The Declining Power Of The Firm

I am a fan of Umair Haque‘s thinking and writing. I find it refreshingly original and often quite thought provoking. Umair’s central tenet is that we are in the midst of a groundbreaking shift from a centralized economy dominated by large "orthodox" companies to a "edge economy" dominated by end users. 

Umair’s most recent post at the Harvard Business School blog really got me thinking. If you care about business, markets, and the impact of technology on them, then the following five paragraphs are truly mind bending.

It’s simple: orthodox strategy doesn’t stop at finance. Strategy as
shadow-making, moral hazard, and market subversion is rife across the
economic landscape, from food, to pharma, to autos, to media. It’s what the industrial-era firm has hardwired into its stale, tired DNA.

If you really want to see the bankruptcy of orthodox strategy in
action, click those links – and spend a few minutes thinking about how
those industries (and more besides) have spent the better part of a century and countless billions creating more and more elaborate shadows to hide behind.

As in finance, the victimizer is becoming the victim: as interaction
accelerates, these industries are increasingly falling victim to the
games orthodox strategy so earnestly taught them to play.

Orthodox strategy was made for an industrial massconomy. And that, I
think, is the real root cause of the macro crisis: the exploding
divergence between today’s economics, and strategy trapped in a
distant, faded, rusting past – consigning firms to act out, like mute
players on a stage, moves bereft of imagination, meaning, and purpose.

The macro crisis isn’t really just about Bear Stearns and a handful
of banks: rather, as we’re all belatedly discovering, orthodox strategy
itself is no longer sustainable. For society, for people, and most of
all, for the corporation.

When I read Umair’s thoughts on this, I am reminded of Ronald Coase’s seminal paper The Nature Of The Firm in which he argues that firms exist because:

there are a number of transaction costs
to using the market; the cost of obtaining a good or service via the
market is actually more than just the price of the good. Other costs,
including search and information costs, bargaining costs, keeping trade secrets,
and policing and enforcement costs, can all potentially add to the cost
of procuring something with a firm. This suggests that firms will arise
when they can arrange to produce what they need internally and somehow
avoid these costs

What Umair is suggesting is that technology, particularly Internet technology, has changed that equation fundamentally. That the transaction and other costs are declining rapidly and the "nature of the firm" must change as well.

And I agree completely with that thinking. To me, the idea that Microsoft should purchase Yahoo! in order to build a better infrastructure for online advertising (and profit from that) is just old school thinking. What should happen is the exact opposite. Yahoo! should break itself up into a number of smaller firms that can be more agile, more nimble, and more connected to the market.

Yahoo! owns an online advertising marketplace called Right Media. In the Right Media marketplace, advertisers and publisher’s inventory come together in real time to create the optimal ad placement for the advertiser and the publisher. It’s still a immature market, even though it’s become a very big business. There is so much more than can be done and will be done in online advertising with marketplace structures like Right Media. I think a distributed marketplace model is so much more powerful than a few companies building enormous scale and dominating an industry.

Umair’s post was inspired by the mess that the financial markets are in because of big firms’ inability to understand everything that is going on inside their firms and inside the markets they trade in. It appears that our government will respond to this crisis with more regulation, fostering the creation of ever larger companies (JP Morgan + Bear), and bailouts of many of the "bad actors" who brought this crisis upon us.

But, like the government’s pursuit of Microsoft in the 90s, it will not be any of these moves that ultimately bring change to the marketplace. It will be the rise of a new way, like the open source movement fundamentally changed the software marketplace, that will bring the change that is badly needed to the financial markets.

I can’t honestly say that I have any idea how this is going to happen and I certainly don’t yet to know how to profit from it. But I want to solve both of those riddles and I know that talking about this stuff openly and honestly with all of you is a good place to start.

#VC & Technology

Comments (Archived):

  1. scott crawford

    Yep, yep and yep. Love the swirl and energy and dialogue going on in this space. Umair is stirring a rich pot. Much coalescing at once as we see the implosion of old systems, the rise of open social, the mobile web, and the redirection of design industry from gatekeepers to servant leaders helping to usher in a new era of widespread, wide-open creativity. I don’t know what’s going to happen either. But I’m pretty confident that the coming decade is going to be wicked good and inventive. And I want to nudge it along.

  2. awilensky

    He is very selective as to what comments are allowed. I’ve never made the cut. I am obviously not smart enough for Umair.

    1. fredwilson

      Really? I didn’t know that. Does he moderate the comments?

      1. preetam

        He does moderate comments on HBS and BubbleGen. But for the longest time I never made the cut either. πŸ™‚ I don’t quite get his logic either, but if I was to venture a guess, I’d say keep writing…you’re maybe one comment or three away from getting on to his HBS comments. :)Or just shoot him an e-mail, ja?

      2. awilensky

        I said some bad words in an otherwise well written comment. I can’t even fathom how I conjoined “manly female machine pol” and “handsome constitutional scholar mulatto”. But I did. And I’m sorry, Umair. Please forgive me.Everyone, forgive me. My mama gave me the lecture only once, and it has never really sunk in:”Alan, you were born after horrible labor and birth conditions that would be considered barbaric by today’ s standards, in a cold room, you were dragged out of me and started to cry for 4 days without respite. We called the OB and asked, ‘doc, can a baby die from crying?’.You write the note, you hold the paper.

