page image

CHAPTER I - The Digital Assets on Open Platforms: A Different Kind of Economy

The Digital Assets on Open Platforms: A Different Kind of Economy

As the Internet matures, new types of technologies and interconnections suddenly arise and the importance of a new kind of social and commercial resource—­“digital assets”—becomes more salient. These are intangible bits of information that have all sorts of personal, commercial, social and national value. They consist of data that may reveal our personal tastes in music, our movements around town or globally, our medical status, financial data about our creditworthiness and consumer preferences, and countless other types of information.

As more transactions and relationships of everyday life migrate to network platforms using digital technologies, the sheer amounts of data being produced are exploding. Much of this data, if properly analyzed and deployed, can yield important strategic advantages for companies, useful buying information for consumers, important knowledge for policymakers, and welcome conveniences for people’s social lives.

But the growing universe of digital assets also comes laden with serious liabilities. If disclosed in unauthorized ways, they can threaten our personal privacy, harm corporate reputations and revenues, limit one’s personal opportunities, and even undermine national security. Yet failing to use digital assets also comes with enormous opportunity costs in terms of economic vitality, product and service innovation, public health responses and the management of government programs.

While existing laws and regulatory systems address some of these issues, the unpleasant truth is that the proliferation of digital assets is producing new uncertainties and challenges that have no clear answers. The growth of networked devices such as sensors, remotely controlled thermostats and military weapons—the so-called Internet of Things— makes it even more urgent to find ways to authenticate the identities of electronic devices to authorize their use. The challenges today extend far beyond private protection, to include such issues as the new business models, the macro-economic and social effects of peer production, control over digital identities and credentials, and the security of nearly every type of communication.

To probe these and related issues, the Aspen Institute Communications and Society Program convened twenty-two technology experts, business executives, privacy experts, policy advocates, venture capital investors, and others. The participants of the 23rd annual Roundtable on Information Technology shared their diverse perspectives on these issues in an attempt to develop some coherent frameworks for understanding the new technological and economic landscape. They also sought to gauge the social and civic implications and propose practical steps by which government, business and civil society might address the many challenges identified.

The conference took place from July 7-10, 2014, in Aspen, Colorado. Charles M. Firestone, Executive Director of the Communications and Society Program, moderated. This report is an interpretive synthesis of the highlights of those conversations.

A Framework for Understanding Organizational Digital Assets

How shall we begin to understand the very idea of “digital assets?” In an opening presentation, Thomas Malone, Professor of Management at the Massachusetts Institute of Technology (M.I.T.) Center for Collective Intelligence, offered a simplified framework for defining “organizational digital assets.”

The most basic challenges for organizations, he said, are how to create and capture value. This requires three elemental factors: labor that can use assets and productive skills. Ultimately the value created must exceed the cost of these individual factors. In many instances, an organization may be quite successful in creating value but less successful in capturing value. Capturing value, said Malone, generally requires thatan organization own productive assets or have productive capabilities that others cannot easily copy.

Throughout history, the assets considered most important have shifted. In hunting and gathering societies, for example, the chief productive asset was labor. Land was not really regarded as an asset because it was seen as an inalienable given for human life—something that could not be bought or sold, and that belonged to everyone.

The dawn of agriculture helped convert land into a valuable asset. As people invested resources to improve agricultural output, they began to treat land as an asset. With the rise of an industrial economy, physical factories and intangible production processes began to create more (monetizable) value than a farm on an identical plot of land.

“In the industrial economy, we have the first harbinger of the next economy,” said Malone, “in which certain kinds of ideas about the design and operation of machines became so valuable that they were treated as a kind of ‘intellectual property’—a kind of asset that people could buy and sell independent of the physical machines that embodied those ideas.” The rise of the “information economy” signaled the importance of yet another class of assets—informational processes— that could create even greater monetizable value.

“The key insight here is that what we consider an asset has changed significantly from one economic era to another,” said Malone. Now we stand at the beginning of a period in which intangible organizational assets constitute a significant new class of assets. These assets have twosignificant attributes—the ease or difficulty of copying them, and the ease or difficulty of controlling the legal transfer of them. Malone shared a chart that illustrates the nature of intangible organizational assets:

There is a shorthand way of thinking about how different sorts of economies rely upon different sorts of assets, said Malone: “In the hunting and gathering economy, it is how much work you do; in the agricultural economy, it is what assets you have; in the industrial economy, it is how productively you are able to use those assets; and in the information economy, I think it is how intelligently you are able to continue being productive in an ever changing environment.”

