Why the Next Paradigm Shift may not be Technological
But the reckoning with the role of a technology that pervades society
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In the last few weeks we witnessed a number of extremely interesting reflections on how the future of technology, the internet and marketplaces could play out, in a turbulent, hyperconnected and transformed society.
Where we are with technology-driven innovation
A few weeks ago, Benedict Evans released his yearly update, this year called “standing on the shoulders of giants” symbolizing how current — digitally powered — society rests on top of giant enabling players that have a tremendous capability to define the possible.
Companies such as Amazon, Netflix or Shopify — Evans explains — are now becoming too big and too important to just being identified as challengers to incumbents.
If it’s true that, even a giant like Amazon is addressing just 15% of the retail market in the US, it’s also impossible to avoid noticing its staggering growth. If it’s true that Netflix is the victim of a new wave of unbundling (with its market share reduced from 91% in 2007 to 19% last year, as an effect of the birth of multiple Direct To Customer competitors), it’s also true that — at today — the streaming giant it’s UK’s most-watched TV channel, with Youtube being even bigger.
The other key characteristic of these exponentially growing and concentrating companies is that they enable more and more a universe of third parties: Shopify now enables more than 60 B$ Gross Merchandise Value exchanges — and it doesn’t sell a penny of it directly — and even if Amazon’s revenues are still mostly due to its first-party sold products (which are, in any case, being produced by a plethora of brands), the third-party marketplace is outgrowing the rest of the retail sales.
[If you’re not familiar with the concept of Techno-Economic paradigm-shift, start here]
But the key question we need to ask if we are to understand the next techno-economic paradigm shift — the next “S-Curve” — Evans explains, is:
“what happens when everyone is online?”
The density and penetration of the internet as we live it today is unprecedented. Consumers expectations are setting a new bar in terms of accessibility, speed, personalization: platforms control vast amounts of the growing parts of the economy and enable more than ever, holding a key position when it comes to defining how the connected economy looks like, who can participate and at what cost.
In Evans’ words:
“We moved from a world in which we sold tech to CIOs at big companies to one in which we provided pocketable computers to people to look up information and message their friends, to one in which you become a systemically an important part of Western civilization.
I mean you see this in the tragedy of the Facebook crypto project. Imagine the process: we should build a payment system and it will be great for inclusion! And we should use Bitcoin and we should have lots of partners! Oh…and we’re going to get regulated by central banks as a systemically important part of our financial infrastructure!
That’s the kind of process the tech industry has gone along: we’ve become part of society so therefore we get treated as part of society.”
Internet? Everywhere and All The Time
If you follow our work, you will probably remember that last year, we based much of our post about the Real Future of the Platform Economy on the data provided by another presentation, always from Evans, called “The End of the Beginning”.
Ironically enough, this very same title was picked by another Ben this year — Thompson — to introduce a reflection later exploded during an amazing podcast episode (“The Water we swim in”): what if the next wave of innovation is not about a new technology but about recognizing that technology is being “embedded” in society?
In the blog post and complementing podcast conversation Thompson reflects on the pervasive nature of today’s technology: can computing go more pervasive than being available always and everywhere?
Thompson makes a couple of key points, in his words:
- “there may not be a significant paradigm shift on the horizon, nor the associated generational change that goes with it.”
- “digital incumbents have insurmountable advantages: the hyperscalers in the cloud are best placed to handle the torrent of data from the Internet of Things, while new I/O devices like augmented reality, wearables, or voice are natural extensions of the phone.”
And what does it mean for society? “not that the impact of technology is somehow diminished: it, in fact, means the impact is only getting started” and that now, when it comes to technology-driven innovations few companies are “seeking to disrupt the dominant cloud and mobile players; rather, they take their presence as an assumption and seek to transform society in ways that were previously impossible when computing was a destination, not a given.”
“Every failed idea from the dotcom bubble would work now” (Marc Andreessen)
As a consequence of this profound integration between the internet and society, we are witnessing a Cambrian explosion of Direct to Customer offerings, generating and generated by a virtuous cycle of unbundling and re-bundling:
- first new distribution channels made possible through the penetration of the internet break apart old aggregation models and generate a plethora of “direct to customer”, user-facing services;
- then since, as Evans says, “there can only be so many brand relationships” a pressure to re-bundle and to re-aggregate emerges.
As a result of this dynamic, we see two major patterns of tech-driven market innovations: one is to vertically integrate higher and higher value chain layers (as an example, what Airbnb has done be integrating everything from services to hosts to adventure trips design and planning), and the other is to horizontally aggregate, by reusing successful aggregation patterns into other arenas of opportunity.
This is something we already described with the six “platform plays” we identified as recurring strategic value chain transformation, that one can apply horizontally: see an explanation here or download our Exploration Guide).
