Slides from my talk at the Price Waterhouse Coopers Deals Exchange conference on April 26, 2018. I talk about algorithmically manage, internet-scale networks and how they are changing the very nature of the economy, the shape of companies, and the competencies that are required for 21st century success. There are many similar themes to other talks, but this is tailored to a business audience, and very specifically to one concerned with how to do M&A in an age of dominant platforms.
1. Networks and the Next Economy
Tim O’Reilly
@timoreilly
oreilly.com
wtfeconomy.com
PWC Deals Exchange
April 26, 2018
2. How is the economy changing?
What are the implications for business?
What does technology now make
possible that was previously impossible?
What work needs doing?
Why aren’t we doing it?
wtfeconomy.com
3. We have to let go of the maps that are steering us wrong
In 1625, we thought
California was an island
4. In 2018, we still think in terms of standalone firms.
We need to think about every company as if it is a network
5. Networks and the Nature of the Firm
“The existence of high transaction costs outside
firms led to the emergence of the firm as we
know it, and management as we know it….The
reverse side of Coase’s argument is as
important: If the (transaction) costs of exchanging
value in the society at large go down drastically
as is happening today [because of networks], the
form and logic of economic and organizational
entities necessarily need to change! The
mainstream firm, as we have known it, becomes
the more expensive alternative.”Esko Kilpi
6. If we want to understand the future of business and the
economy, we have to understand networked platforms
19. The algorithms decide “who gets what – and why”
Markets are outcomes. A better designed
marketplace can have better outcomes.
But it can be enormously disruptive for
existing participants.
20. Algorithms have become a battleground
The takeaway: You have to think
far more broadly about security
and trust in the networked age.
21. We are all living and working inside a machine
22.
23. “The Uber app is the drivers’ workplace,
as much as the city where they’re driving
is. Each decision about its interface
structures drivers’ interactions with Uber
the company as well as Uber the
transportation marketplace.”
Alexis Madrigal, The Atlantic,
“Uber Drivers are About to Get a New Boss”
25. “A business model is the way that
all of the parts of a business work
together to create competitive
advantage and customer value.”
- Dan and Meredith Beam
26. Who Do You Want Your Customers to Become?
Henry Ford didn’t just rethink
the automobile and the
factory, he rethought the
work week, and the reasons
why people might want to
drive.
27. A Business Model Map of Uber
A magical app that lets drivers
and passengers find each other
in real time
A networked marketplace of
drivers and passengers
Customers who trust that they
don’t have to drive their own car
Augmented workers able to join
the market as and when they
wish
A matching market managed by
algorithm
28. What makes an app “magical”?
1. It seems unbelievable at first.
2. It changes the way the world works, so that the
unbelievable comes to seem inevitable and normal.
3. It results in an ecosystem of new services, jobs, business
models, and industries.
30. The takeaway: You can’t just add an app
or buy a startup and hope to compete
31. After a strong start, Walmart’s jet.com acquisition
demonstrates how hard it is to
compete with a market-leading
network on its own terms.
You have to take the entire
business model into account!
38. Many of today’s workers are programs.
Developers are actually their managers.
Every day, they are inspecting the
performance of their workers and
giving them instruction (in the form of
code) about how to do a better job
39. How Amazon Became a Platform
“[Jeff’s] Big Mandate went something along these lines:
1) All teams will henceforth expose their data and functionality through service interfaces.
2) Teams must communicate with each other through these interfaces.
3) There will be no other form of interprocess communication allowed: no direct linking, no
direct reads of another team’s data store, no shared-memory model, no back-doors
whatsoever. The only communication allowed is via service interface calls over the network.
4) It doesn’t matter what technology they use. HTTP, Corba, Pubsub, custom protocols —
doesn’t matter. Bezos doesn’t care.
5) All service interfaces, without exception, must be designed from the ground up to be
externalizable. That is to say, the team must plan and design to be able to expose the
interface to developers in the outside world. No exceptions.
6) Anyone who doesn’t do this will be fired.”
Steve Yegge, in http://siliconangle.com/furrier/2011/10/12/google-engineer-accidently-
shares-his-internal-memo-about-google-platform/
41. The lessons of technology are also lessons
for the organization of the business
“Services not only represent a
software structure but also the
organizational structure.”
Werner Vogels, Amazon CTO
42. The takeaway: You can’t just do a digital acquisition and
expect it to transform your company
43. In 2018, we still pretend that growth goes on forever
46. Fitness Landscapes
The way in which genes contribute to
the survival of an organism can be
viewed as a landscape of peaks and
valleys.
Through a series of experiments,
organisms evolve towards fitness
peaks, adapted to a particular
environment, or they die out.
Image source: http://evolution.berkeley.edu/evolibrary/article/side_0_0/complexnovelties_02
47. Technology also has a fitness landscape
In my career, I’ve watched a number of migrations to new peaks, and I’d like to share with
you some observations about what happened, and why. And then we’ll talk about some
lessons for companies like Google, but also for the overall economy.
Apple
Personal
Computer
Big Data
and
AI
Smartphones
48. It’s very hard to beat an entrenched platform
at its own game
49. The Rules for Success Change
IBM fitness function: Maximize competitive advantage by control over hardware
Microsoft fitness function: Maximize competitive advantage by control over software
Google fitness function: Maximize competitive advantage by control over data and
marketplaces
Apple fitness function: Maximize competitive advantage by integrated control of
hardware, software, and marketplace.
