The Internet’s Offspring: The Connection Economy
James Cook (48120-1167) USA
When asked what single event was most helpful in developing the Theory of Relativity,
Albert Einstein replied, "Figuring out how to think about the problem."
Albert Einstein (1879-1955)
Not since the 19th
Century when the steam engine ushered in the Industrial Economy has there been an
economic shift of such profound proportions. Now, the ubiquity of the internet
is ushering in a new economy; let’s call it the Connection Economy since
making connections, not goods, is its essence. This new economy is governed by
radically, yes radically, different rules. For starters, in the Connection
Economy: control, mass, sales, response, demand, consumption, ownership, and
risk/reward are all starkly different.
Control, in this new economy,
is truly with the people, both personally AND through their governments, local
and national. This Connection Economy is substantially massless. Sales come and
go from one supplier to another, all in a fleeting moment which translates into
demand and consumption being ephemeral. Ownership by consumers is non-existent
and rental, if any, is only for the moments actively in use. Lastly, financing
this economy is high risk, mostly no returns, but when returns happen, they’re
Uber’s ride hailing venture
vividly exemplifies the Connection Economy. Take note, by 2015, at the tender
age of 6, Uber was financially valued more than Ford or GM. Other examples of
the Connection Economy are: Google, FaceBook, LinkedIn, Airbnb, Amazon, eBay,
SnapChat … who are connecting people with information, friends, colleagues,
lodgings, goods, and, in Uber’s case, connecting people with rides. Sales
are initiated, consummated, and satisfied in seconds, by and between anyone
(primarily by cellphone), anywhere on the planet.
In the Connection Economy,
sales’ growths are different, they begin virally and then grow exponentially.
In the Industrial Economy, sales start slowly, build up gradually, and then fall
off. Connection Economy sales’ milestones are never satisfied: a) acceptance,
b) critical mass, c) network effects, and d) sustained dominance by expansion or
cannibalism or death. Google and Yahoo make a good comparison; Yahoo got up to
dominance then lost it to Google and so experienced death, except for its Alibaba
Connection Economy’s sales are
largely through mobile APPs. The owner of the APP can usually dictate the entire
value chain’s economics constrained only by performing satisfactorily for their
users. However, a neat, popular APP is not enough, the first hurdle is critical
mass. Meaning, the APP must have sufficient uses and "likes" that users actively
recommend others use it. Still, that’s not enough, that critical mass must not
only trigger network effects, but they need to grow and grow aggressively!
These network effects are the
magic of this economy. The users are basically doing the advertising and
enhancing the value of the APP. The value to the individual is the density of
other users of that APP; users beget users, and more users beget more value to
ALL users! That’s why so much usage and value is given away free in the
Connection Economy, yet its leaders are worth (meaning, have market
capitalizations in the) hundreds of billions of dollars.
|SCOPE, SCALE, and
||A new Point of View is worth 80 IQ
Alan Kay (1940- )
Imagine an hourglass with
metallic grains (representing products) where the grains fall onto spaces, but
only onto those spaces that request specific grains (these spaces represent
consumers). Next, imagine that at the nexus, a magically informed magnet directs
the grains onto the requesting spaces. Now you have a metaphor for the
Connection Economy. Notice that it is the nexus that directs the flow of goods
(and services) directly to individual consumers. That nexus often takes the
form of an APP.
In the real world of many
suppliers in need of connection to many consumers, such a magically informed
connector is a marketing lifeline for Industrial Economy suppliers. The
Connection Economy’s sales are the source of income for the APP owners; that
income is analogous to a commission on sales or a distributor’s markup in that
it is a fee for facilitating the sale of Industrial Economy’s goods. It is
these Connection Economy sales, and only these, that undergo network
This Connection Economy helps
the core of the Industrial Economy’s big businesses, but in the process,
commoditizes them and slims them down by the elimination of most of their
non-production activities. The independent organizations that previously did
inventorying, promotion, support, and service will be eliminated. We’ve
already seen this in the travel booking industry; travel agents are a business
of the past. Going forward, dealers, distributors, agencies will be marginalized
to the point of repairs and showcasing high ticket items.
This Connection Economy will
affect us directly on an even broader scale than commerce alone. In the
impending "Internet of Things" all our home appliances become
manageable from the internet. That is going to create an explosion of
Connection Economy opportunities, for good and for bad. The future Connection
Economy will be connecting Things to Things, for example; cars to cars, cars to
roads, our heating and cooling devices to the weather, … with and without
our knowledge and/or consent.