Unbundling and Re-bundling!
The application of mechanisms of unbundling and re-bundling to the digital realm is not new and has been thoroughly explained — always by Thompson — in connection with Christensen’s so-called “Law of conservation of Attractive Profits”:
“When attractive profits disappear at one stage in the value chain because a product becomes modular and commoditized, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage. That is, the location in the value chain where attractive profits can be earned shifts in a predictable way over time.”
C. Christensen
It’s truly interesting to re-read Thompson’s “Netflix and the Conservation of Attractive Profits” where he explains how to spot the pattern:
“breaking up a formerly integrated system — commoditizing and modularizing it — destroys incumbent value while simultaneously allowing a new entrant to integrate a different part of the value chain and thus capture new value.
Thompson also provides some clear examples of it through the lens of Netflix, Airbnb and Uber strategy:
In all these examples, platform/aggregators:
- first, modularize a basic element of the value chain that was previously integrated with the most adjacent one;
- then reintegrate an upper layer of the value chain, by controlling it, favoring supply-aggregation through the attraction of now modularized parts (players) of the value chain.
Those following our work may have spotted a resonance with the work of Simon Wardley and ILC (Innovate-Leverage-Commoditise) cycle. In an ILC cycle:
- first, you modularize the lower part of the value chain, most likely inventory, making it easier to embed new external existing inventory in the supply side of your platform (e.g.: Airbnb rooms) by providing a specific role for suppliers;
- then, as you provide participants the basic tools to perform at their best, you also let your ecosystem be “disobedient” enough to invent something new (e.g.: Airbnb host-supporting services emerged from the ecosystem, and players around Airbnb emerged to provide more integrated experiences, complementary to housing…);
- then, of the new offerings that you see emerging, you chose what to modularize and what to integrate and control (e.g.: Airbnb modularized co-hosts by providing a standardized co-host role in the platform, and integrated experiences and adventures to make it possible for people to offer more than rooms).
A Cambrian explosion of niche aggregators
As a result of such dynamic, we’re seeing something that we already had the chance to describe in our comment of 2018’s Mary Meeker’s Internet trend: on one hand the consolidation and the staggering growth — not only in terms of value and size but also in terms of Value Chain depth that they control — of dominant platforms, but also the continuous birth of a plethora of vertically exploring micro aggregators, marketplaces aiming at organizing more niche aspects of the customer experience.
That’s more or less what the recent #Marketplace100 work at Andreessen Horowitz brought to our attention last week.
Despite some informed revisions — like this one from our community contributor Manfredi Sassoli de Bianchi —in the #Marketplace100 research based on “anonymized, aggregated US consumer spending data captured via credit cards, debit cards, and bank transfers” the US venture firm provides an analysis of startups and private companies now addressing the D2C market with the aim of providing “a ranking of the largest and fastest-growing consumer-facing marketplace”.
But what are the insights that a16z provides us with the research? As general insights, the analysts explain that:
- “A small number of marketplace startups — four of them — account for 76 percent of consumer spend with Travel, food, and groceries being the largest categories”
- “emerging categories are intriguing, including local indie brands, celebrity shout-outs, streetwear, fitness memberships, and even car washes”
- “The fastest-growing marketplaces are growing really fast — 3x to 5x year-over-year”
More generally, it’s easy to see how a handful of companies dominate in terms of Gross Merchandise Value (“once they hit critical mass, they get big, showing a power-law distribution in the extreme. It’s not the 80/20 rule, it’s the 80/4 rule”) and that pockets of growth allowing fast-growth are mostly relegated to spaces where companies create new channels in markets where demand is pent-up, and where new behaviors need to be “unlocked” in emergent consumer categories.
The blind spot here, I must admit, is to get excited by companies that attack opportunity spaces that — as much as they may be a profitable niche — don’t really add much to society.
Finally, researchers from a16z agree to say that “scaling the mountain is much harder than you think” signaling how the behavior of these markets seems following a strong power law (as anticipated above).
The root of this difficulty in creating new marketplace propositions is to be found in considerations that a16z’s Andrew Chen highlighted already one year ago and that we expanded and echoed in our Future of Platform Economy post: as the target of innovation moves away from easily unbundable and rebundable markets (such as travel, retail, food delivery…) into vertical, location-dependent, more regulated and capital intensive spaces such as license dependent personal services, energy, sustainable food production and distribution, healthcare, education, living, etc… growth is heavily more dependent, from the very start, on concerns related to safety, the need of more complex onboarding processes, and on the need to develop more specific technologies to support specialized workers, not just basic Software as a Service products able to organize simple processes like bookings, check-ins, and check-outs.
As one moves into healthcare, for example, confusing a patient data or running a process that is slightly off-protocol may end up in a wrong diagnosis, or much worse outcomes, not just in bad reviews.
