On Competition, Collaboration and Innovation design

A whole new world of possibilities is becoming real thanks to increasingly growing and permeating technologies which act as a transformative force.
This is happening in a deeply messed up world where huge threats approach our society on an increasingly near horizon. To understand how large social and technological trends change our perceptions of markets is a challenging but important task: companies’ approach towards users – no more just consumers –  changes accordingly and this leads to key transformations in products, services and organizations.

Mega trends that enable digital marketplaces and platforms

Among recently published resources, the systematization work recently done ​​by PWC, with its mega trend research, is pretty excellent. In this report, PWC points out the first “collision” (ie a super-trend that is generated by the collision of other trends): the increasingly visible and discussed “SharingEconomy” now more and more dubbed as “platform” economy or sometimes just “platform capitalism” (or even ODE – On Demand Economy for some).

megatrends-collisions-infographic

Note that I will use the term “Sharing Economy” from now on in this post to describe mostly P2P, multi sided, digitally intermediated marketplaces (platforms), while I normally use the broader “Collaborative Economy” as we do in OuiShare (and also others do like Nesta) to describe a wider and often much more transformative and complex context which include much more diversity, from open source to user coops, from the fight to protect the Commons to sustainable and open manufacturing.

According to PWC the shift towards “sharing” is then the result of four major trends. First, there’s no doubt about the increasing pervasiveness of technology. Today technology is not only represented by the infamous “as a service” paradigm (which transformed everything digital in a utility) and in mobile devices, but also increasingly in the promises of the Internet of Things and Big Data. IoT and Big data appear as void concepts and buzzword, but they hide some great potential. According to Mary Meeker only 1% of the data generated by this information network is currently studied, analyzed and understood. The potential to leverage knowledge in data is already enormous today.

In the background of this techno-centric transformation, environmental threats are also playing a major role prompting us with rather terrifying scenarios. Just few days ago, Jem Bendell explained with clarity that. not only we may have already gone too far – and this insanely hot October perhaps confirm this – but that our society as a whole is perhaps inadequate to the challenge:

Instead, we need people to approach this difficult time with greater humility, equanimity, gratitude, inquisitiveness, compassion, love, playfulness and hope. I am also convinced that the institutions we have created in our political, economic and social sphere have not promoted such qualities within them or to the top roles. So the greatest leadership challenge I see today is therefore one of unlearning a lot of deluded notions about self, success, and progress.

[from Jem Bendell’s “Future lines of debate and action on climate”]

On top of this we must consider that a generational change is also happening today in western economies, shifting hands from baby boomers to Generation X and millennials. The latter, in particular, experience dashed hopes today, become adult in the greatest systemic crisis in history and their expectations as consumer are different. Millennials look for access rather than ownership and this happens in line with the changes that closely relate to their lives: more dynamic lives in which the usual trajectory study-work-retirement is no longer credible. Not only you are going to do 7 or 8 different jobs in your life, but perhaps you do such simultaneously, as Antonin said once.

A further enabler of such a bubbling peer to peer, marketplace economy, which is strongly based on social relations, is also a reinforced urbanization trend. UN World Urbanization Prospects data tell us that 54% of the world population now lives in cities and 1.5 million are added to them every week for a total of 2.5 billion people that should be added to urban population by 2050.

Jeremiah Owyiang admirably summed up recently that thanks to these trends, that “just as the social media enabled peer-to-peer content sharing” technologies that are enabling the collaborative economy today allow sharing of “goods, services, transportation, space and money” and that those formerly called consumers are increasingly becoming “ funders, producers, sellers and distributors

 

How (digital) markets work: Fragmentation VS Concentration

In a bright research work, released in July by the Deloitte Center for the Edge, John Hagel and others explained very well how digital markets work by using a three levels pseudo-stratification: products and services, infrastructures and customer relationship.

Basically the game is played on two, rather polarized, extremes: on the upper level, the one with higher customer value and overall profitability, the market for products and services, the long tail triumphs. In  this part of the market we are witnessing an economy made ​​up of micro-producers and pro-consumers (prosumers) who are empowered by enabling “infrastructures” and create value by connecting to communities and monetizing their (tangible or intangible) assets such as a car, time or knowledge.

