The New Scale

I should save this for my cliche of the week, but its Tuesday and I can’t wait to blog this until tomorrow.

One of the most overused cliches in the venture business is the word scale.

"It doesn’t scale"

"They’ve reached scale"

"We are having scaling problems"

"There are economies of scale"

Etc, etc.  You get the point.

We all look for scale because scale is what generates returns.

In the old world anyway.

As Jeff Jarvis points out in a great post, scale doesn’t mean what it used to anymore.

You cannot collect all the pieces of a marketplace in a centralized way and control all of it.  The technology won’t allow that to happen.  You can’t "get to scale" that way.

You must be open to others owning pieces of the equation.  You must let the users get the value of scale however the choose to create that scale.  You must facilitate the creation of virtual scale.

We had two conversations in the office yesterday that are good examples of this.

First, we were discussing the online news business with a newspaper executive.  He mentioned the the AP is considering pulling out of Google news if Google doesn’t pay for AP’s content.  After getting off of that call, we all agreed that the Google news reader won’t suffer too much if AP’s stories aren’t part of Google news.  There are so many sources of news these days that Google news will still be a viable service with our without AP.  AP’s scale is the wrong kind of scale.  Google’s is the right kind.

Second, we were talking about financial markets.  For as long as there have been markets, there have been centers where all the participants need to get together and trade.  Call them exchanges, hubs, or trading pits.  It doesn’t matter really what they are called.  They’ve been a critical piece of every market that has existed.  Soon that won’t be the case.  Plenty of trades get done one to one these days because technology makes that happen.  There is still a need for some kind of centralized clearinghouse that provides price discovery and liquidity.  But technology will provide that to the market participants and everyone will be trading one to one with tools that create a "virtual marketplace".  The kind of scale that exchanges provide is the wrong kind of scale.  Bloomberg’s is the right kind.  And even Bloomberg faces the possibility that its kind of scale will be the wrong kind soon as new technologies emerge to replace it.

So think carefully about the word scale when you use it next time.  Is it the right kind of scale you want to create?  If you go about creating the old kind of scale, you’ll spend a lot of money and end up with some really bad economics.  Just watch what is going to happen to the AP.