How our economy is shifting towards network-centric players

Managing our hub economy, HBR

I loved this article from the Harvard Business Review: Managing Our Hub Economy,by Marco Iansiti and Karim R. Lakhani, the authors explain in a very clear way what we are already experiencing in the last decade already at the macro-level economy.

The global economy is coalescing around a few digital superpowers. We see unmistakable evidence that a winner-take-all world is emerging in which a small number of “hub firms”—including Alibaba, Alphabet/Google, Amazon, Apple, Baidu, Facebook, Microsoft, and Tencent—occupy central positions. While creating real value for users, these companies are also capturing a disproportionate and expanding share of the value, and that’s shaping our collective economic future. The very same technologies that promised to democratize business are now threatening to make it more monopolistic.

Beyond dominating individual markets, hub firms create and control essential connections in the networks that pervade our economy. Google’s Android and related technologies form “competitive bottlenecks”; that is, they own access to billions of mobile consumers that other product and service providers want to reach. Google can not only exact a toll on transactions but also influence the flow of information and the data collected.

These big ‘Hub’ companies, as these authors call them, are companies that you cannot ignore when you want to do business in many markets today.  The interesting point of this article is that those same companies have a great competitive advantage over traditional companies in a lot of other markets. And each time they dominate in a different market, their competitive advantage grows to capture yet more easily the future next market they’ll wish to enter.

This is flipping, because one of the great advantages we all see on being connected through Internet and being heard by (almost) everybody is the democratisation of power, the opening of opportunities for everybody… and what is really happening is that the same companies that are offering the inter-connections are growing so much that they are not avoidable, so they monopolise the communications channels.

Hub firms don’t compete in a traditional fashion—vying with existing products or services, perhaps with improved features or lower cost. Rather, they take the network-based assets that have already reached scale in one setting and then use them to enter another industry and “re-architect” its competitive structure—transforming it from product-driven to network-driven. They plug adjacent industries into the same competitive bottlenecks they already control.

For example […] Google’s automotive strategy does not simply entail creating an improved car; it leverages technologies and data advantages (many already at scale from billions of mobile consumers and millions of advertisers) to change the structure of the auto industry itself.[…]

If current trends continue, the hub economy will spread across more industries, further concentrating data, value, and power in the hands of a small number of firms employing a tiny fraction of the workforce.[…]

To remain competitive, companies will need to use their assets and capabilities differently, transform their core businesses, develop new revenue opportunities, and identify areas that can be defended from encroaching hub firms and others rushing in from previously disconnected economic sectors. Some companies have started on this path—Comcast, with its new Xfinity platform, is a notable example—but the majority, especially those in traditional sectors, still need to master the implications of network competition.

In this article, the authors encourage the ‘hub’ companies to realize the impact they have on society, the resentment that could rise if their power is not wisely used.

Most importantly, the very same hub firms that are transforming our economy must be part of the solution—and their leaders must step up. As Mark Zuckerberg articulated in his Harvard commencement address in May 2017, “we have a level of wealth inequality that hurts everyone.” Business as usual is not a good option. Witness the public concern about the roles that Facebook and Twitter played in the recent U.S. presidential election, Google’s challenges with global regulatory bodies, criticism of Uber’s culture and operating policies, and complaints that Airbnb’s rental practices are racially discriminatory and harmful to municipal housing stocks, rents, and pricing.

Thoughtful hub strategies will create effective ways to share economic value, manage collective risks, and sustain the networks and communities we all ultimately depend on. If carmakers, major retailers, or media companies continue to go out of business, massive economic and social dislocation will ensue. And with governments and public opinion increasingly attuned to this problem, hub strategies that foster a more stable economy and united society will drive differentiation among the hub firms themselves.[…]

A real opportunity exists for hub firms to truly lead our economy. This will require hubs to fully consider the long-term societal impact of their decisions and to prioritize their ethical responsibilities to the large economic ecosystems that increasingly revolve around them. At the same time, the rest of us—whether in established enterprises or start-ups, in institutions or communities—will need to serve as checks and balances, helping to shape the hub economy by providing critical, informed input and, as needed, pushback.