    2. tomnixon

      I’ve met Umair a few times and found him to be very open. And I’m certainly no genius.

  3. tomnixon

    Great post Fred. It seems to me that the investment market today is designed to build companies that will either get swallowed up by a larger fish or to go public and become a big fish in their own right. The logic being that a big fish can do the job best. But this doesn’t seem to hold true in the edge economy. I wonder if in the future, the model will be to quickly and efficiently create a long tail of niche specialist companies. Perhaps incubation and angel investing are where the action will be, ala Y-Combinator, SeedCamp etc, but with a view to keeping the companies small and going for larger portfolios. What do you think?

    1. fredwilson

      I agree and I am hoping that we’ll see a market emerge for private positionsin these companies like has happened via recaps in the buyout marketfred

      1. Farhan Lalji

        But then what happens with exits in these positions? Perhaps more venture loans rather then capital and equity investments? Seems like the system needs a fundamental rethink to enable firms to be small, quick and nimble.

        1. tomnixon

          Companies will still have stock (although I think more and more of it will be private rather than public) so an exit is still possible – you just sell your shares. But perhaps the big paydays of large acquisitions and IPOs will become less and less common. This might put off the investors and entrepreneurs who are motivated purely by greed, but those people who want to build and invest in incredible products and services that make the world a better place could find this new ‘ecosystem’ approach to building companies to be highly appealing – it certainly is to me.

        2. fredwilson

          In theory the capital structure should be able to change as a firm grows in value and provide liquidity to founders and early investors without requiring a sale or an ipoThat’s what needs to happen. We need a highly liquid secondary market for privately held equity positionsFred

          1. William I

            Actually such a market exist. Goldman Sachs recently created the GS True, which can trade unregistered (with the SEC) shares of stock in a market platform. This would be the logical outlet for private equity firms to incubate small ventures and then create shares to be sold on the market. Also, an added benefit would be that only institutional investors (net worth 100 million+) are allowed to invest. Normally allowing for longer time horizons.

          2. fredwilson

            This is great. I want to leearn more about thisFred

          3. Devin Dawson

            Thanks for the link trail. It always disturbs me when delicious is blind on a topic. has only two links.

          4. William I

            I originally became aware of these market by my good friend Houman Shabab, who currently works at the Mercatus Center in Washington DC. I sent a link to his piece in Regulation on the subject. I also sent a WSJ Article on just the GS True platform.Hope it helps- William…

          5. Devin Dawson

            Can you explain why limiting participation to institutional investors should be seen as a benefit? It would be overstating my experience to state that I’m not familiar with private equity, but limiting participation seems to have the twin disadvantages of less liquidity and fewer information inputs. Is it a legal consideration that makes that smaller pool a benefit?

          6. fredwilson

            I don’t think its necessarily optimal but its what the law would allow right nowFred

  4. alan p

    Fred, to my mind most of what is going on can actually be fairly well described by existing strategic models, its just you can’t use existing assumptions / axioms in the models.Your example of Transaction costs is a typical example of this – it’s not hard to work out that if transaction costs change, a lot of structures in a supply chain will change even if it is doing exactly the same thing – its just that the old ways don’ make economic sense.But look at the confusion going on in industries being hit early today – music, media, pro photography – nearly all the strategic and economic models do predict the outcomes fairly well, but its totally unacceptable to the current powers so is unsaleable (and unmentionable in some channels), is hugely threatening to the current workforces so is bitterly rejected, etc etc (heck, Machiavelli had all this stuff written down – it ain’t new news)I think where strategists typically do go wrong is not going far enough, or wide enough in looking for the pressure points that drive changes. The other major criticism I have of much strategy work I’ve seen is that its not dynamic, i.e. it doesn’t think through the “what happens after X happens”.You know – the “I know, we’ll sell subprime mortgages cheap to get market share” (or similar…). Great idea, but what about when everyone else is doing it too… have to reset the strategy as the original assumptions have changed, but did Bear Sterns or Northern Rock?(Or all the BlogZines for that matter πŸ˜‰

    1. Nick Molnar

      Let’s talk about the dynamic side of this. If we take Umair’s theory about the edgeconomy as a given, how will big firms react, and how will that affect the firms truly on the edge?OK. It’s safe to say that after Newsweek runs a few articles on the same theme, the first step will involve companies, from Monsanto to Hewlett Packard, hiring teams of watered-down Umairs to help them do all of the superficial steps (turn 1 giant call center into 10 large call centers, CEO blogs, removing layers of middle management, etc). This will postpone the ‘macropacalypse’ for a few years.Then what? The strategic rot that plagues these companies is still there, focusing on lock-in, trade secrets, and using IP and copyright as barriers entry. Are we to really believe that these firms are going to watch one-anothers demise idly? Just look at the list of the top 10 online retailers. Last I checked, half of them were retail giants, the dinosaurs that were allegedly going to be left in the dust in the first bubble. These firms, and many new ones, are going to take these edge principles and create decentralized monoliths. It’s the only way to stay in the game.Corporations don’t have DNA, they have programming, and that can change. Management gets fired, customers revolt, and just like the emergence of popular rock & roll or hip-hop: the fringes quickly become the mainstream. So, what happens when you have firms that take edge principles and apply them on a massive scale? Will these decentralized monoliths be customers or competitors of the true edgeconomy? Will they just swallow up smaller edge firms like to create conglomerates? Will a lack of openness and transparency ultimately kill the large firm? Those are questions for someone else to answer.