Based on economic history, Malone predicted that as more and more things are digitized, pressures will grow to devise new legal forms to protect intangible digital assets. However, social capital, civic capital and individual value will also be influential.

Robin Chase, an entrepreneur who founded Zipcar, Buzzcar and Veniam Works, took issue with Malone’s conclusion that the ownership of value through property rights was the next phase of the economy. “Today we see value-creation coming through openness because there is more value to be created by moving away from legal control of assets.” Malone agreed with this analysis as it applies to creating value, but disagreed in terms of the capture of value. “In order for organizations to be sustainable, they have to at least capture enough value to support their continuing operations.”

Malone cited the immense amount of new value that Google has created, which is available to everyone for free. “Google has captured only a small fraction of that value through advertising,” he said, “but that small fraction has been a huge amount in absolute terms.” Kara Sprague, Principal at McKinsey & Company’s Business Technology Office, agreed, noting that Google’s chief economist, Hal Varian, has estimated that consumers reap about $1.40 in economic value from the Google search engine every day, for free. Facebook users reap an untold amount of value from that platform while Facebook, in monetary terms, earns only about $1 per user annually. “There is clearly a lot more value that Facebook is creating than it is actually getting.” On the other hand, Malone pointed out that “in many cases trying to capture too much of the value created [through advertising, data-mining, etc.] can be counterproductive” if it irritates or angers users.

One of the big drivers of value in the Internet age, said Jerry Murdock, Co-Founder of Insight Venture Partners, is the “intangible value of the network itself. When Facebook bought WhatsApp [a cross-platform mobile messaging app], it was clearly buying a network of networks. A lot of the most important businesses today are all about the intangible value of the network.” What makes a network especially valuable, he added, is the personal and social engagement that may occur on a given platform.

Capturing Value through Open Platforms

But is it networks—or platforms—that are the biggest generators of value?

The big story of our time, said Kim Taipale, Founder and Executive Director of the Stilwell Center, a private research and advisory organization, is the role that platforms play in privatizing value. “Platform owners are capturing the bulk of the value right now, and may capture 100 percent of the value in the future unless there is a legal development that democratizes, or balances out somehow, the winner-take-all dynamic that now prevails by default on most platforms.”

As evidence of the proprietary ambitions of platforms, Taipale cited the use of cease-and-desist letters to developers who use the platform’s APIs [application protocol interfaces] in unauthorized ways. “Right now platforms are controlling the creation and capture of value.” But platforms are not necessarily Web-based such as Facebook and Google, said Bill Coleman, Partner with Alsop Louie Partners, noting the rise of mobile telephony as a platform. “In this era of post-Internet connectivity, platforms are what you interact with,” he said. These platforms become invincible, at least for a period, for two reasons: Metcalfe’s Law of network effects (in which network value grows exponentially as more users join the network) and the Long Tail of niche users who arise to build out the ecosystem.

“In eBay’s case, its dominance stems from everyone using eBay. In the case of Facebook, it is not only the numbers of users, but the subgroups who are adding many applications. These forces work in synergy to create a ‘winner takes most’ situation. That is why there is only one Facebook and only one Google, which represent 70 percent to 80 percent of the marketplace. Nobody else can get very big because you cannot break that network effect, especially once you start generating a Long Tail.” Coleman cited the example of Microsoft, which built Windows into a successful platform, without network effects, by capturing the leading applications that were built to interact with Windows.

In the Internet era with massive “free reach,” as Coleman put it, the power of network effects and the Long Tail are amplified by the growth of rich ecosystems of symbiotic players. This produces an even more powerful “network effect of network effects,” said Coleman, compounding growth. A “power law” of distribution effects comes into play, fortifying the dominant platforms.

“Now, the interesting thing about this dynamic is the low switching costs,” said Coleman. Google has a phenomenal central search engine, but there is almost no cost to switching to a rival. “All the other ecosystems that Google has created so far have not added value to the search platform, and the search platform is where they are vulnerable just like everybody else.” On the other hand, he conceded that the social switching costs—the user loyalty, habits and image associated with the Google brand—are more formidable than the technical or economic switching costs.