They explain that with the growing connectivity, we share information at near-zero marginal cost. Thus networks are creating value:

Metcalfe’s law states that a network’s value increases with the number of nodes (connection points) or users—the dynamic we think of as network effects. This means that digital technology is enabling significant growth in value across our economy, particularly as open-network connections allow for the recombination of business offerings[…]

But that value is not much distributed among players to begin with, moreover the bigger the network, the stronger effect of attraction that it will exert, thus exacerbating the differences:

But while value is being created for everyone, value capture is getting more skewed and concentrated. This is because in networks, traffic begets more traffic, and as certain nodes become more heavily used, they attract additional attachments, which further increases their importance. This brings us to the third principle, a lesser-known dynamic originally posited by the physicist Albert-László Barabási: the notion that digital-network formation naturally leads to the emergence of positive feedback loops that create increasingly important, highly connected hubs. As digital networks carry more and more economic transactions, the economic power of network hubs, which connect consumers, firms, and even industries to one another, expands. Once a hub is highly connected (and enjoying increasing returns to scale) in one sector of the economy (such as mobile telecommunications), it will enjoy a crucial advantage as it begins to connect in a new sector (automobiles, for example). This can, in turn, drive more and more markets to tip, and the many players competing in traditionally separate industries get winnowed down to just a few hub firms that capture a growing share of the overall economic value created—a kind of digital domino effect.

They give then some well-known examples of our near past:

Just a few years ago, cell phone manufacturers competed head-to-head for industry leadership in a traditional product market without appreciable network effects. [..] But with the introduction of iOS and Android, the industry began to tip away from its hardware centricity to network structures centered on these multisided platforms. The platforms connected smartphones to a large number of apps and services. Each new app makes the platform it sits on more valuable, creating a powerful network effect that in turn creates a more daunting barrier to entry for new players. Today Motorola, Nokia, BlackBerry, and Palm are out of the mobile phone business, and Google and Apple are extracting the lion’s share of the sector’s value. The value captured by the large majority of complementors—the app developers and third-party manufacturers—is generally modest at best.

The domino effect is now spreading to other sectors and picking up speed. Music has already tipped to Apple, Google, and Spotify. […] On-premise computer and software offerings are losing ground to the cloud services provided by Amazon, Microsoft, Google, and Alibaba. In financial services, the big players are Ant, Paytm, Ingenico, and the independent start-up Wealthfront; in home entertainment, Amazon, Apple, Google, and Netflix dominate.

Where are powerful hub firms likely to emerge next? Health care, industrial products, and agriculture are three contenders. But let’s examine how the digital domino effect could play out in another prime candidate, the automotive sector […].

The authors then describe their analysis of the transformation that is going on in the automotive sector:

As with many other products and services, cars are now connected to digital networks, essentially becoming rolling information and transaction nodes. This connectivity is reshaping the structure of the automotive industry. When cars were merely products, car sales were the main prize. But a new source of value is emerging: the connection to consumers in transit. […] If consumers embrace self-driving vehicles, that one hour of consumer access could be worth hundreds of billions of dollars in the U.S. alone.

Which companies will capitalize on the vast commercial potential of a new hour of free time for the world’s car commuters? Hub firms like Alphabet and Apple are first in line. They already have bottleneck assets like maps and advertising networks at scale, and both are ready to create super-relevant ads pinpointed to the car’s passengers and location. […]

The transformation will also upend a range of connected sectors—including insurance, automotive repairs and maintenance, road construction, law enforcement, and infrastructure—as the digital dominos continue to fall. […]

In conclusion :

To reach the scale required to be competitive, automotive companies that were once fierce rivals may need to join together. […]

Of course, successful collaboration depends on a common, strongly felt commitment. So as traditional enterprises position themselves for a fight, they must understand how the competitive dynamics in their industries have shifted.

I think this analysis is highly accurate and we can expect similar developments in other industries.  They give a good advice to bare in mind when defining the best strategy for the long term.

Print Friendly, PDF & Email
Be Sociable, Share!

Leave a Reply

Your email address will not be published. Required fields are marked *

Comments will be closed on January 28, 2018.