      1. alan p

        I think taking the edgeconomy as a given is risky ;-)I find it more useful to think of this shift as Coase’s Law in the dynamic form, so rather than an edge effect (or boundary effect) as such, its a general reduction in transaction costs within entities and across supply chains, you just see it at edges first as its more visible (and sexy, so its gets more airplay).But if for eg you are in within media or telecoms today, you will see it all around you in the businesses.But otherwise I broadly agree, except to note that in time of rapid change – which this probably is – some structures just cannot change quickly enough.

  5. vruz

    I don’t think “the firm” is going to dissappear, but it’s going to become something else.More like a Hollywood franchise, where machinery, locations and sets are rented (factories?) where you have a director (CEO?) and a producer (CFO?) for a brief period of time only to produce some very focused output, you may sign a cast of main actors (programmers, designers?) for the principal roles, but mostly everything else is in flux.

    1. NickA

      Hedge Funds are a lot like this as well with significant elements of the operation coming from service providers such as prime brokers. The core of the firm is the investment talent and a tight group of support staff. This enables the rapid creation and destruction of firms and the focusing of the rewards on the talented and or lucky.In many ways buy out shops work this way as well with much of the heavy lifting done by lawyers, accountants, investment banks, placement agents and most of all consultants like McKinsey or Bain. How else does a firm like KKR run with 75 odd investment staff and more capital to work with than the average small country?Not so sure where VCs stand as this is more about the actions of the investment team.Anyway plenty of evidence that the financial markets are moving in this direction.

      1. fredwilson

        Excellent observations and commentOur VC firm is three partners, one analyst, and one officemanager/receptionistIt allows us to be nimble, turn on a dime, and move when we need to.It works wellfred

    2. glory

      another analogy might be CEO or prez as dungeon master; like if you think about it Hitler was just a super-charismatic lawful evil DM who convinced his role-playing PCs — ein Volk — they were living in a chaotic neutral world… (it works on so many different levels and translations!) /self-Godwin :Pand that mythos, apparently, is what Tolkien et al were aiming to counter… and ‘psychological warfare’ (Cordwainer Smith literally wrote the book on it) has been an aspect of SF/fantasy ever since; notably PKD — viz… — Vance, Herbert, Moorcock, Brunner etc; cf. Stapledon…so ‘campaign’ could work as well in addition to ‘franchise’?

  6. DonRyan

    Completely agree. While the market seems to be focused on creating “supermarkets” (financial or whatever) the marketplace continues to respond to small, nimble companies who can meet client’s needs without going through multiple layers of hierarchy or trying to conform the customer’s problem to the firm’s policies and procedures. I think we’re not seeing this on the customer end but also the human resource end as highly skilled workers flee from large companies to small(er) ones for greater reward and autonomy. The flight from Google is perhaps the most prominent example of this in the tech sector. Big companies can be soul crushers.

  7. Joseph Weisenthal

    You might call me a moron — I might call myself as such as well — but I’ve always found Umair’s writing to be borderline impenetrable. But as I said, I’m open to the possibility that its my own intelligence at stake, rather than his writing

    1. tomnixon

      Don’t worry Joseph, it’s not just you. After a few weeks of reading his stuff you start to get the jist.

    2. Joseph Weisenthal

      I should add, however, that he does seem to be hitting on some important ideas.

    3. fredwilson

      He’s ‘obtuse’ but I think its worth trying to figure him outFred

      1. Bruce MacVarish

        Fred – I agree. I think the effort of trying to pull out the key elements of Umair’s thinking is worth it. In my post on Friday and a number of others over the past year, I try to start that process. It would be good to get your thoughts on how best to translate key strategies for the edge economy into useable tools and frameworks for all to apply.

        1. Philippe Bradley

          People said the same thing about all oracles, mediums, snake oil peddlars and abstract artists. People who say things so obtusely that their meaning is retroactively attributed to them by an impressionable audience.You’ll have to forgive my miseryguts – I get a little suspicious/cynical when someone’s output is written in such an unwavering, projected voice, but tends to repetition, jumps to conclusions, is not particularly empirical, makes questionable assumptions, and rarely links out to/references any existing literature/thinking. None of these imply falsehood, but the point I’m making is that they’re frequent characteristics of models/theories/explanations that have no predictive value, and may not be true. That being said, they DO have value: it lies in the questions it makes the reader ask himself – the meaning is created by the reader and projected back onto what he/she just read (just like abstract art). It’s worth adding that in the past it’s been the dark side of consulting, it’s often associated with the ‘cult of celebrity’ and its value is debateable even if to many it seems like panacea.(christ, this biochem degree is turning me into a monster)But as Bruce (and others here) say, within his body of work there are some interesting formulations of some of the phenomena going on around us. What it needs is coauthoring, as Burce asks – someone to make it more to the point, provide the proper context, and help avoid some of the all too frequent repetition. At least reinterpretation by Fred, broadstuff, et al, is great, but a Becker/Posner type blogging dynamic – pseudo-competitive coverage between two authors on the blog, would be a huge boon for the readership

      2. Bruce MacVarish

        Fred – I agree. I think the effort of trying to pull out the key elements of Umair’s thinking is worth it. In my post on Friday and a number of others over the past year, I try to start that process. It would be good to get your thoughts on how best to translate key strategies for the edge economy into useable tools and frameworks for all to apply.