Cory Ondrejka, Vice President of Engineering in the Core Experience Group at Facebook, disagreed with Coleman’s analysis about Facebook arguing, “We are at the very beginning of understanding how people are using mobile phones as networks and platforms. I think that we have layers of platform owners, and the incumbent status of any of them is very much a dangerous assumption.”

There was certainly wide agreement on this proposition—that the rapid convergence of diverse networks and technologies, and their highly fluid, dynamic interactions, are scrambling old, familiar categories and forcing the invention of new business and organizational models.

“What we are seeing now is a complete rethinking of old business models and the creation of entirely new ones that mirror no previous circumstances,” said Tony Scott, Senior Vice President and Chief Information Officer at VMware, and a former CIO at Microsoft, The Walt Disney Company and General Motors Corporation. What is different today, he said, is the use of broadly available infrastructure, labor and intellectual property—i.e., “all the open stuff…. All the old institutional resources that we used to rely on are breaking down; the new model is the network.”

“What generates value is the unique idea on top of the broad, open use of [infrastructure, labor and intellectual property],” Scott said. “That is why it is all about ecosystems and the things that you can combine together easily and quickly to deliver value.”

Dorothy Attwood, Senior Vice President of Global Public Policy for The Walt Disney Company, sees platforms “as enablers” for tapping into the value of a social and technological ecosystem. She cited Disney’s recent purchase of Maker Studios, a company that enables 75,000 creators to make user-generated control on a large scale for YouTube. “It is kind of a heresy for traditional content companies to say, ‘Oh, wait a minute—I am going to try to maximize value for individuals who are not on my studio lot!’ And yet, because of network effects, that is the way in which people are creating value and content. You have got to move into these worlds. It is clearly not a zero-sum game.”

One explanation for this shift is the role of social communities in generating value. “Our focus on value and value-capture has been focused on financial capital,” said John Seely Brown, Independent Co-Chairman of the Deloitte Center for the Edge and Visiting Scholar at the University of Southern California and former Chief Scientist of the Xerox Corporation and Director of its Palo Alto Research Center. “The question is: Can we open up a new kind of orthogonal space that is built around the notion of identity and the social economy? We are entering a world in which people are making trade-offs between the construction of social capital—identity, reputation, social engagement—and financial capital.”

While it is clear that the social and personal lives of users constitute an enormous store of intangible value, there are no consensus frameworks for talking about this fact yet. In their 2013 book, The Ethical Economy, sociologist Adam Arvidsson and Nicolai Peitersen make thefascinating observation that a huge amount of the market capitalization of companies these days—and of the economy as a whole—is based on intangibles. These intangibles include social allegiance to brands, a company’s organizational flexibility and culture, and its public reputation. An estimated 54 percent of the market value of the McDonald’s brand, for example, is said to be based on intangibles—as opposed to the physical asset needed to make hamburgers. A huge amount of the value of the Apple brand stems from the public’s loyalty to its image, product designs and social vibe.

This is a significant development because conventional economics is not well-equipped to assess the dynamics of intangible value. There are no agreed-upon metrics, models or formulas for analyzing how intangible value is created or what it consists of. For Arvidsson and Peitersen, the emerging story is about the “socialization of production”—a subtle shifting of power over brands from managers to consumers:

It is thought that consumer-based advocacy now counts for much more than advertising, and that ‘earned media’ (what consumers freely say about brands) counts for more than ‘owned media’ (what companies can say about brands in their advertising). And there have been corresponding suggestions of a new ‘community based’ brand paradigm, in which brand managers are open not only to ‘conversation’ with consumers (that is to understanding and possibly profiting from their point of view) but also to ‘debate’ (that is, allowing consumers to have a say in the management of the brand and its core values).2

In short, businesses increasingly need to mobilize active, participatory publics if their brands are going to flourish. They must “initiate and support the formation of an interpretive community.” In this sense, a huge amount of value-creation is shifting to users, with all the loss of control that this implies. A company does not “own” its customers, much as it may try to do so. This is one reason that “brand is probably one of the most significant digital assets that a company can have,” as Jerry Murdock of Insight Venture Partners put it.