The global smart phone users
constitute today’s Connection Market size and that comes, in 2017, to about
two and a half billion users. American users have their cellphones with them 90%
of the time, check them 150 times a day, spend an average of 3 hours a day on them,
and 82% use them as shopping consultants. Mobile commerce is projected to grow
over 40% annually going forward. If representative globally, that comes to 137
trillion cellphone checks per year!
The Connection Economy is
additive to, not a substitution for, the Industrial Economy. In fact, these
economies are usually symbiotic. In practice, it can often be quite detrimental
to manufacturers (or distributors or dealers) to ignore or try to compete with
APPs. It can be beneficial for manufacturers to create APPs, but unless
they’re dominant (like Walmart), they’re unlikely to reach critical
mass and therefore won’t get the cost benefits that network effects have
on marketing, consequently becoming price uncompetitive.
APPs eliminate intermediaries.
Network effects create near monopolies. These, enable very high contribution
margins for APPs (when not counting flow throughs like drivers’ and
suppliers’ payments and credit card fees). However, many successful APP
owners are incurring large losses because they’re essentially buying APP
usage. This buying of APP users is counted as a cost, but really is an investment
in reaching network nirvana: sustained growth generated by users. When that kicks
in, investors and entrepreneurs will be handsomely rewarded.
||To them I said, "The
truth would be literally nothing but the shadows of the images."
Plato (427?-347? BC)
The Industrial Economy will
take on many facets of the Agriculture Economy in that it will be enormously
productive, involve fewer and fewer laborers, become incredibly distributed and
commoditized, and remain critically essential to the functioning of the
Connection Economy. There will also be a boutique world supplied by craftsmen
and short production runs and buoyed by endorsements and fads. This boutique
world is price inelastic and exists by being associated with upscale contexts
such as resorts, movements, and artists.
Financial Markets will
bifurcate into: Connection Economy securities and Industrial Economy securities.
Connection Economy securities will fluctuate wildly upward, but, if they fall it
will be hard and final. Connection Economy securities will behave more like
today’s options than stocks. Meanwhile, Industrial Economy securities will
be secure, but will grow mainly by taking over where other Industrial Economy
competitors are failing. The financial theories tied to random walks will work
well in managing meagre returns in Industrial Economy financial markets.
The Connection Economy value
creation will come from brilliant business models (reflect on LinkedIn) and APPs
that serve unmet needs or improve upon existing APPs with competitive ease and
alacrity. Unpredictable, creative talent’s APPs will be the source of
growth which most rapidly scale by viral promotion and sustain by reliable
internet server systems. Connection Economy corporations will need to be open
to engaging, financing, and deferring creative judgement to these
"irregulars." Venture capitalists, angels, and deal makers become
Over the span of the Industrial
Economy’s reign, market leaders supported laws that are now barriers to
Connection Economy entrants, for example, the prohibition of finders’
commissions by amateurs or licensing requirements of all sorts from taxis to
giving advice reserved for professionals. Accommodation of the Connecting
Economy’s business models is a prerequisite to significant wealth creation.
Even more dramatic are the infrastructure enhancements, most evident for the
emerging trillion dollar mobility market requiring legislative will, as well as
The Connecting Economy needs
humanities and arts, as much as technology. The call for professionals
(physicians, lawyers, accountants) will be diminished by connecting people,
often for free, to knowledge robots (like IBM’s Watson and Google’s
Deep Mind). Extraordinary talents will create unbelievable wealth! Those growing
up in this economy will need training in the ways of the arts, that is, holistic,
not reductionist, to become generalists, not specialists. Lifetime learning will
be necessary for personal fulfillment and adapting to changes.
The perpetual obstacle to human advancement is custom.
John Stuart Mill (1806-1873)
Governance (Board Level)
The Connection Economy
presents a communications challenge, even after the Board "gets it."
Shareholders must be led to support the Board in encouraging the necessary shift,
particularly regarding investment risks and returns. Investments will be need
to be quicker, often strategic, and more intuitive, resulting in higher risk.
The returns expected will need to value future growth as highly as present
earnings. The Board must let executives proposing risky investments know that
they will be given multiple chances of failure.
As the Connection Economy
takes hold, today’s rigidly disciplined, closed, centralized, functionally
chartered organizations will be replaced by flexible, open, decentralized,
project chartered ones. Their project management will often extend into
production and scaling phases. The parent company will provide resources, but
not necessarily brand. Work will be increasingly entrepreneurial, even in large
organizations. When the exponential growth stabilizes, then the project will
often segue into a standalone company. Collaboration with boutique organizations
and talented individuals will also become widespread.