      3. Bruce MacVarish

        Fred – I agree. I think the effort of trying to pull out the key elements of Umair’s thinking is worth it. In my post on Friday and a number of others over the past year, I try to start that process. It would be good to get your thoughts on how best to translate key strategies for the edge economy into useable tools and frameworks for all to apply.

      4. Bruce MacVarish

        Fred – I agree. I think the effort of trying to pull out the key elements of Umair’s thinking is worth it. In my post on Friday and a number of others over the past year, I try to start that process. It would be good to get your thoughts on how best to translate key strategies for the edge economy into useable tools and frameworks for all to apply.

        1. vruz

          so you agree, right ?:-)

      5. Dick Costolo

        I’d like to take this opportunity to reintroduce the term “Upaque”. Ok, i’ll stop using your blog as my personal nomenclature platform now. Sorry.

  8. Jeff Jarvis

    Fred,Of course, corporations won’t end. But I believe they are being supplemented by a few models that are not about command-and-control at the center, as all old corporations were. They’re the obvious ones you know:* Platforms. Take Google, of course. It is the anti-Yahoo, built on the distributed model of enabling countless companies to start atop what it provides. Yahoo, I’ve said, shouldn’t just break up into smaller pieces; it should make its entire self exportable and reusable. Ditto AOL. Ditto, for that matter, Microsoft. Amazon and Google are offering up their infrastructures as the bases for others’ companies and that’s smart. Pardon the plug for my book, but they should all be asking WWGD?* Networks. A little less-loose than platforms; they come together to benefit from critical mass but do not join into a corporation; there is still ownership and control at the edges. I believe that Right Media is part of a larger trend toward open ad networks, for example; see OpenX and Google AdManager. Again: WWGD?* Metaorganizations. That’s made-up but I want to encompass more than just open-source. This is the loosest affiliation: gathering around standards or standard-making efforts to gain some benefits of critical mass with all control and ownership at the edge. As Google proves, though, this isn’t an either-or. A corporation can, as the examples above have shown, still be a corporation but scale much larger by creating a network, loose or tight, and adding as much value as possible while extracting as little value as possible while growing as big as possible. This is what I learned at your event from the likes of Yochai Benkler, Tom Evslin, Tim O’Reilly, Umair, and you. From the top view, size still has benefits so it still matters but there are now alternatives to size that also demands ownership and control. From the bottom-up view, enterprises at the edge will join whatever gives them the benefits of size — whether that’s building on a Google platform, or adhering to a Web standard, or selling on eBay, or using Amazon infrastructure, or joining an OpenX or other ad network. To quote Mark Potts from my conference on networked journalism at CUNY: To be small, you have to be part of something big.The thing is, nobody can own big anymore. And that is what will keep big — the corporations and organizations of the future — more honest, I hope (but then, I’m an optimist). That control is what allowed them to corrupt.How do you make money on this? I think you already are, by supporting companies that create platforms or take advantage of others’ platforms or standards. Are there more ways? Well, that’s an interesting conversation. Time for lunch. I do think that one could look at any of the industries Umair links to and complains about above and try to figure out what platforms would be needed to utterly disrupt them. Pardon the last plug, but that’s part of what I’m trying to do in the book. So I’ll buy lunch.*

    1. fredwilson

      JeffThis comment is a post in and of itself. We need a reblog button in disqus badly!Fred

      1. jeffjarvis

        I just cut-and-pasted it into my blog. Yes, there’s too much separation between posts and (good) comments. They’re all just tchotchkes of content floating around with links among. That’s what disqus really needs to enable. See the current Technology Review with its visualizations of blog relationships. There’s the opportunity: meta.

        1. joshyoung

          I can’t seem to find the discussion of visualizations of blog relationships at http://www.technologyreview…. Is it there?

      2. slowblogger

        You may not like it, but that is why I like cocomment. I get to keep my comment log, which you can see at my blog. But Cocomment cannot copy comments made on Disqus. Maybe due to competition? But these are different models, which means both can exist together.

    2. Amanda Chapel

      God save us.