But what are the enablers?

Two other components are key: first what we call the “infrastructure providers” providing componentized support services at the “essential cost of doing business”, secondly those who are concerned with the connecting users with opportunities – that we call “Customer Relationship” businesses. [From Deloitte – The hero’s journey through the landscape of the future ]

Three Layers of Market

Not surprisingly an essential feature of today’s “hot startups” is exactly their ability to connect and control supply and demand: they connect the two sides quickly, monetizing wherever there is an opportunity. Despite the river of words recently spent, Airbnb and Uber remain exemplary stories: both are characterized by a furious run-up to globally grab and own local market niches where their propositions provide answer to existing demands of a certain class of users (cheap tourism, good quality taxi services) and on the other hand provide opportunities for resources monetization (driving or concierge time, car/ house ownership) to a class of users in search of new ways to generate an income (making up the supply).

That is, plain and simple, why everyone talks about the Sharing Economy today: the dynamics we just described (long tail marketplaces) are now possible in new sectors of the economy. While in the past these dynamics related solely to the digital realm (content, music and publishing) today they apply to mobility, travel and increasingly to food, craft, design and soon to energy and more.

In this perspective “customer relationship” businesses are those who provide the most interesting business opportunities for capital, for two main reasons that I will explain.

As previously said, digitally enabled markets are polarized: the products and services layer respond to power law and the “long tail” and thus it offers clear opportunities, but in a “fragmented” way making them interesting mostly to small, agile, nimble players (such as Prosumers) which are able to intercept the tiniest opportunities.

On the other hand, the “enabler” part of the market, the one made of infrastructures and customer relationship (those responsible to meet increasingly specific demands) is subjected to a strong “concentration” trend which tends to create “monopolies” and represent indeed huge opportunities for private capital.

According to Hagel “If you’re in a part of the economy that’s concentrating, growth can be amplified and sustained by riding the waves that are driving concentration.”

 

Empowering  Monopolies and Customer Driven Capitalism

The very latest “nobel prize” laureate Jean Tirole was eventually awarded of the prize because of his important work on the dynamics of digital markets. In particular, Tirole’s work show that in two sided marketplaces – notoriously dubbed “platforms”– monopolies are pretty much unavoidable and  some (also Tirole at some extent) don’t really consider concentration as a problem (regarding Tirole’s work this paper from 2002 can help you understand more).

Introducing his latest book “Zero to One: Notes on Startups, or How to Build the Future”, Peter Thiel recently framed enabling monopolies in a rather positive way. From his point of view, it is exactly the annihilation of competition which allows companies to look into more “ethical choices”.

In a way, Google represent the flagship of the enabling business as described by Deloitte: it incorporates both the technological infrastructure and the customer relationship features (as Google core business is  advertising). Regarding Google Thiel explains that especially since Google don’t have to worry about competing it has “ample opportunity to worry about its employees, its products and its impact on the rest of the world”. According to Thiel the “Do not Be Evil” motto is not only about branding, but is also “a feature of a type of business […] successful enough to take seriously the ethics without jeopardizing its existence “ as “monopolists can afford to think of different things to make money, the non-monopolists can not”. [From Peter Thiel’s, “Competition is for Losers“]

According to Thiel  than, competition, makes business focus on the “daily struggle for survival” and only “brute profits from monopoly” can help firms have longer plans and look for long term developments.

Describing Prof. Tirole’s conclusions on a clear reflection on FT alphaville days ago, Izabella Kaminska put it down very clearly:

“Perfect competition is rare. And in some markets, particular idiosyncrasies can lead to longstanding dominant positions which need to be smartly regulated in a way that doesn’t overly penalise innovators.”

Regulations should “make sure there’s a level playing field, that the platforms are empowering rather than restricting and that the interests of the wider economy are defended”.

On another hand, it may be interesting to ask whether these “empowering monopolies” are not only the result of market transformation but also evolutions which are dictated by users. In the third digital wave: digital is indeed not only used to increase sales, not just technology is integrated into products to help customers achieve personal goals: in addition consumers today are taking their digital identity and learn how to extract value from it in a market where they expect the brand, always know what they want and they need. It’s Customer Driven Capitalism.

