The new barriers to entry

1 Comment

Get the short URL

At this year’s Foo Camp, I had some really interesting conversations with people about economics. There’s a sense in the tech world that there is a genuinely new economy emerging, and we don’t know what it will wind up looking like.

There are plenty of reasons to feel this way:

  • Crowdfunding and microfinance tools like Kiva and Indiegogo;
  • The demise of long-reliable economic indicators like GDP;
  • The liquidity of online transactions with trust and rating systems that facilitate barter and reduce the ability for central institutions (such as governments) to track traditional currencies;
  • Our ability to easily track new currencies such as reputation, and to “bank” reputation for a while, even though these don’t register on traditional accountants’ balance sheets;
  • A big decentralization of businesses, with the App and eBay workforces swelling to hundreds of thousands of people;
  • Tools that reduce the friction of transactions, making it possible to pay for economic resources such as labor by the drink (Taskrabbit, Mechanical Turk, and so on.)

Tim O’Reilly stacked the attendee list with disruptive startups and breakout success stories from Kickstarter, as well as smart economists and professors. This is the genius of Foo Camp: conversations happen because interesting people are getting scruffy and unkempt together.

After the event, I wrote up some of my thoughts in an attempt to define this shift in economic sentiment. But what to call it? Peer Economy? Hidden Economy? Post-industrial Economy? Everything seems cliché. Nevertheless, there’s something there.

I’m going to try and publish chunks of what I wrote, here, in the hopes of fomenting discussion. I also hope to find out whether I’m just living in a bubble, or if there are, in fact, some genuinely tectonic changes afoot.

First up: barriers to entry.

If you believe early Internet pundits, the Web would give us a flat, level playing field where anyone could be king or queen.

That’s not what happened. Sure, the Web has disrupted plenty of industries, largely because it’s overcome the inherent friction in many business processes, turning “too hard to bother” into “why not?” One only needs to look at the thousands of hobbyists turned merchants on Etsy to see what happens when a coefficient of friction drops. But there are still huge advantages that large, well-entrenched players enjoy. You can create Betabrand, and carve out a niche; but you can’t easily be Amazon.

This is as true today as it was when Michael Porter described the “hole in the middle” problem: you can be small, and compete on differentiated niche; or big, and compete on cost and margin. But being mid-sized sucks, because you can’t focus, and you can’t dominate your supply chain.

Barriers to entry at scale were traditionally related to control over economic inputs and outputs. For example:

  • You could corner the market for a particular resource, as some electronics companies have done by buying up supply and stalling competitors.
  • You could lobby politicians and enjoy a sanctioned monopoly (AT&T, the railroads, patent rights) in return for your undertaking.
  • You could train the market on a particular way of doing things, slanting the resource pool in your favor (Microsoft’s focus on developers, developers, developers.)
  • You could have access to capital, and use that to invest at advantageous terms (investment banks, magnates, oil barons.)
  • You could control a supply chain or means of distribution and dictate profits (Clear Channel and Ticketmaster for billings.)

In the end, these amount to one thing: you could achieve a greater scale, and the corresponding economies of scale, than your rivals. Classic marketing strategy says that cost leadership resulting from scale is the only long-term competitive advantage for large companies.

There may be good reason to believe that the dominance of these scale-centric barriers is over. As Geoffrey West observes in Why Cities Keep Growing, Corporations and People Always Die, and Life Gets Faster,

The great thing about cities, the thing that is amazing about cities is as they grow, so to speak, their dimensionality increases. That is, the space of opportunity, the space of functions, the space of jobs just continually increases. And the data shows that. If you look at job categories, it continually increases. I’ll use the word “dimensionality.”  It opens up. And in fact, one of the great things about cities is that it supports crazy people. You walk down Fifth Avenue, you see crazy people. There are always crazy people. Well, that’s good. Cities are tolerant of extraordinary diversity.

This is in complete contrast to companies. The Google boys in the back garage so to speak with ideas of the search engine, were no doubt promoting all kinds of crazy ideas and maybe having even crazy people around them.

Companies hit a point of diminishing returns, where scale costs more to deal with than it brings in. But cities become more productive as they get bigger. Are new-economy companies more like cities? The rise of network-driven, crazy-tolerant organizations may be an element of this hidden economy. But does that mean barriers to entry are gone?

Nope. They’ve just changed.

Barriers to entry still loom large. The myth that somehow it’s easy to enter a market may be false. But maybe the barriers changed. And perhaps our perception that they went away was simply a brief, beautiful period during the disruption when old barriers crumbled but new ones hadn’t yet been erected: When Google, Amazon, and Facebook hadn’t yet risen to power; when one could still gain a foothold as the world colonized its online lives.

In other words, we thought the rising tide of the Web would float all boats, even as it washed away the old walls. We forgot that those waters had strong, inexorable, irresistible currents. And we didn’t know that we’d soon be mere flotsam, tossed about in the spray, tapping at our pocket-sized Skinner Boxes for a few droplets of adulation, waiting for someone else to tell us where we wanted to go next.

David Lowery asks us to, “Meet the new boss, worse than the old boss?” Are the barriers to entry that Internet giants can erect worse than those of their predecessors?

I contend there are three big barriers to entry that companies can erect:

  • Attention. Simply, if you have people’s attention, you can direct it at things. Attention is a scarce resource. Google has your attention, and they’re an effective middleman. Kickstarter projects and Youtube channels compete for your attention; even the great equalizer of Kickstarter conforms to Pareto Curves, as this research into project success shows.
  • Permission. The right to interrupt a consumer—to send them messages—is a strong advantage. Facebook can tell you when you’ve been tagged; Amazon can let you know when a friend recommends something; and so on.
  • Math. The ability to crunch data and make optimized decisions is an advantage. Access to data, and tools to mine it (including proprietary algorithms) are key. Google knows enough about you to present a genuinely better offer at the time when you want it, something Maribel Lopez calls Right Time Experiences.

There likely aren’t fewer barriers to entry, just new ones. Carriers, cable companies, news networks, and others are scrambling to control and consolidate these in order to tax our online lives and steer our decisions, which is why we see jockeying for position around net neutrality, copyright law, and so on.

As Lowery warns, these new bosses may indeed be worse than the old ones. At least the old barrier-owners had a hand in the product—raw materials, distribution chains, invention. The new barrier-owners and gatekeepers extract a tax simply for access, without necessarily offering tangible value related to the good or service itself.

So perhaps one facet of this elusive new economy is the use of math, attention, and permission as a valuable currency for which members of the chain are willing to—or forced to—pay handsomely.