    3. davidshay

      as glory mentions in the comments above, Benkler indeed discusses this transition in details. Different version of the argument are found in the article Coase’s Penguin (… ) and his book The Wealth of Networks (… ). In somewhat different terms, but trying to get to the heart of the same issues Umair is after, Benkler talks not about an edge-economy but about peer-production. one of the key ideas is that peer-producers are loosely organized but can still reduce transaction costs (including information costs), an alternative to firms’ attempts to internalize externalities in the orthodox way. clearly, as is evidenced from free/open source software or cases like Wikipedia, under some conditions peer-production can be more efficient that traditional firm-based production. the (multi) billion dollar question is what those conditions are. when do these models apply, or to put it in Umair’s terms, under what socio-technical-economic conditions can the edge economy eclipse the orthodoxy. it seems as if the answer lies in understanding the relation between coordination costs and scale. the edge economy, or peer production systems, or open systems if you will, work better if coordination costs can be kept down while scale goes up. perhaps one of the biggest innovations in wikipedia wasn’t only the Wiki software itself, but the ‘talk’ pages around every article which allow a small group of authors to coordinate their efforts of writing the article itself. sourceforge has many of those mechanisms built into it too. so if Jeff is right, and enterprises at the edge will join whatever gives them the benefits of size, my bet is that those benefits increase when ‘big’ is centered on reducing the cost of coordination between the edges, allowing each edge to focus on what it does best (be it post a fact, solve a bug, show an ad).

  9. johndodds

    I’m not sure the crisis was caused by their inability to know what was going on but rather by an unwillingness to cheak (while the profits rolled in). I find Umair’s hypothesis interesting but I’m not sure the opacity of asset value currently runs beyond that of financial instruments which have been created on the back of unregulated lendign ratios. Let’s see how he expands this argument.

  10. laljif

    Like the idea of operating as small companies. The problem is the execution of such a principle. There is something fundamentally wrong with the market system of valuation and value capitalisation. Firms are rewarded for growing and for size even if this means value with regards to the world or individuals is destroyed. Think private companies – like 37Signals for example – are able to stay nimble, to stay authentic but when a company reaches a certain size it gets too difficult to turn back.

    1. Jeff Jarvis

      That’s an interesting question: Is the definition of “too big” changing (witness Tribune Company, McClatchy, Clearchannel, and various electronics retailers from Crazy Eddie to the Wiz to Circuit City today).I argued sometime ago that the definition of “big enough” has changed thanks to all the factors above.

  11. John Ramey

    Fred – Will you elaborate more on the “distributed marketplace model”? Great post.

  12. Crab Nebula

    Hi – I think Umair fundamentally underestimates human nature – this mess is not about a lack of “information.” The financial mess was about countless bad actors trying to “get theirs” and exploit a system which facilitates this .You NEED good regulation. The idea that we can do without regulation and simply rely upon the aggregate good intentions of a group of agents in a given industry strikes me as pure fantasy.Otherwise, I think Umair is right.

  13. glory

    um, isn’t he just catching up w/ Benkler* et al, e.g. Moglen and Lessig? like starting with Saxenian and Drucker [sort of already prefigured by Wilson/Bey (viz TAZ)] and extending thru to ESR (The Cathedral and the Bazaar) and RMS (GNU) — even Shirky has a pop-tech book out on it now —…if you’re thinking post-capitalism-as-we-know-it (Obama) change, then ‘deconstructing’ (I know po-mo terms are out of favour — teasing out ‘hidden assumptions’** behind) the “market” and the “state” is a nice exercise in seeking a workable first order paradigm realignment; (read Gellner’s Plough, Sword and Book and DeLanda’s A New Philosophy of Society)go back to Locke on currency…… cf.…DeLong on the corporation…http://www.j-bradford-delon…cf.…and the market…http://www.j-bradford-delon… & http://www.j-bradford-delon…so you probably wind up with something like economically feasible socialism*** (Nussbaum cosmopolitanism) or Stephensonesque burbclaves/phyles (deterritorialised balkanisation a la B.Anderson) before entering the Eganian/Dysonian post-human far future :Pcheers!—* http://www.creativecomponen…**…***

    1. fredwilson

      Whoa. You are so far ahead of me on this stuff, its not even funnyI have read benkler and lessig but it looks like I’ve got a big homework assignment nowFred

    2. Will Hunting

      How do ya like them apples????!!!!

      1. simondodson

        i got her number!

    3. vruz

      in the beginning there was GNU.then the internet enabled open source.Google runs entirely on open source software.then these concepts were applied by Lessig to culture and art.then others like Moglen and PJ are applying it to the law.I’ve heard from others that are trying to do the same in healthcare and science(which is actually more of a comeback, science had always been open source until the 20th century, the very term open source is borrowed from the scientific community)Lessig is now moving to politics, transparency and positive anti-corruption (i.e. open source for politics)how long until Wall Street and the entire marketplace feel the heat and need to become authentic with no room for cheating ?I wouldn’t go as far as to call this socialism, but clearly antisocial capitalism can’t afford to exist in its current incarnation.and I mean it literally also, the current symbiosis of the US and China should be sufficient proof.what we have now is not even capitalism if we stick to the word of Adam Smith.

      1. markslater

        that is a priceless response to your post fred!I’m reaching for Orwell as we speak.

      2. fredwilson

        Maybe we are entering the time of ‘social capitalism’Where the end users control and allocate attention, money, and ultimately power based on a dynamic and ever evolving measure of trust and social goodGoogle may have been hip to this earlier than most with their desire to do no evilFred

        1. vruz

          the Dean and Obama campaigns on the internet have given a hint of some things the future may bring to politics.