"Manage to market
capitalization, not earnings!" This mantra creates a lot of value AND the
ability to make strategic acquisitions with stock (it’s akin to having a
strong currency) instead of cash. Note: Today, price to earnings ratios of
Connection Economy companies are generally three times those of Industrial
Economy’s stalwarts. The Connection Economy, being chaotic and
unpredictable, may need cash without notice, so dividends are actually risky.
Lastly, aggressive risk should can be mitigated by partners, options, and
Goodbye push; hello pull!
Customers get connected to suppliers because some APP knows the prospect’s
context and profile and presents an enticing and easy way to satisfy the
prospect, then and there! However, APP marketing still has a daunting
challenge: achieve critical mass to trigger network effects and sustain the
delivery of value in order to be "then and there," when wanted. That
takes an especially creative viral launch or "buzz blitz" with the full
engagement of the technology developers.
Key to the Connection Economy
is the APPs that "smartly" connect users and suppliers by
"interpreting" individual user’s real-time context and profile
(which is extracted from "big data," social sites, pictures, and past
visits, queries, and purchases, …) using the this era’s most important
software technology, Artificial Intelligence (including machine learning). Smart
and/or communicating sensors will play a huge role, especially with Internet of
Things. Sensors’ prices may be highly price elastic if their performance
is regulated, except regards security.
||To be perfect is to have changed
John Henry Newman (1801-1890)
Wealth distribution is the
most daunting political and social challenge of this century! As the shift
from human work (including intellectual) to automated work (with 24/7 potential)
occurs there is a corresponding income shift from labor to capital or, more
tangibly, from personal income to rental income. Insidiously, rental income
provides capital for even more rental income; over time rental income grows
exponentially. Contrast that with personal income which rises for half a career,
then levels off, and then ceases.
Cities will grow and
self-organize into villages of competency (academics, finance, entrepreneurship,
arts, culinary, sports …) and villages of ethnicity (not just "China
Town"), since these are rewarding reasons for "in person" connections. As
families become smaller, suburbs will hallow out and cities will become more
attractive and inexpensive. Urban communities will grow vegetables and
swap/barter goods and clothing. Commuting will become sporadic and often entail
air flight. Parks and sporting fields/courts will abound and ubiquitous
surveillance will suppress crime.
Robots are displacing assemblers,
drivers, and, even some diagnoses are better than specialists. Jobs requiring
"touch," for example: home repair, aged care, maintenance, and arts
(from performing to crafts) will be done as gigs, stints, contract, and intermittently.
Today, 2% of those employed are farmers; whereas, before the Industrial Economy
mechanized farming, 90% were. Entrepreneurship will flourish fulfilling wants of
so many with much time on their hands. Crucial to everyone’s success is a
basic living income for all adults.
Quality of Life
Paradoxically, the global
Connection Economy will increase our involvement in our local community. With
significant gaps in work, there is more time (and less money) shared by enough
people to create local leisure activity, from socializing to recycling to urban
farming to trading everything from goods to clothes to services. Common areas and
local committees will enable a sharing culture. Lifetime learning and the pursuit
of dreams will now be widespread. Say, "good-bye" to the fear and anxiety
The Connection Economy entails
an epochal transformation from the Industrial Economy. The Industrial Economy’s
money, power, and influence will resist necessary changes in personal income
(basic income entitlement) and education. It is possible, the inevitability of a
new local order will not be gracefully embraced and political and, even, military
conflict may erupt. Let’s hope the promise of longer life, managed reproduction,
healthy environment, and freedom from tyranny will prevail. If sanity prevails,
we will witness the greatest science advances!
Human history becomes more and more a race between education and catastrophe.
Herbert George Wells (1866-1946)
As a reward to those who, having
gotten this far, feel some guilt as this seems so "philosophical", I
wish to dissuade you with the concluding wisdom of the seminal economic treatise of
the 20th Century, Employment, Interest, and Money by John Maynard
The ideas of economists and political philosophers, both when they are right and
when they are wrong, are more powerful than is commonly understood. Indeed, the
world is ruled by little else. Practical men, who believe themselves to be quite
exempt from any intellectual influences, are usually the slaves of some defunct
economist. Madmen in authority, who hear voices in the air, are distilling their
frenzy from some academic scribbler of a few years back. I am sure that the power
of vested interests is vastly exaggerated compared with the gradual encroachment
of ideas ... But, soon or late, it is ideas, not vested interests, which are
dangerous for good or evil.
So, go forth and apply this for good!
Warning: dismissing ideas of progress can lead
to dire consequences.