Much has been made of the blurring of boundaries between producers and consumers, resulting in “prosumers.” But it is also true that many users are organizing themselves into collectives seeking to maximize their own interests, not necessarily in monetary terms. David Bollier, an author and scholar of the commons, pointed to “a recent proposal by the Peer to Peer Foundation to create a new commons-based reciprocity license that would let a group retain the surplus value that its members create. If a company wanted to use the community’s resources, it might have to pay—or it may not even be allowed to use them at all.”

Alluding to John Seely Brown’s insights about identity and social agency, Bollier noted that “many self-styled commoners are starting to find the organizational and legal means to protect the social and economic value that they create.” This trend builds on the examples set by the General Public License for software and Creative Commons licenses for creative works. “Many people are deliberately resisting attempts by proprietary market players to capture socially created value.”

There is a lesson in this for new business models, argued Shane Green, Co-Founder and CEO of Personal, Inc., a mobile and web data vault and network for important data and documents. “The best companies are going to be those who figure out how to align their interests with consumers to create a maximum amount of value for both. But I think it has to be transparent.”

Green added, “What is strange about this moment in time is that the capture and use of personal data is happening in ways that we do not understand.” Meanwhile, the bigger companies are already so awash in data and focused on proprietary advantage that they do not feel compelled to collaborate with users in deploying data in innovative ways. “I worry that because of the existing business models, there is a structural inability to take the next step [to use data to enhance the user experience].”

Two conference participants offered different visions for how empowered individuals (and self-organized groups of individuals) could use platforms to advance their interests. In one scenario, presented by John Henry Clippinger of ID3, every individual can in effect become a platform, meaning he or she would be capable of asserting his or her own digital identity and showing a high degree of self-sovereignty. In another scenario, presented by entrepreneur Robin Chase, groups of individuals acting as “peers” are engaged in an ongoing symbiotic, Yin/Yang struggle with platforms—a drama of interdependence that she will explore in her forthcoming book Peers, Inc.

Individuals as their Own Platforms

On the periphery of existing data-management practices, an ascendant paradigm aspires to change the very architecture of how digital assets are accessed and used. In a short presentation, John Henry Clippinger of ID3 described the “Cambrian explosion” of innovations in a “surreal new data ecosystem” now emerging. Its notable elements include the capacity of individuals to assert control over their own data; the ability to aggregate personal data in fluid, real-time ways to yield new social and commercial benefits; and new sorts of algorithm-based institutions and governance systems.

In some ways, the workings of these systems require that we adopt a new ontological perspective about data itself, said Clippinger. “The key element in the new data ecology is data immersion. When we talk about collecting data, we usually see ourselves as independent observers outside of the data, as if we stand apart from them and can apply external tools such as government and law to manage them. But in fact, we are on the inside, looking out,” said Clippinger. “Data is a lens through which we see and do things these days. It is really like water that we are swimming in; there is no outside Archimedean perspective.”

Clippinger stressed that this has profound implications for how we try to manage data. Instead of assuming that external institutions such as government and law can adequately govern new data systems, he believes that governance must be internalized into the very design of new technological systems and use data to provide new sorts of “algorithmic governance.”

Existing regulatory models are archaic and unworkable, said Clippinger, because they are based on old notions of data as something external and controllable. “They assume that the harms caused by data come simply from inappropriate access and circulation. And so you have regulatory policies like ‘do not collect this data’ and ‘notification and consent’ to individuals as conditions for the third-party use of data,” he said. “But such ‘opt-out’ policies are equivalent to forcing someone to become a digital pariah. They are not realistic for a society in which everything is digitized. These policies are actually destructive to the new digital ecology that is emerging, and so we have to think about new regulatory approaches.”

The imperative for a new regulatory regime is not just about personal privacy, he noted. “In the new Internet of Things, all sorts of devices are creating data. We are seeing self-driving cars and ‘smart dust’—very small processors with self-organizing sensors that transmit data back to satellites. The point of this data-rich environment is for things to be semi-autonomous. The question then is, how do you control these devices? Who are they sharing data with, and how do you verify that? In the next generation of smartphones, it is not clear if it is a ‘spy phone’ or ‘my phone.’”