        2. vruz

          by the way, there are signs it’s beginning to happen in other parts of the world as well…

      3. glory

        well the Fed, Wall Street & DC are of course trying to preserve the (BWII) system — http://www.investorsinsight… — but is the status quo sustainable in the face of widespread panic^H^H^H^H^H (but slow) realisation that ‘free’ markets aren’t the same thing as _efficient_ markets?…these three leading lights, at least, presumable edge thinkers or conduits of such, say nay; reformulating Obama, we are the system and we can do it better — if there’s a ‘betr’ (technological/cultural) alternative that coercion/cynicism/apathy is impotent against, then the path of least resistance follows — voila, we’ve (re)created the creative class…or, if you want it in business terms, if fixed/replacement cost (capital) [path dependence] is no longer prohibitive — and indeed, can be replicated many times over w/ relative ease — and marginal cost is next to zero (and we’re talking about the _entire_ system: worlds, universes, _realities_) then PKD-like [We Can Build You] ‘simulations’* proliferate [witness China/Second Life/Solaris] and start encroaching on what was consensus/convention; we’ve started living in subjunctive (meta-)time** and it’s opening up another _dimension_***what’s more, it calls for a new kind of statistics :P…cf.…cf.… &…cheers!—*…**…***

    4. Dick Costolo

      Not that tired old “nussbaum cosmopolitanism” saw again. If I had a nickel for every time that’s started coming up in conversation.

  14. Ethan Bauley

    “Ultimately…traditional businesses will unbundle and then rebundle into large infrastructure and customer-relationship businesses and small, nimble product innovation companies.”- John Hagel (in 1999!!!) http://www.strategyworld.or…Infrastructure/logistics/economies of scope: AMZ, BigTable, FedEx, etcCRM/economies of scope: AdWords, GetSatsfaction, etcMy reading of Umair basically says that product innovation firms will just plug into the platforms provided by the above, and compete in terms of their ability to create and sustain markets, networks, and/or communities.Umair has said “markets, networks, and communities are the natural bottlenecks of the post-network economy.”'s work really informs so much of Umair’s frameworks…it’s really brilliant stuff and soooooo satisfying after struggling up the Umair Learning Curve.(I already ref’d this stuff on Albert’s post at the USV blog and The Gong Show but thought it would be good to throw up here πŸ˜‰

    1. Nick Molnar

      That Hagel quote did a perfect job of putting some of Umair’s thoughts into a practical context for me. Fred’s Coase quote at first seemed to contradict Umair’s theme of small/transparent > big/opaque in the edgeconomy.After all, large firms are able to grow quickly due to decreasing transactional costs as well. Sometimes, even faster than the small firms which cannot afford the capital outlays to lower marginal costs further (increasing returns to scale).Unbundling/rebundling seems to be a pretty natural extension of all the things we have been talking about here & a pretty good description of what has been happening on the web since 1999.

      1. Ethan Bauley

        ya Hagel’s a

    2. alan p

      As well as John Hagel, read Brian Arthur for eg, or the “Memetic” theorists in the 90’s, this was all pretty common currency at the time. Whats more curious to me is that it kind of all got forgotten in 2001-2005, and is being rediscovered now.The really big difference though is that 10 years ago it was more or less purely theoretical, today the penetration of low cost broadband internet has made the technology and the way it behaves a reality for early adopters.One could argue that email and the web already have mass adoption, and the results in company and supply chain structure are all around us. Its been clear for teh last 2-3 years that the next technology push is the one around inter

    3. Ethan Bauley

      oops, typo: logistics have economies of “scale”, not scope, but ya’ll knew that already πŸ˜‰

  15. Rob

    And in 1998, web companies were going to put all the bricks and mortar companies out of business. Yes, there is a change going on, but it isn’t as revolutionary as Umair makes it out to be. Let me give an example. Technology, in theory, makes it easier to keep in touch with people, One could argue that with social networks, etc., our “relationship maintenance time” has dropped, and on a per-relationship basis, this is true. But, all that really happened is that we now maintain more relationships.Strategy hasn’t fundamentally changed, we have just added another variable and made it more complex. Old rules still apply. Everything just moves faster. Umair harps on this stuff because it is his calling card. He’s just differentiating his ideas, like most all bloggers do, to try to gain attention. Consultants are always preaching revolution because otherwise, what use would they be? 90% of the time, the revolution doesn’t happen.

  16. Don Jones

    My belief is that every company wants to “compete unfairly” (shadow-making, market subversion) – they want lock in their customers as much as possible since that drives valuation – and every VC worth his salt asks the question, “How can you compete unfairly.” So there will always be that goal among business people, regardless of Haque’s ideas, since it is human nature from time immemorial to gather as many resources with little regard for others.Large companies in various industries were able in the past to compete unfairly, but due to technology and their inability to adapt, are now vulnerable. As for which industries are most vulnerable – information-heavy industries or ones that have been or can be translated into digital bytes are likely the low-hanging fruit. Markets that can be made more efficient by rapid communications, or that have low inherent trust which can be increased by crowd-sourcing or other automated aggregating facility, are also ripe for change.

    1. fredwilson

      I guess my partners and I are not worth our salt πŸ™‚

      1. Guest

        Oops – I was playing fast and loose with the salt…

        1. fredwilson

          No harm no foul. But I couldn’t resist the reply!