With great honesty, a recent article by Franklin Foer on The New Republic, explained the role that irresponsible consumers had in allowing these “empowering monopolies”, religiously dedicated to building the best “User Experiences”, do this at the expense of relevant social and environmental impact. In an editorial piece that advocates for the American Antitrust to intervene to regulate Amazon (and partly in response to Thiel’s the positions), he points out that we have to realize our own complicity:

“We’ve all been seduced by the deep discounts, the monthly automatic diaper delivery, the free Prime movies, the gift wrapping, the free two-day shipping, the ability to buy shoes or books or pinto beans or a toilet all from the same place. But […] We expect these kinds of conveniences now, as if they were birthrights. They’ve become baked into our ideas about how consumers should be treated.”

[Franklin Foer “Amazon Must be Stopped” ]

Tweet this: “Is this an era of Empowering Monopolies?”

In what ways capital can still be an advantage?

So apparently in digitally enabled markets, value is generated mostly at two levels. One level is that I that of the long tail where micro niches interact generating fragmented value around small opportunities; on the other hand (potentially enormous and centralized) value is created at the Customer Relationships layer.

Technology is now mostly an enabling factor: it is cheap – thanks to increasingly mature and standardized infrastructures, as those of the “cloud” – and ubiquitous and the capital needed to build the technical side of a solution (the website, the mobile app) is no longer so decisive differentiating factor.

So the question is: why so much venture capital is going into the Sharing Economy (or the next frontier of “platform capitalism”)?

According to Jeremiah Owyiang, approximately 6 B$ have been invested in the industry of the Sharing Economy over the past five years (while all social media industry – including Facebook, Twitter, YouTube, Linkedin … raised about 4.2 B$ in ten years). If it’s true that this certainly at least partially reflects a speculative, high risk aspect of investing in scarcely regulated markets; this influx of Venture Capital also went to feed tow still quite expensive weapons. First, marketing and advertising: helped these players to bring the necessary liquidity to the marketplaces, often with long periods of operating under live costs and with strong investment to bring users to try the service. Secondly, the ability to design better user experiences, also known as design.

[For a fascinating deep dive into how the VC industry itself is transforming to cope with this shift you should look into this amazing post on the New Yorker , “Bay Watched”  by Nathan Heller].

 

The fundamental forces: componentization and design of innovation

One of the fundamental forces that now rule these markets is certainly competition. Competition encourages progressive componentization of the enabling “bricks” (such as advanced support services and infrastructure systems) and, by demanding ever lower costs, market leaders attract new entrants (those dynamics have been briefly explained recently here).

On the other hand innovation forces brands to create new higher value products and services: in essence users ask for better user experiences and for increasingly customized value (as we have already seen).

In this friction between the two forces (competition and innovation), the future of companies and brands is defined: those that fail to innovate, create higher value services, enabling others to create value in their ecosystem are sucked by competition into a mostly undifferentiated market with narrow margins.  A rather clear example in this case is that of mobile operators (poorly differentiated services, price competition).

Instead those who design real, multi-sided, innovation ecosystems often get monopolist results. I am compelled again to refer to Thiel’s own words to explain the key role that the design has in creating innovation:

“In a static world, a Monopolist is just a rent collector. If you corner the market for something, you can jack up the price; others will have no choice but to buy from you. […] But the world we live in is dynamic: We can invent new and better things. Creative monopolists give customers choices by adding blackberries Entirely new categories of abundance to the world. Creative Monopolies are not just good for the rest of society; they’re powerful engines for making it better.

But if it’s true that this kind of innovation may open new perspectives to “customers”, what are the effects on the other side of the market? Now that these platforms grow, compete with pre-existing markets and execute their (often aggressive) strategy: what is the outlook for the “suppliers” side?

A beautiful post on pbs.org, recently summed up the pressure on the “suppliers” of the Sharing Economy: they do not control the prices, have no social safety net, have no union representatives and they often bear also the costs of investment in materials. They call them micro entrepreneurs, but in reality, especially when they try to monetize time assets (as for TaskRabbit’s “rabbits” and Uber drivers) who’s is likely to be “disrupted” is not only status quo, but also themselves ( see Jordan Vesey, “Who protects the workers powering the new sharing economy?“). As John Robb recently said “this type of work environment can be a blessing or a curse, depending on how you approach it”.

