and redistribute value in a perpetual cycle, reminding us of Lavoisier’s famous law :
“Nothing is lost, nothing is created, everything is transformed”.
This cycle is at the core of GAFAnomics companies’ models, allowing them to maximize value creation by minimizing value losses. Let’s just note that connecting objects and making them enter the “Internet of Things” is a way to create value loops around physical objects by being able to capture the value they create and deliver additional value accordingly.
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?
Spoiler: We discovered GAFAnomics® companies all exhibit 4 superpowers drawn from their unique network structures: they’re magnetic, real-time, intimate and infinite. Read part III