As digital assets grow in value—whether they be data archives, financial assets or military drones and satellites—“devices, like people, are going to have to be authenticated, verified, permitted and governed,” said Clippinger. “The question is how they are going to be regulated. You have to be able to verify the chain of custody if you are going to know whom to trust.”

There is a certain urgency to this challenge, he added, because some former NSA analysts claim that RSA, a widely used system for secure data transmissions, will not be secure against hacking by quantum computers by the year 2015. “So every aspect of sovereign financial infrastructures will have to be rethought and redesigned to be made ‘quantum immune,’” he said.

In designing a new architecture for secure digital identity, Clippinger stressed that the question of who will control a person’s digital identity is pivotal: “‘He who enrolls, controls,’ as the saying goes,” he said. Identity has historically been something that larger institutions—the state, caste and lineage systems, kinship systems—provided. They asserted what your role would be and they conferred credentials (passports, drivers licenses, Social Security cards) authorizing access to certain privileges and resources. Identity-provisioning and credentials have thus been ways for institutions to assert and concentrate their power.

Today, many large players such as Google and Facebook are attempting to become identity gatekeepers for much of the Internet. This is a means by which they assert control over large quantities of personal data and expand their market power. But Clippinger believes that “the next value proposition is going to be opening up the identity level to everyone”—i.e., democratizing the technical means to authenticate a person’s digital identity and for communities to build trusted networks on their own terms.

Clippinger’s nonprofit, ID3, has built a new open source software platform, Open Mustard Seed, which enables decentralized implementations of secure digital identity, authentication and individual control. He explains:

If you have a 360-degree view of who is using your data, and of your own data trail, that information can be updated on a dynamic basis and in context. It allows you to mitigate risks [of spoofing and fraud] and obtain better marketing offers tailored to your actual interests. Individuals can attach self-executing digital contracts to the data itself, and markets can build a virtual cycle around that system of identity-authentication. So you can forge a complete, secure link between the origination of the data and its later use. I think this is going to be very important because many institutions depend upon the reliability of digital assets.

If there is going to be trust in open networked systems, not to mention the possibility of an open, democratic polity, Clippinger stressed that individuals must have control over their own identity and data. “The person is the platform in this new world,” he argued. This idea is currently being propagated by the technology at the heart of Bitcoin— the distributed ledger system—he said, and by people’s growing interest in creating “decentralized autonomous organizations that are not captive to any particular network.”

If the individual and his personal data becomes the platform, Clippinger added, then open networks will build all sorts of different value-propositions around the individual in socially and commercially useful ways. “When your identity certification is not controlled by any party, but is open, then your ability to host ‘enrollment’ becomes a lot easier. No one controls that chokepoint. You do not have to have face-to-face meetings; you can use biometric and other metrics embedded on a device, which then allows trustworthy interactions to occur easily and scale a lot faster. You can deploy what we call ‘trusted compute cells,’ which are self-deploying virtual machines that are capable of performing self-executing legal contracts in a distributed network environment.” This functionality would enable people to create their own Facebook-style networks of friends and colleagues without relying on centralized identity management by Facebook.

User-driven control of data also opens up the door for the creation of new sorts of automated digital asset exchanges and new types of business models. For example, it would be entirely possible to use new sorts of personal data collections to establish more reliable credit-scoring systems than, say, the standard FICO score. Groups of consumers with highly specialized interests would be capable of banding together to seek out customized or specialized products and services.

The Yin/Yang Symbiosis of Peers and Platforms

Robin Chase, an entrepreneur who has founded several startup ventures in different countries, presented her vision of the “sharing economy,” which she calls “Peers, Incorporated.” The essence of this concept is that disaggregated people are brought together by big companies who build digital platforms for participation to use under-leveraged “excess capacity.” This capacity consists of existing, already paid for resources such as an individual’s house or apartment, motor vehicle, videos, software code, expertise or social network. It is the artful conjoining of these three elements—people, platforms and excess capacity—that unleashes huge, new sources of value-creation, producing abundance.

Facebook, YouTube, eBay, Linux, Skype and Wikipedia are among the major platforms that are in the business of creating new sorts of abundance through peer collaboration and networking. Chase explained that these platforms unlock excess capacity by providing access to assets in three primary ways:

  1. By “slicing up” peer assets so that they can be more readily used.

An example is Zipcar’s ability to rent out a person’s car during the 95 percent of the time that it is not used.