    2. vruz

      I don’t agree with your definition of unfairness. I know where you’re getting it from, I know Friedman too, and I still don’t agree with them.Do we all have to turn into unethical, antisocial cavemen, game the system and do everything we can to cheat the market ?The concept of unfairness in market disruption is not a matter of ethics, law, or anything that gives any particular player any literal unfair advantage.The concept is really about asymmetry, those who have a competitive advantage may have earned it lawfully and ethically, for example, by being the most studious and the best, capable of anticipating a lucrative trend.You can be asymmetrical and ethical, without being unfair.A healthy marketplace requires a level playing field and rules all the players agree not to subvert.Unfairness is totally opposite to this notion.Saying people out there aren’t “worth their salt” because you don’t agree with them is, at best, narrowminded.

      1. Don Jones

        vruz – “not worth their salt” is just an expression in passing, not literal or personal…I subscribe to ethical, fair practices, but entrepreneurial capitalism is not for the faint of heart…

        1. fredwilson

          Or the faint of mind

  17. David

    Wow, great post. Intersting synthesis.

  18. umair

    wow, great discussion. thanks to fred for kicking it off.let me add a few minor points.the idea that i’m selective about comments isn’t accurate. i almost *never* mod out comments: i’ve rejected less than ten in the last year. none of those were from preetam or alan wilensky.maybe there is an issue with blogger. if you guys are having problems commenting, just email me – everyone’s welcome to comment at bubblegen or my hbs blog.glory,benkler, shirky, moglen, et al are discussing technologically-driven shifts in econ, society, politics, law etc. the focus of my work is how the economics of the edge force firms to rethink dna, strategy, and advantage. we are, in fact, talking about very different things.rob,i’m not a consultant. i run a lab. i have no interest in “selling” anything, and never have had. it’s the opposite: i’m sharing this stuff with you because i think it’s cooler that for being obtuse – i’m working on it πŸ™‚

    1. bernard luu

      This is the most interesting discussion on the Internet. The reversal of the last 50 years trend, from 1955 when Fortune 500 controlled 2/3 of US GDP to 2000 when they controlled 2/3, is a massive force. The Internet started it but it is much bigger than the Internet.

      1. vruz

        it sounds like a revolution to me.(though as you may have read in other posts, others are inclined to believe things are and will always be the same)

    2. vruz

      now that was acute πŸ™‚

    3. alan p

      Umair, is it just a reflex πŸ˜‰

    4. fredwilson

      Umair, I think you kicked it off, not me.But thanks very much for making it over here to join the discussion.It’s an important onefred

    5. Amadou M. Sall

      Umair, I think Fred and phbradley actually mean “abstruse”, instead of “obtuse” πŸ™‚

    6. Web 2.0 Skeptic

      You were a consultant before this gig, and a not a very good one. You take great delight in pointing out how right you are after the fact, but are unable to deliver the goods up front, and that is why you failed as consultant.

  19. Philippe Bradley

    ” I certainly don’t yet to know how to profit from it”bioanalogy – (if) firms are breaking up into smaller, agile units, the economy will resemble the human brain – dense, dispersed clusters of small inter-related units (neurons!) forming transient, agile patterns, constantly being remodelled.There are 4 components to the system you could copy: 1) be a neuron – basically small firms, startups, road warrior consultants and creatives; 2) be a synapse between neurons: the service that lets neurons talk to one another, form temporary networks and memories; 3) be the extracellular matrix – half incubator, half director, it’s the YCombinator of the brain on which every neuron finds its position and develops under its occasional signals. 4) be the blood supply – the main supply of resources (multimillion VC?), but *not* directly involved with neurons. Often aligned with the neurons via the extracellular matrix. 5) be the skull (i think government’s already got that one figured out pretty good)This century, if the economy is edge-bound, is certainly going to need some damn good synapses and extracellular matrix. A shakeout is also needed to weed out the underperforming neurons.

  20. John Furrier

    It’s great to see the big thinkers are picking up on the main message to this post..…influence isn’t about people – it’s about groups.. ding ding 1 point for fred wilson; welcome to the party Fred. You’re doing the community a great service by point out Hamir’s post and your view on it..classic b-school stuff but very relevent as the modern web evolves as ‘infrastructure transactional’ engine or a ‘vertical engine’.

  21. Alberto Molina

    We’re a long way from Firms becoming not powerful. The fact that power flows to the center and the reach of an existing power base and known channels of distribution are not going to evaporate.So News of the demise of the Firm is clearly premature. But the part that is obvious, and is not new, is that there is something antisocial about Firms, especially in their incarnations as pure captialist phenomenon.I read today, for example, the Yahoo! board’s response to the latest takeover push from Microsoft. The language focuses on the Microsoft offer not being in the best interests of stock holders. Traditionally this simply means the price isn’t the best. But there’s a huge question of whats best for the business, it’s people and the world? Stock holders need to be rewarded of course, but there is so much more than price that matters to society and the fundamental assumtion that the rest is irrelevant leads to antisocial behavior.There’s no point going into how and why, it’s been done from Karl Marx to GreenPeace to any normal observer feeling oppressed in a fluorescent cubicle.What is most interesting is the liquidity that the internet and technology have brought to transactions of all types and the effect that has had on destabilizing monolithic Firms based on narrow concepts of capitalistic value. Humanistic values continue to be exercised at the expense to a never before degree of monoliths.