In each case, companies playing by the old rules lost. Or did they?
50. Generosity takes us to the next peak
Tim Berners-Lee, 1990
The World Wide Web
Linus Torvalds, 1991
Linux
Big Data
and
AI
Tim Berners-Lee, 1990
The World Wide Web
Linus Torvalds, 1991
Linux
55. The great opportunity of the 21st century is to use our
newfound cognitive tools to build
better networked marketplaces
56. A language for networked marketplaces
Network effect: the value of a network is
proportional to the square of the number of
possible connections
Scale effect: bigger is better (but not always)
Feedback effect: the more data you collect from
the marketplace, the more you can learn, and the
better the services you can provide
Two-sided market: different classes of users
being matched up: searchers and advertisers,
drivers and passengers, homes and renters.
57.
58. Asymptotic Networks
“The reason Lyft is able to compete with
Uber is that even if they have fewer drivers
in many cities, both platforms are still able
to guarantee a ride with an average wait
time of 4 minutes. Neither can improve by
adding more drivers to a city.”
James Currier
59.
60. Market Networks
In a market network, you’re not
connecting a simple marketplace of
buyers and sellers, but also
connecting them with intermediaries
and service providers. A Market
Network combines elements of a
professional network, an online
marketplace, and SaaS tools.
61.
62. “We wouldn’t be able to build defensibility from our supply-
side relationships purely on the basis of a Marketplace
Network Effect, because it was in the interests of the real
estate agents to syndicate their listings through every
possible channel…. So we created an XML feed standard …
This prevented brokers from having to go through the hassle
of posting them manually to every channel, and soon our
competitors had adopted the same XML standards for their
sites as well.”
And, after 2009, when the real estate market collapsed, ”to
scale [a] new monetization strategy targeting smaller
customers, we set to work creating cost-effective marketing
and lead generation products for the individual real estate
agents.”
Pete Flint
63. “Once they get some traction, platforms survive
either because:
They achieve critical mass in a market with
network effects. They are the default place to
go—this is why Craigslist, Airbnb, ebay, Etsy,
and other places with most of the inventory
thrive.
They provide a tool set ecosystem. The
product or service has certain functions that
buyer and seller need (escrow, analytics, a
CRM, etc.) that the marketplace can provide with
an economy of scale that beats everyone doing
it themselves.”
Alistair Croll
64.
65. The takeaway: There are many opportunities to apply
platform thinking besides “winner takes all.”
66. In 2018, we believe that technology replaces people
67. “…47 percent of jobs are “at
risk” of being automated in the
next 20 years.”
Carl Frey and Michael Osborne, Oxford University
“The Future of Employment: How Susceptible
Are Jobs to Computerisation?”
68. Will there really be nothing left for people to do?
Is there really
nothing left for
humans to do?
69.
70. Dealing with climate change
Rebuilding our infrastructure
Feeding the world
Ending disease
Resettling refugees
Caring for each other
Educating the next generation
Enjoying the fruits of shared prosperity
71. This is what technology wants
“Prosperity in human societies is best
understood as the accumulation of
solutions to human problems. We won’t
run out of work until we run out of
problems.”
Nick Hanauer
82. “In order to fully reap the benefits of a
changing economy—and sustain growth
over the long-term—businesses will need
to increase the earnings potential of the
workers who drive returns, helping the
employee who once operated a machine
learn to program it. They must improve
their capacity for internal training and
education to compete for talent in today’s
economy and fulfill their responsibilities to
their employees.”
Just-in-time learning is a 21st century competency
Larry Fink,
CEO, Blackrock
84. WeWork Acquires The Flatiron School
Like Kiva (Amazon
Robotics), this is a
network-enabling
acquisition!
85. The takeaway: acquire or partner to supercharge the skills
of your employees and of your network
86. PROFICIENT/HIGH PERFORMERS
Use self-directed discovery for problem-solving, and
nonlinear instruction to acquire new skills.
Require high-quality, relevant content with depth and breadth.
NEED THE FUNDAMENTALS
Learn basics through comprehensive, sequential (linear) instruction.
Require structured, highly curated content.
STRUCTURE CONTENT
STRUCTURAL
LITERACY
LOW-LEVEL
KNOWLEDGE
Professional Skills Development Framework
HIGH-LEVEL
KNOWLEDGE
Fluency
Awareness
Identification
87. O’Reilly Media
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2.0, Maker Movement, Big Data
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contributors
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platform users globally
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20k individuals and 1,000 sponsor
companies
94. O’Reilly’s Platform-Centered Learning Ecosystem
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(learning
platform)
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Foo Camps
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Network
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Cutting edge idea forums
Digital platform for
on-demand learning
across modalities.
Books, video,
synchronous and
asynchronous
online learning
Our ecosystem matches
thousands of learning providers
with millions of customers
95. Tim O’Reilly
@timoreilly
• O’Reilly AI Conference
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• …
• 40,000+ ebooks
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of video training
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• A platform for knowledge
exchange
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Founder & CEO, O’Reilly Media
Partner, O’Reilly AlphaTech Ventures
Board member, Code for America
Co-founder, Maker Media