  1. By aggregating lots of very small pieces. An example is Airbnb’sability to let people select from thousands of dwellings in a city to rent overnight.

  1. By opening up a resource so that it can be remixed and used in new ways. An example of this is LinkedIn, which provides anopen platform for personal and professional data about people.

Platforms are able to organize people and resources in new ways, and facilitate access, by providing standardized APIs, data, rule sets and processes.

The chief driver for this framework of “Peer, Inc.” is the ability of platforms to reduce the transaction costs of dealing with great multitudes of small, diverse, dispersed resources. The key is developing a friendly interface that can link the “industrial strength” capacities of companies, institutions and government, with the particular “individual strengths” of people, small non-governmental organizations and local companies.

“Companies, institutions and governments are uniquely good at certain things,” said Chase. “These include large investments, multi-year efforts, integration and aggregation of many parts and Deep Sector knowledge.” She also noted that large organizations can marshal diverse technical expertise, standard contracts and protocols, consistency and a trusted “brand promise,” all on a global scale.

By contrast, there are many things that individuals, small NGOs and local companies can provide more easily and inexpensively than companies. These include small investments, short-term sporadic efforts, the delivery of small services and local knowledge, said Chase. Individuals and small enterprises are also good at offering specific, unique expertise, customization and specialization, creativity and access to trusted social networks.

Through this Peers, Inc. approach, then, the local and the global can be brought together in fruitful new symbiosis. All of it is made possible by “this sea of excess capacity” that results when global platforms are made available to local producers and when local producers can participate in huge global economies of scale. This produces a Yin/Yang of interdependency in which “peers” provide “diversity, innovation and resilience” to the ecosystem while the “incorporated” side provides “a platform for participation, scale economies and high growth.”

Chase finds this new paradigm of production “unbelievably compelling” because it makes possible “a world of very, very high-paced growth and transition. If you want to keep up, whether you are big or small, you will have to adopt this model because it provides the cheapest path, has the highest growth, and generates innovation quickly.”

Chase outlined three stages in the evolution of platforms in the Peer, Inc. framework. In the first stage, the founders seed the best cases and guide their early growth. In the second stage, peer participation on platforms is well established, but it also attracts “a lot of junk” that tends to be distracting, off-putting or inefficient. And in stage three, efforts are made to raise the quality of the experience on the platform, including filtering out the junk. This stage is also when the large “power players” attempt to capture the platform.

The interdependency of the “peers” with the “incorporated” platforms comes with built-in tensions because the large, market-driven players are eager to consolidate their control of peer participation and monetize it. Chase warned: “I think we need to move past that ‘capture.’ The platform needs to keep giving power back to the peers to retain their participation and retain innovation.”

“What is wrong with capture?” someone asked. Chase responded: “The small providers will say, ‘Why play?’” In New York City, for example, 70 percent of the units offered by Airbnb are offered by something like fourteen players in effect acting as small hotels. Small, individual participants are a minority. “People fail to understand that you are only empowered because of the platform. That platform is the structure that gives the power of the corporation and the power of government to the individual,” said Chase.
How Platforms Let Businesses Outsource Costs

Chase’s presentation provoked a series of exchanges about the role of platforms in empowering individuals and small businesses. Allen Blue, Co-Founder and Vice President of Product Management at LinkedIn, noted that platforms enable “each individual to act like a small startup, taking advantage of the capacity that exists within that network.” This theme was explored by Reid Hoffman, Co-Founder of LinkedIn, and Ben Casnocha in their 2012 book The Startup of You.

For M-Squared Consulting, a contract consulting business run by John Kunzweiler, former CEO of M-Squared Consulting and Chairman of Salesian High School, the ability to rely on the LinkedIn management of personal data has been “a game-changer” because “it is a massive cost-cutter. Our balance sheet was totally transformed. And the day we do not like LinkedIn, we can go somewhere else and not worry about the legacy of the database.” Blue envisions LinkedIn enabling many other types of business-to-business transactions that would enable small players to access all the resources they need, whether they be lawyers, tax accountants, payroll managers or software services.