Symptoms of growing hurdles in keeping the network safe and sound and managing regulatory concerns are growing even for the giants: Airbnb profits are apparently falling lately, exactly in the process of making the platform more just, and robust to the eyes of policymakers and societal stakeholders.
So what?
Given these premises what can we expect to see in the coming months and years? What happens when, as Evans puts it, “connecting the world has consequences far outside tech?”
As the pressure to regulate both, existing large players that are expanding globally, and new entrants that replicate aggregations strategies and platforms models in new spaces, we are likely to witness an explosion of contexts where regulators will be trying to exert control and others where a wholly new approach to regulation will be needed.
The nature of our interconnected society brings more issues when we confront technological patterns of disruption: the internet is no more a US-centric phenomenon. Today there are several Internets: the US one, the European, the Chinese, the Indian…. All these sovereign players will try to exercise their control far beyond their boundaries — similarly to what happened with GDPR two years ago.
Despite technological trends then, the next paradigm shift might be, in Evans’ views, a shift in how much we need to regulate internet-enabled services as they penetrate society: a challenge that, effectively, we still don’t understand well.
Our limitation in the capabilities to regulate such a pervasive internet is rooted in the industrial nature of our public institutions. Anti-trust, the most widely adopted regulatory approach for the matter we’re discussing, maybe great to deal with how companies are “being bad to each other”, but it has a very limited capacity to regulate the effects that companies and a markets have on society as a whole, and an even a more limited capacity to control and regulate the behavior of single malicious actors using far-reaching platforms to create harm to others.
Furthermore, as Evans correctly notes, crypto-tech is even going to make it more difficult to act in this policing and regulatory space. The intrinsic capability crypto-tech has to provide anonymity, Free speech, and distributed ownership makes crypto-networks a hard beast to police and regulate: good luck regulating an unstoppable and headless ecosystem of distributed actors only acting based on pre-defined incentive structures. You certainly can’t ask Satoshi Nakamoto to join a Congress hearing.
A Bigger Picture
The conversation wouldn’t be complete without reframing these trends in an even bigger picture. And the bigger picture, these days, is not rosy at all.
In January, the World Economic Forum released its 2020 global risk report, touting haunting scenarios of almost out-of-control risks related to how the environmental collapse can threaten a global system that is more conflictual and fragmented than ever.
“Ammunition to fight a potential recession is lacking, and there is a possibility of an extended low-growth period, akin to the 1970s…The question […] is whether in the face of a prolonged global slowdown we are positioned in a way that will foster resiliency and prosperity […] on global health and technology, we caution that international systems have not kept up to date with the challenges of these domains
Today’s risk landscape is being shaped in significant measure by an unsettled geopolitical environment — one in which new centres of power and influence are forming — as old alliance structures and global institutions are being tested….in the immediate term, they are putting stress on systems of coordination”
It took only a few days during and after the forum for the world to face a global epidemic of Cov-19 that is now wreaking havoc on our economic flows, projecting far-reaching disruptions. Due to a globalized industrial system allowing key elements of real-time supply chains to concentrate locally in single points of failure, this infection showed us how unprepared our organizational structures are to operate with a sustained level of uncertainty.
The bad news is that uncertainty is becoming the new normal.
How will our globalized, digitally-powered economy deal with such exponentially growing risk factors? How are we going to rebuild a system that is more tolerant of trade wars, pandemics, climate catastrophes, and humanitarian crises?
On the other side, if our governance systems get to act: what will be the impact of policies designed to generate radical CO2 emission cuts or transition to circular and local supply chains? If a possible direction is — as it seems — that of building new types of networks based on different topologies, that are heavily more locally bounded, with no doubts we’ll need to rethink profoundly how our platform strategies will work. How are we going to address the opportunities to reorganize markets that provide the key services of our economy? How to do that with substantially different intentions and involving radically different constituencies like local communities, cities, social organizers and entrepreneurs?
On top of that, structural technological innovations that are coming through, have an uncertain future, as they depend on the same networks that the increasing unpredictability we’re living is disrupting. 5G, Crypto, Machine Learning and AI, Serverless, are now coming to the world and promise to transform the value chain deeply. It’s our mission now to understand how these and other maturing tech innovations such as AR/VR, Voice & Neural interfaces, quantum computing, new battery chemistry, drones, precision medicine, and biotech, can impact the value chain further, making it possible to imagine new kinds of networked enterprises: the next wave of platforms.
Did you know that we’re working on a new White Paper? It’s going to explore the new foundations of platforms and ecosystems thinking for this crucial decade of deep societal transformation: check out the presentation post here, our expression of interest form or reach out directly if you are interested in sponsoring the research.
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