 

The Next (Sharing) Economy

Increasingly today, we praise the emergence of a different approach business conception: cooperative, multi stakeholders, externalities aware and not focused on short-term shareholder value. In a rather discussed but very effective video, Janelle Orsi, among the best experts of how co-operative models may have a role in the construction of participatory economies, recently described what “The Next Sharing Economy” ( or rather, the Next Economy) should be.

Firstly, according to Orsi, the huge money flow – primarily created from a platform which is powered by armies of self-employed – goes to consolidate social differences which already quite high. In the United States 93% of the wealth is owned by 20% of the population: as Orsi says, “20% of the population make ends meet by sharing 7% of the resources”. These marginalized people which are themselves victims of the disruption, deal with serious economic problems and are pushed to consume cheap, low quality unsustainable products with enormous ecological and social impacts (did you know that the Big Mac contains cheapest calories in the world?).

In addition Janelle points out that, even if these companies are often born with good intentions (as Benefit Corporations, or Social Enterprise) when getting first Venture Capital funds, those firms are pushed to adopt questionable practices, in order to generate more short term profits, e.g. by aiming to more affluent clientele, by selling users’ private information, or just raising rates.

According to the Orsi there are at least six levels in which Sharing Economy platforms should share. In the first place they should share control (with the users involved so that they have a voice in important decisions), then the responsibility for the common good, by avoid competing with public benefit and public administrations, should also share gains not with who owns the shares but with the ones co-producing (like in coops), should have shared capitalization via crowdfunding for example; finally, it should share information (giving access to code and data in open source) and innovation efforts by enabling collaborative development (again thanks open source development models). In short, according to Orsi the platforms of the sharing economy should be designed as commons.

Despite fascinating, Janelle’s proposal shows many open spots to me: the importance of design in creating innovation is IMHO fundamentally underestimated (“we’re not recreating the wheel, but only by designing a web platform”) and so is the ability of designers to create the best user experiences.

She also refers to investors who might be interested in divesting from mining contexts such as in fuel fossils and invest their money on such type of for good company. But why should any private investor bet money on a venture redistribute profits to users and not shareholders? Certainly such investments would be mostly public (which is another aspects that would be worth exploring: you may start with Marianna Mazzucato “The Entrepreneurial State – Debunking Public vs. Private Sector Myths”).

On the other hand I definitely agree there’s a huge market potential in such approaches to collaborative business, especially if link it with the topic of economy decentralization. Increasingly localized cooperative platforms (as loconomics) may arise dedicated to smaller market niches, such as regions, cities, small towns or network of such. Such players might really provide an incredible amount of primary services and products at a competitive quality. By kicking off the Collaborative Territories Toolkit with OuiShare recently, we mapped at least 30 scenarios where such smart cooperatives or smart collaborative firms could pose threats to traditional large scale corporate players and win on local markets, ranging from Food to Transportation. The truth is that such players will also compete with centralized platforms empowering citizens to easily take part to more global genuinely collaborative organizations (an example may well be The Food Assembly).

If one is clear though is that future will be ecosystemic, as Salvatore Iaconesi pointed out to me days ago, we tend to make many classifications but don’t really realize that everything is already possible in hundreds of experiments.

It’s an encouraging and challenging moment: as creative destruction transforms the economy some bullshit job will go away and we will need more changemakers to build new, local, fair solutions and markets to cover our primary needs (housing, food, transport, creative space…) and more. Such answers to primary needs will be provided by local workforce potentially empowered by global, quasi monopolistic digital platforms or by globally networked local coops or firm sexperimenting with new models.

Will the next generation of designers and entrepreneurs be interested in such markets or will they get bored?

Certainly Design for Good in business is already a possible choice today and entrepreneurs have new tools to think about innovation, going beyond ideologies of the past.

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Notes: this post is available in italian on CheFuturo as “La rivoluzione della sharing economy al bivio: reale innovazione sociale o super-monopoli?

Special thanks goes to: Simon WardleySangeet Paul Choudary and John Hagel for inspiration and discussion.

 

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About meedabyte

Strategist, Consultant and Collaborative Pathfinder

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