The basic point is that platforms can help businesses radically reduce the costs of all sorts of services and products. Perhaps the most significant of these are the ability of large companies to deliver customization and specialization in competitive, cost-efficient ways.

Anastasia Leng, Co-Founder of Hatch.co, cited her own experience in building a new business based on customization while reducing costly risks. Hatch.co is an online marketplace that allows consumers to buy made-to-order items from more than a thousand artisans and retailers around the world. In the conventional marketplace, small retailers usually end up shouldering enormous risks—and often failing as businesses—in trying to guess what consumers want. “In the apparel industry in the U.S. alone, about $6 billion is wasted annually on warehouse costs and merchandise that does not get sold.”

“The answer to this problem is customization,” said Leng, who explained how Hatch.co sells customized apparel, accessories and objects without any inventory costs or risks: “The retailer creates products that they know will get sold, and there is no unused capacity or leftover inventory.” The Hatch.co platform is key to this “just in time retail” model.

The growing role of platforms in routine business has serious implications for the structure and scope of corporations, too, because platforms allow the outsourcing of many functions at lower costs. “I think a big part of the value of a corporation is its distribution network,” said Leng. She cited the craft website Etsy, which despite some controversial policies over the years, remains the largest, most powerful distribution and marketing vehicle for small crafters, as well as a source for business-to-business tools.

The upshot, concluded Allen Blue, “is that a corporation shrinks to the point where its primary and only function is to act as a temporary platform.” It is a temporary function, he explained, because “platforms will end up competing with each other to be able to provide the right services.” He said that LinkedIn years ago anticipated that individuals would be empowered to choose from among many platforms, based on efficiency and convenience.

The Strategic and Competitive Implications of Open Platforms

Allen Blue of LinkedIn made an insightful comment about the novel ways that platforms are able to capture and privatize value: “Many platforms today basically rely on an entanglement between a platform and an application,” citing Facebook and LinkedIn as two examples. “If those layers become separated, then you end up with a very different situation.” Thus there is a lot of energy directed at maintaining the entanglement between a platform and its (proprietary) applications.

Kim Taipale of the Stilwell Center agreed: “These platforms that are emerging are really driven by the app. That is where the business of the platform lies and where the value is captured.” He noted that allowing openness on the edges helps enhance the viral capacities of the platform, but that openness is “deceptive.” As soon as public usage of the platform becomes large enough to threaten the app, he maintained, the platform owner is likely to begin issuing cease-and-desist letters and attempting to capture regulators, as the taxi service Uber has done in New York City.

It is important to distinguish between a platform and a market, said lower than in a market, and an app is a market tool for capturing some of that lower transaction cost and allowing a service to be delivered.”

Shane Green of Personal.com asked whether the app/product or the platform was the primary focus when Facebook and LinkedIn were started. Participants associated with those enterprises said that Facebook was started as a product first and LinkedIn as a platform. Green believes that the most promising business models seem to be linked to the product, and not to a platform that can be used in a wholly open way. That is one axis. Another axis is whether the business model is based on advertising or paying customers. What appears to be critical, no matter which quadrant a business is in, is how it can cross-subsidize its long-term growth while maintaining its margins.

“This analysis becomes a lot easier if we release ourselves from the assumption that companies have to survive,” said Michael Fertik of Reputation.com. Certain functions tend to be commoditized as they become public goods that cannot be captured and privatized. And, Fertik maintained, certain companies that are able to retain their margins by creating unique products—citing Disney and Xerox—will survive in the end.

Robin Chase wondered, however, about the fairly novel reality of today that private companies, not governments, are creating public goods. Historically, government has either itself created or acted to protect public goods, she said. “But now that private entitles like Google are creating platforms that are public goods; how does that play out?”

Fertik speculated that we may be seeing “the birth of the ‘instant trust.’” Referencing the thinking of Josh Kopelman, the Founder of First Round Capital, Fertik called attention to a new model of “buying” a market franchise. The taxi service Uber and the peer-to-peer lending marketplaces Prosper and Lending Club did just this: “At Uber, they went into cities and bought out all the inventory by paying drivers not to take rides from anyone else except Uber customers for a period of time. That seeded the market and allowed Uber to drive customer traffic to itself until the market bloomed. The same thing happened at Lending Club and Prosper, where the hedge funds are now buying up the best inventory.”

