Our final everyday example of high and increasing connection and concentration is the city.
Cities have always been among humankind’s greatest superconnecting machines, bringing people into contact with strangers and becoming ever more important magnets for trade, finance, government, production, learning, shopping and even leisure. In 1500, only about one person in a hundred around the globe lived in a city. By 1800, this had increased to three in a hundred. A hundred years later, the figure was fourteen in a hundred. Today, more people live in cities than outside them.
But in addition to urban concentration increasing over the past five hundred years, it has increased within the class of cities. Rather than cities becoming relatively dispersed, as many commentators predicted a generation ago, the big cities have become even bigger. And cities consistently seem to show the big-get-bigger pattern. The big cities of yesterday–New York, London, Tokyo, Peking and Bombay–are the even bigger cities of today, even if the last two have changed their names. Metropolitan Tokyo–Yokohama now has thirty-five million inhabitants, more than the whole of Canada.
Big cities appear to be practically indestructible. London was ravaged by bubonic plague in 1665. The following year, the Great Fire destroyed the homes of seventy thousand of the eighty thousand residents. Hitler tried hard to destroy the city in the Blitz of 1940–1, damaging or destroying more than a million homes. But throughout the centuries, London has just grown bigger and bigger–only the green belt around the city now limits further expansion, resulting in modest population growth but, over the decades, escalating house prices.
Compared to some cities, however, London has had a relatively easy time. Think of the tragedy of Hiroshima, which had a population of 420,000 in 1942. In August 1945, the American B-29 bomber Enola Gay dropped ‘Little Boy’, a nuclear weapon that immediately killed almost a fifth of the city’s people and flattened 70 per cent of its buildings, leaving behind deadly radioactive contamination. By year’s end, the city contained only a third of its former inhabitants. Yet, ten years later, Hiroshima had been rebuilt and its population had returned to pre-war levels. Today, the city has blossomed to three times that size.
Cities, currencies (especially reserve currencies) and languages are all communication devices, and all networks. And they each share three characteristic patterns of networks. First, they are concentrated, so a few of them are superconnectors while the majority are unimportant. Second, they are increasingly concentrated: the big cities grow; the more popular currencies and languages become more popular. Finally, without any master plan or deliberate encouragement, they are expanding spontaneously, driven by the human urge to connect and exchange, and, perhaps even more fundamentally, by the very nature of networks.
Do businesses exhibit these same inclinations to expand and concentrate? Many do, but some–network businesses–do so much more than others.
Greg was lucky enough to stumble into one such network star early in his career. It left him with the strong conviction that some businesses could be dominant, a belief that eventually led him to invest in Flutter and support its merger with Betfair. Here he explains what happened.
Toronto, my early twenties, new graduate from business school–not the foggiest idea how to start my career, but the desire to get my hands dirty. A few influential professors, and my father, a career lawyer who grew to like business more than law, had impressed on me the excitement of ‘real business’ and entrepreneurship. I joined a successful and entrepreneurial commercial real-estate firm founded by a fêted graduate of my business programme. It seemed a solid middle-class choice and everyone approved. Of course, I detested it with all my soul. I left after six months, and promptly did something that did not meet expectations: I went into used cars.
Bill Francis was the father of a friend. He owned a regional chain of photo-classified advertising magazines known as Auto Trader that helped people buy or sell used cars and other vehicles. My first visit made an impression. The company was located in a former belting factory in a light-industrial area of Toronto. Bill sat in the centre of it, in a large, round office created by cutting out the sides of a steel silo, a remnant of the building’s industrial past. The foremost items on his desk were scissors and tape and piles of past editions of his myriad weekly and monthly titles. In an expansive mood, he’d light up a cigar and get busy with the scissors, snipping up old editions and pasting the strips together to mock-up new titles–Recreational Vehicle Trader, Older Imported Car Trader, Snowmobile Trader, Heavy Equipment Trader. These experimental front pages would be taped to the walls of his round room, joining dozens of others for smoky reflection.
The company bustled around him. There were telephone desks just within earshot that handled customer complaints and where photographers would set up meetings to take pictures of vehicles that customers wanted to sell. In the back there was a pre-press operation, and a humming newspaper-style press together with a bindery. And there was a staging area where delivery-route bundles for four thousand stores were assembled for forty drivers, typically itinerant musicians who prized this steady, one-day-a-week gig where they could pocket a few hundred bucks.
Bill was looking for someone to work with him on new magazines as well as initiatives to improve the existing business. That was me. I got to work with the boss who had built up this company from nothing. Founded twenty years earlier, it had an unbroken string of profits and growth. The outfit radiated a certain hard-to-explain buzz and confidence. It really took the full five years I worked there to understand just what a special business it was.
During my time, Auto Trader moved from about a 30 per cent share of automotive classified advertising to double that. The winning trend continued after I left, to the point where the company was really a local monopoly. It had beaten the large and powerful daily newspapers at their own game, stealing one of their most profitable sources of revenue. It also withstood more than one launch of a magazine copying its format at a lower price.
How did Auto Trader manage all this?
Well, it had the Holy Grail of competitive advantage. It started out with product advantages over a more expensive newspaper line ad–Auto Trader offered a photo and more words. Better information sold more cars. It also had cost advantages over the newspapers–unlike the papers, Auto Trader targeted only people who wanted to buy or sell vehicles, so it didn’t have to pay for newsprint for ads that weren’t read by most of its audience. And the scale economies of delivery, and of getting around the city to photograph customers’ cars, improved as more magazines were sold and more people paid for pictures of their cars to be taken.