Market Networks In a market Networks and the Next Economy

Networks and the Next Economy Tim O’Reilly @timoreilly oreilly.com wtfeconomy.com Tech Week Kansas City October 11, 2018

How is the economy changing? What are the implications for business? What does technology now make possible that was previously impossible? What work needs doing? Why aren’t we doing it? wtfeconomy.com

We have to let go of the maps that are steering us wrong In 1625, we thought California was an island

In 1977, we still thought robots might look like this

Here’s what we got instead

In 2005, we thought the connected taxicab looked like this

Here’s what we got instead

“Framing blindness”

“Make it new!” Ezra Pound

“Gradually, then suddenly” Ernest Hemingway

Gradually, then suddenly Large segments of the economy are governed not by free markets but by centrally managed platform monopolies

Gradually, then suddenly Artificial Intelligence and algorithmic systems are everywhere, in new kinds of partnerships with humans

In 2018, we still believe in the “invisible hand” of free markets

Internet-scale networked platforms managed by algorithm are fundamentally changing the economic equation and the very nature of markets

The invisible hand at work

What happens when there’s only one queue?

And what happens when there’s only one price for everything?

The algorithms decide “who gets what – and why” Markets are outcomes. A better designed marketplace can have better outcomes. But it can be enormously disruptive for existing participants.

Algorithms become a battleground Security: “That word does not mean what you think it means.”

We are all living and working inside a machine

“The Uber app is the drivers’ workplace, as much as the city where they’re driving is. Each decision about its interface structures drivers’ interactions with Uber the company as well as Uber the transportation marketplace.” Alexis Madrigal, The Atlantic, “Uber Drivers are About to Get a New Boss”

An Amazon warehouse is a human-machine hybrid

If we want to understand the future of business and the economy, we have to understand these platforms

Networks and the Nature of the Firm “The existence of high transaction costs outside firms led to the emergence of the firm as we know it, and management as we know it….The reverse side of Coase’s argument is as important: If the (transaction) costs of exchanging value in the society at large go down drastically as is happening today [because of networks], the form and logic of economic and organizational entities necessarily need to change! The mainstream firm, as we have known it, becomes the more expensive alternative.”Esko Kilpi

A language for networked marketplaces Network effect: the value of a network is proportional to the square of the number of possible connections Scale effect: bigger is better (but not always) Feedback effect: the more data you collect from the marketplace, the more you can learn, and the better the services you can provide Two-sided market: different classes of users being matched up: searchers and advertisers, drivers and passengers, homes and renters.

Asymptotic Networks “The reason Lyft is able to compete with Uber is that even if they have fewer drivers in many cities, both platforms are still able to guarantee a ride with an average wait time of 4 minutes. Neither can improve by adding more drivers to a city.” James Currier

“A business model is the way that all of the parts of a business work together to create competitive advantage and customer value.” - Dan and Meredith Beam

Who Do You Want Your Customers to Become? Henry Ford didn’t just rethink the automobile and the factory, he rethought the work week, and the reasons why people might want to drive.

A Business Model Map of Uber  A magical app that lets drivers and passengers find each other in real time  A networked marketplace of drivers and passengers  Customers who trust that they don’t have to drive their own car  Augmented workers able to join the market as and when they wish  A matching market managed by algorithm

What makes an app “magical”? 1. It seems unbelievable at first. 2. It changes the way the world works, so that the unbelievable comes to seem inevitable and normal. 3. It results in an ecosystem of new services, jobs, business models, and industries.

Why simply adding an app doesn’t change the game for taxis

Think platform, think ecosystem

It’s very hard to beat an entrenched platform at its own game

Technology has a fitness landscape In my career, I’ve watched a number of migrations to new peaks, and I’d like to share with you some observations about what happened, and why. And then we’ll talk about some lessons for companies like Google, but also for the overall economy. Apple Personal Computer Big Data and AI Smartphones

The Rules for Success Change  IBM: Maximize competitive advantage by control over hardware  Microsoft: Maximize competitive advantage by control over software  Google: Maximize competitive advantage by control over data and marketplaces  Apple: Maximize competitive advantage by integrated control of hardware, software, and marketplace.  In each case, companies playing by the old rules lost. Or did they?

Generosity takes us to the next peak Tim Berners-Lee, 1990 The World Wide Web Linus Torvalds, 1991 Linux Big Data and AI Tim Berners-Lee, 1990 The World Wide Web Linus Torvalds, 1991 Linux

Generous or “Long-term greedy”?

