So once it starts growing fast, a network will continue to grow fast. This is great news for the network owners, but their good fortune doesn’t stop there. Networks tend to favour one standard, one language, one supplier, one common system. In normal circumstances, the smaller network providers tend to drop away, while the biggest supplier makes ground hand over fist. Because it has the most users, the leading network has the most value–even if aspects of its product or service are not as good as those of a rival. The value of having the most users tilts the scales heavily in attracting new users.
Result: the winner takes at least most, and sometimes all.
In mainstream online social networking, Facebook and MySpace loom large over a host of rats and mice. There is one Microsoft. One eBay. One Google. One Wikipedia. One Yahoo! One Betfair. Yes, all of these have rivals, but they are tiny in comparison. Networks naturally tend to support the leader and make it dominant…unless and until new technology or some other unexpected change disrupts the established game.
Markets that are heavily networked–such as online services–are more likely to see a dominant star emerge than less network-reliant markets, such as supermarkets. Paradoxically, in our increasingly networked world, it is easier to create a very valuable star business with network characteristics than it is to create a much less valuable non-network star.
You’ll realise by now why network stars are so attractive. Their combination of growth, high profitability, dominance and sustainability results in a fantastic business. But while the network-star phenomenon is important from the perspective of understanding individual businesses, we should not miss its implications for industry, the economy and society in general. If you accept that increasing connection leads to increasing concentration, and acknowledge that our society and industry, aided by technology, are becoming increasingly, seamlessly connected, where does that lead us?
For commerce, it’s becoming clearer. The more networked an industry is, the more its competitive structure will tend to concentrate around a few big, superconnecting companies. Markets will become more monopolistic. You’ll find a single dominant network star in an increasing number of markets and niches. This is a pretty grand pronouncement, but look at what Eric Schmidt, Google’s chief, has to say on the subject:
I would like to tell you that the Internet has created such a level playing field that the long tail is absolutely the place to be–that there’s so much differentiation, there’s so much diversity, so many new voices. Unfortunately, that’s not the case.
What really happens is something called a power law, with the property that a small number of things are very highly concentrated and most other things have relatively little volume. Virtually all of the new network markets follow this law. So, while the tail is very interesting, the vast majority of revenue remains in the head. And this is a lesson that businesses have to learn. While you can have a long tail strategy, you better have a head, because that’s where all the revenue is.
And, in fact, it’s probable that the Internet will lead to larger blockbusters and more concentration of brands. Which, again, doesn’t make sense to most people, because it’s a larger distribution medium. But when you get everybody together they still like to have one superstar. It’s no longer a US superstar, it’s a global superstar. So that means global brands, global businesses, global sports figures, global celebrities, global scandals, global politicians.
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This raises some thought-provoking questions. How ‘free’ are network markets if they always gravitate towards one mega-winner? Especially when it’s the network itself, rather than the firm, that drives growth and profitability. Is the notion of antitrust even relevant in a system that naturally, inevitably, ends in monopoly? Customers benefit from network effects–probably outweighing any disadvantage arising from the firm’s monopoly power.76 As Kevin Kelly, former editor of Wired magazine, says, ‘Mono-sellers are actually desirable in a network economy…a large single pool is superior to many smaller pools.’77
Is the world really increasingly ‘flat’, as Thomas Friedman contends?78 He argues that the challenge from low-cost suppliers in China, India or elsewhere means that competition is hotting up–there is a level playing field globally and nobody is safe. No doubt this is true in many markets–where one product is much like another and the one with the lowest price tag will win. But it is hard to argue the same thing for the star firms in network markets. Here the threat is not cheap labour, but new technology, stricter regulation or some other sea-change. Large parts of the competitive scenery may be flat, but there are some great hulking mountains as well. And that is where the serious money lies.
Do you find that a depressing prospect, with fewer and fewer players taking more and more of a market? Do networks, in this case, mean less opportunity? Well, yes and no. Networks lead to ‘decentralised concentration’–the niche can be very concentrated, but it is often very specialised; and networks usually expand by splitting an existing market into two, and later fragmenting it again, with new ways of making a living and new types of customer. We used to have state monopolies of gambling, or else an oligarchy of a few big bookmakers. Then Internet gambling opened up other niches; and new players, different from the old ones, took the lead online. Then we had spread betting, then betting exchanges, each with their special innovators. Each expansion of a new niche tends to create a monopoly, but it is typically a new opportunity and a new monopolist. In Friedman’s terms, the world starts out flat, then someone builds a mountain (Google); or takes an existing mountain, and erects a nice new hill alongside it (Betfair).
But that doesn’t resolve all the issues with networks. In particular, what about the distribution of wealth? How will governments and societies respond to the immensely unbalanced split of wealth that will inevitably result when network markets concentrate? Not to mention the millions of dollars that flow to top executives who are in the right place at the right time. How should we guide and pay management in a business that is structurally slated to win? Who or what is responsible for its success? Really, the network itself is creating much of the value, far more than the individual. Yet a few individuals–skilled and shrewd, yes, but also often lucky–can capture extraordinary wealth, gaining more money at a faster rate than has ever been the case in human history.
Meg Whitman, when she ran eBay, famously said, ‘Even a monkey could drive this train.’ As with Auto Trader, as with Betfair, much of the spectacular growth has little to do with how they are managed, and much more to do with the initial idea, design and execution. Then the network takes over. This is not to say that there are no management challenges in these firms; there are. But shareholders and directors should understand that network stars benefit from a force denied to other businesses–the network tailwind that drives the firm forward. The network provides the growth; the executives just steer.
Executives and boards of firms must decide which markets to enter and invest in, and which to avoid. If our network view of markets had prevailed, would financial institutions have fallen over themselves, in their droves, to enter some areas of investment banking, which is an ultra-networked universe? There could only ever have been a few winners, and masses of losers. Of course, it is human nature to think that you’ll defy the odds and succeed. But a full understanding of networks would have shown a legion of bankers just how slim their chances were.