The basic lesson from these examples, Fertik said, is that “the switching costs have gotten so low and markets are so fragile, that you can move liquidity to purchase and capture new markets. We are in a moment now where you do not ‘earn and capture,’ as LinkedIn did, but where you ‘buy and capture’—and succeed.”

Joseph Vardi, the noted Israeli venture capitalist, was skeptical: “It is a very risky strategy. A big portion of the venture capital money is going to fail to buy markets. When you buy markets, it means that the product itself does not stick—because you have to bribe the user to use it. Once you start bribing, then the whole effort is a failure. I have invested in 95 companies. If the company does not show viral stickiness after a few months, I give up on the investment.”

Kara Sprague of McKinsey & Company basically agreed: “If the business model has network effects, you are going to see customer acquisition costs go down over time—and so there is a model where you can invest upfront to build and seed the market. But if you are not seeing customer acquisition costs go down and you are not capturing network effects, it is ultimately going to be a money drain.” She added that this is not an entirely new phenomenon, citing Google’s practice of paying for distribution of its search services as early as 2005.

And yet even with significant venture capital and hedge fund money attempting to buy markets, the bottom-up creativity and energy of platform users cannot be so easily captured. Individuals and small businesses that use platforms are often eager to eliminate their dependency on a platform because it constitutes a vulnerability and risk.

Merchants who were dependent on the Visa system eventually began to accept a wider variety of credit cards to acquire some bargaining leverage with Visa over transaction fees. Banks began to issue their own Visa and MasterCards to enhance their autonomy and reduce costs. Similarly, many individual Facebook users are expressing their skittishness at being overly dependent on that platform, especially in being able to retain control of their photos, text and other data.

The power of individuals collaborating on open networks is introducing a whole new competitive force in innovation, said John Clippinger, Executive Director of ID3. “We are at a point now where software developers are using the principle of DRY—“Do not Repeat Yourself”—to have “self-assembly of standards and iterative infrastructures and services in the design of APIs. People are building different kinds of open utilities that functionally reinforce each other. And so you are getting new sorts of ephemeral organizational structures that are pulled together at some instant to achieve some particular end, but which no one party controls.”

To Clippinger, DRY represents a shared vision and awareness of where the world is going. Bitcoin and other digital currencies represent types of “decentralized autonomous organizations,” or DAOs, which enable new types of value to be generated, discovered and exchanged without any single party controlling it. (While a small set of bitcoin speculators have for now acquired significant share of bitcoins, Clippinger stressed that there are many solutions to this problem.)

John Seely Brown of the Deloitte Center for the Edge agreed with Clippinger’s general vision: “Thousands of tiny, tiny working groups— small companies, peer production teams, a few platform companies— are restructuring the entire landscape of the corporate world. If firms in the 20th century were built to achieve scalable efficiency, the game in the 21st century is basically about scalable learning.”

An example offered by Robin Chase is the language company Duolingo, which after only two years has more than 12 million users who can learn a language for free, with extreme efficiency. College courses generally require 120 hours of learning (a semester) to learn a language, and Rosetta Stone, a highly popular set of language tapes, requires 54 hours for the same amount of learning. But Duolingo, said Chase, has got the learning time down to 34 hours by using its platform as an iterative feedback loop. It can conduct 100 experiments simultaneously with 150,000 participants, and in 48 hours it can identify the best ways to learn a language. The platform is not only a source of learning about people; the platform itself can be repeatedly modified to improve best practices and eliminate worst practices.

John Seely Brown believes such platforms are valuable because they are “a platform for reflective participation. The ‘excess capacity’ of such platforms may actually give you the latitude to build reflection—and this could become the foundation for a nation’s competitive advantage.” Brown added, “We have never succeeded in making organizational learning work—but we know a lot about how to make ecosystemic learning work. Basically, you learn from the broader ecosystem and its diversity, and you are not captured by organizational politics.”

This can be a great advantage for companies in other ways, said Joseph Vardi, most notably in enabling them to identify and recruit passionate and talented individuals: “The platform becomes a way to aggregate, cull and outsource work to passionate people, which are hard for big companies to assemble and maintain. Instead of trying to do that from within a company,” said Vardi, “you can draw upon the whole world.”

Share On