Smart platforms enable their “hackers” and their ecosystem – unfortunately, most eventually forget this lesson

Google’s share of ad revenue over time O’Reilly Research

Where does it stop?

Why must it be winner takes all? ?? ?

The great opportunity of the 21st century is to use our newfound cognitive tools to build sustainable networks and ecosystems

Growth goes on forever?

The runaway objective function “Even robots with a seemingly benign task could indifferently harm us. ‘Let’s say you create a self- improving A.I. to pick strawberries,’ Musk said, ‘and it gets better and better at picking strawberries and picks more and more and it is self- improving, so all it really wants to do is pick strawberries. So then it would have all the world be strawberry fields. Strawberry fields forever.’ No room for human beings.” Elon Musk, quoted in Vanity Fair https://www.vanityfair.com/news/2017/03/elon-musk- billion-dollar-crusade-to-stop-ai-space-x

“Doughnut Economics” Kate Raworth

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How might network enablement play out For Uber and Lyft? For Airbnb? For Facebook or Google? For Amazon?

Market Networks In a market network, you’re not connecting a simple marketplace of buyers and sellers, but also connecting them with intermediaries and service providers. A Market Network combines elements of a professional network, an online marketplace, and SaaS tools.

“We wouldn’t be able to build defensibility from our supply- side relationships purely on the basis of a Marketplace Network Effect, because it was in the interests of the real estate agents to syndicate their listings through every possible channel…. So we created an XML feed standard … This prevented brokers from having to go through the hassle of posting them manually to every channel, and soon our competitors had adopted the same XML standards for their sites as well.” And, after 2009, when the real estate market collapsed, ”to scale [a] new monetization strategy targeting smaller customers, we set to work creating cost-effective marketing and lead generation products for the individual real estate agents.” Pete Flint

“Once they get some traction, platforms survive either because:  They achieve critical mass in a market with network effects. They are the default place to go—this is why Craigslist, Airbnb, ebay, Etsy, and other places with most of the inventory thrive.  They provide a tool set ecosystem. The product or service has certain functions that buyer and seller need (escrow, analytics, a CRM, etc.) that the marketplace can provide with an economy of scale that beats everyone doing it themselves.” Alistair Croll

In 2018, we believe that technology replaces people

“…47 percent of jobs are “at risk” of being automated in the next 20 years.” Carl Frey and Michael Osborne, Oxford University “The Future of Employment: How Susceptible Are Jobs to Computerisation?”

Will there really be nothing left for people to do? Is there really nothing left for humans to do?

Dealing with climate change Rebuilding our infrastructure Feeding the world Ending disease Resettling refugees Caring for each other Educating the next generation Enjoying the fruits of shared prosperity

This is what technology wants “Prosperity in human societies is best understood as the accumulation of solutions to human problems. We won’t run out of work until we run out of problems.” Nick Hanauer

What happened when Amazon added 45,000 robots

Jeff Bezos calls this “the flywheel”

“I’ve just invested in an AI startup that will put 30% of call center workers out of a job.” (A VC who shall remain nameless)

This is the master design pattern for applying technology: Do more. Do things that were previously impossible.

The Augmented Worker Neo: “Can you fly that thing?” Trinity: “Not yet.”

Uber’s app isn’t quite what Trinity’s got, but…

“In order to fully reap the benefits of a changing economy—and sustain growth over the long-term—businesses will need to increase the earnings potential of the workers who drive returns, helping the employee who once operated a machine learn to program it. They must improve their capacity for internal training and education to compete for talent in today’s economy and fulfill their responsibilities to their employees.” Just-in-time learning is a 21st century competency Larry Fink, CEO, Blackrock

WeWork Acquires The Flatiron School Like Kiva (Amazon Robotics), this is a network-enabling acquisition!

Supercharge the skills of your employees, your customers, and your partners

Create more value than you capture

Work on stuff that matters

Tim O’Reilly @timoreilly • O’Reilly AI Conference • Strata: The Business of Data • JupyterCon • O’Reilly Open Source Summit • Maker Faire • Foo Camp • … • 40,000+ ebooks • Tens of thousands of hours of video training • Live training • Millions of customers • A platform for knowledge exchange • Commercial internet • Open source software • Web 2.0 • Maker movement • Government as a platform • AI and The Next Economy Founder & CEO, O’Reilly Media Partner, O’Reilly AlphaTech Ventures Board member, Code for America Co-founder, Maker Media

Market Networks In a market Networks and the Next Economy

Tim O'Reilly

Market Networks In a market