  22. qwang

    Certain economies of scale will always exist. What mega-firms should be thinking about is how to spin-off the innovation process to small players, then bring semi-mature products back into the fold where there are meaningful synergies.The trick is how to define the relationship between innovator and integrator and find the proper trade off between control and innovative freedom. Big pharma is moving in this direction as they look more and more to start-ups as an alternative to their traditional pipeline, but no one else can commercialize products like big pharma can.PS – my first time using Disqus, my god the the signup process took a whooping 5 seconds! Now if only micro-payments could be this easy…

  23. TMC2K

    Outstanding Post. This thinking is dead on. I totally agree with connecting this thinking to the Yahoo deal. By the time MS would absorb Yahoo! the landscape will shift beneath them and then they will realize it was wrong. Yahoo is doing the best thing for MS right now by refusing, (although they are doing the worst thing for themselves – they’ll never get the chance to monitize their properties at this level again).

  24. gregory

    profit will come from what you give, not from what you get … it is the way love works … the rise of the new way is simply a closer external, organizational, approximation to the internal structures of consciousness, mediums becoming more transparent, more fluid, more invisiblequalities of character will be far more crucial, immediate…structures have always been an effect, not a cause… this will continue of course … new structures will arise out of higher consciousness is the short way to say it

  25. BillSeitz

    I think that rather than make huge profits which they plow into acquisitions which they can’t integrate, the big players like Google should keep a smaller piece of the ad-revenue pie, so that players in their eco-system (hello AppEngine) can build a sustainable model…

  26. Jake

    Thanks for sharing something that has truly opened my eyes. I agree that this could be big, but of course, it’s the details of this transition that matter. Like you indicate: “Great, now that I understand this, what do I do now?” Also, people are fans of binary thinking when reality is so much more distributed across outcomes. Understanding where this occurs first and when is critical.Lastly, the mortgage finance industry blew up not just because of unknown risks (some people knew it: see Paulson Capital), but also because of politics. The reality in any company is that those with revenue growth dominate the strategic agenda, which is why you see disruption and corporate disaster. I am very interested to understand how companies that are able to maintain their portfolio in the face of dominant revenue generating BUs (i.e. Goldman Sachs) do it.

  27. JoshGrot

    Fred–I agree with you entirely. And thanks for directing me to Umari.As a matter of fact, we had extrapolated from Coase and projected (back when I was with the e-Citi arm of Citigroup in the 90’s) that the Fortune 500 would go through the greatest change in recent years precisely due to the rise of the Internet economy.While this didn’t take place during the first wave, the Web 2.0 economy seems to have greased the skids for true “frictionless” transactions (of all varieties).What now may be holding back the change is the legacy of an M&A infrastructure whose central tenet is that scope and scale are both beneficial to shareholder value. Simply put, I don’t know whether most of corporate America has fully learned yet how to compete as effectively via partnering vs. buying. In that respect, it reminds one a bit of the old Road Runner cartoons where Wile E. Coyote would skid off a cliff and pause for a few moments before realizing that there was nothing holding him up any longer.

  28. Prokofy

    Here’s the problem with Umair’s idea: A Murdoch values a Myspace and buys it, or Yahoo values Flickr and buys it, or Google values Feedburner and buys it, and buys the aggregated end users that are supposed to be the new black here. Except, what they buy at that level isn’t an aggregate of end users, but a database that behaves as a kind of already merged dumb beast. And the dumb beast, half the time, flees or tanks because end users don’t like the feeling of being bought, and the managers of their dbase records imagine them to be an aggregate they can manipulate.I always marvel when I see that article being flogged (Philip Rosedale, maker of Second Life flogged it in 2005, too). 1937 was not a good year — look at the world ideologies of the time. This one was a mild version of the same problem: romanticizing about the collective, the firm as a hippie commune with a food co-op…I don’t need Yahoo to break up. I need Yahoo to charge for email accounts, and then there will be less spam and its search will be down less. That’s all. It should also revenue-share with me if I run ads at the bottom of all my emails.Prokofy Neva

  29. Abe Murray

    I’ve been thinking a lot about this recently – why do cities exist, if not because they suit the requirements of firms? What would the world look like if people actually did work from their homes or local communities, coming together online in more ad-hoc fashions. This is the world I want to be building in my daily life – to me the drudgery and unpleasantness of commuting to NYC every day just seems so backwards – millions of people have terribly structured lives simply because it has been more efficient to compete as groups in firms.I love the Coase reference – I appreciate his theories, but have always felt they were more problems to be solved than immutable forces of nature.

  30. slowblogger

    I agree a lot (BTW, I disagree with you in ‘Free’ issues). I have a related topic called Mass Niche, on which I have a book in writing (forever).”Mass Production”: 20th century – corporate strategy – large company – large consulting firms as thought leaders – “You can have any color, as long as it is black.””Mass Niche”: now and forever – innovation – small business and individuals – individual bloggers as thought leaders – “Mr. Ford, Let me paint my car.”