Internet 3.0: Collaboration in Commerce, Communities and Networks

26 May 15

This is under revision… pardon the typos..

Exec Summary

• Consumers, Communities, Markets, Technology and Commerce are undergoing tectonic shifts. Over the last 20 years Companies “enabled a channel” in Internet 1.0 and 2.0. Internet 3.0 will bring about fundamental transformation in organizational structures, products and processes.
• Internet 3.0 (i3) eliminates traditional competitive barriers (assets intensity, specialized skills, product design, distribution, marketing, brand,… ) enabling new forms of collaboration and asset utilization within a new set of non geographic communities.
• Swarms of specialized communities are hyper meritocracies which react to serve areas that are: #1 inefficient, #2 opaque (ie wiki leaks, banking, advertising…), #3 poorly serve the consumer or #4 at risk (ie Darwinian). Today we see this dynamic take place in many areas: App Stores, Uber Drivers, MOOCs (College Learning), Wikipedia, Blogs (vs Newspapers), …etc. This may be analogous to the end of the Jurassic period (no more Dinosaurs).
• The structure of most corporations is at risk (inefficient, opaque, poorly serve consumer, at risk). Information intensity and the ability to manage across internal boundaries and interfaces will be key to future margin (not economies of scale, asset intensity and competitive hurdles).
• Large companies must reshape organizational boundaries to enable many connections (to source demand and execute) within their processes to create new products and reach an amorphous set of new dynamic communities. The “boundaries” of a company MUST become more open (as they are currently in your marketing and sales sides today).
• Historically, acquisition and JVs were the approach to boundary growth. The future will see a much more loosely coupled approach to deliver value, one focused around common platforms, standards and networks. Best examples are Microsoft/Intel, and Uber were many independent nodes innovate and connect to successful networks, and each node is in control (with ability to measure and price) its unique value.
• Regulation (ex Taxi Commissions and CFPB), societal norms, ability to measure value, and Risk management are the environmental factors most influencing boundaries.
• Modularity is the key technical term describing how business must react to boundaries (specifiability, measureability, predictability). What services do you want to make available? This is NOT a technical problem, but a business one. Amazon is one of the clear leaders in this discipline (ex Legos). The rules in which modules operate are “platforms”. Most platforms have been internal only, with a few exceptions (RosettaNet, Windows/Intel, Java, Commerce Signals, ..etc). Networks are required for platforms to communicate, discover and interact with heterogeneous clusters.  Today the most valuable networks are Visa/MA, Google, Amazon, Markets (NASDAQ/NYSE), Alibaba, eBay, …
• Most large companies struggle with internal complexity today. Internet 3.0 brings on a whole host of new problems for companies that don’t have a software culture, and have legacy infrastructures which resulted from thousands of small tactical decisions.
• There are many exciting investment opportunities in this hypothesis. For example, existing networks have a big leg up in constructing new collaborative networks. Their success will be driven by balancing openness/governance with control and value exchange. I’m quite impressed with Visa’s move here (see this week’s press).

Year of Collaboration

I painted 2015 as the year of collaboration in my 2015 Predictions. Why? The structure of most corporations is at risk (inefficient, opaque, poorly serve consumer, at risk). Information intensity and the ability to manage across internal boundaries and interfaces will be key to future margin (not economies of scale, asset intensity and competitive hurdles).

Large companies must reshape organizational boundaries to enable many connections (to source demand and execute) within their processes to create new products and reach an amorphous set of new dynamic communities.  Historically, acquisition and JVs were the approach to boundary growth. The future will see a much more loosely coupled approach to deliver value, one focused around common platforms, standards and networks. Best examples are App Store, Wikipedia, Microsoft/Intel, and Uber were many independent nodes innovate and connect to successful networks, and each node is in control (with ability to measure and price) its unique value.

What are the 2015 drivers of collaboration?

1) Consumer behavior is undergoing a tectonic shifts (mobile, commerce, social interaction, employment, education, reputation, …).

2) Information intensity has outpaced the importance of economies of scale (asset intensity). Both in terms of efficiency (cost) and growth (revenue). Over the last 5 years new networks (mobile, digital communities, Uber, …etc) have destroyed the traditional structures of information creation, curation, distribution and use (ex Universities/MOOCs, Maytag Repair/Youtube DIY, Britanica/Wikipedia, ..). It is NOT ENOUGH to manage your data (ie Big Data), you must find a way to let it work with the environment (ex CommerceSignals). Traditional networks and closed systems are fragmenting (ie Commercial, social, political).

3) Awareness (the Solo Approach has failed). Fortune 50s have each spent over $500M (each) in attempts to build a Google (aka business platform) where everyone works with them. They have now realized that this myopic approach creates magnets of opposing fields. No one company can do build a platform.. platforms REQUIRE collaboration not ownership. Partnerships (closed networks/clusters) are the natural first response to this environmental change. However closed networks are challenged to gain traction in dynamic markets.

4) Google, Amazon, FB and Apple have become powerful Star networks threatening just about everyone (see below). There is a race going on today, some of which I outlined in Banks/Non-Banks and Commerce Networks. Also see Google Creating Platform for Mobile Economy. My NewCo, CommerceSignals is focused on helping everyone else collaborate and compete.

Information Intensity

If information is power.. where is it flowing? If we assume Networks are conduits of information, will mapping networks allow us to map power?

• 500 years ago information was held in books. Books resided in academia and in monasteries. Networks were largely structured in relationships and affiliations (which were highly geographical).
• 100 years ago public information (books) moved into public libraries, and commercial information (designs and processes) was held within commercial enterprises. Networks expanded in geographical scope (reach), specialization (scope) but transaction depth and information organization did not change. Power largely resided with the creators of information and distributors of information.
• 20 years ago – Democratization of Data (access/structuring). Public information moved online and became dynamic (Wikipedia) while private information became organized within any given commercial enterprise (ie ERP/Big data). Information organization and access exponentially expanded (mobile, internet, google, broadband…etc), new specialized networks formed with many new specialists (stores, outsourcing, design, hosted services, …). Power began to shift to individuals, virtual access points for information, and new communities.
• 5-10 years ago – New networks facilitated new connected communities (social, educational, business, ..etc). Expertise and content creation shifted from traditional geographically based entities into loosely structured global communities of experts. Time spent in community increased, as depth of information increased, and tools for dissemination improved (MOOCs, Youtube DIY, ISIS Propoganda, …). Consumer behavior shifted massively to new channels and communities. Private commercial data became actionable through new private networks (ex supply chain, advertising, …etc). Power shifted to communities and orchestrators of (public) small world information (Google, FB, Amazon, Apple, …). Risk and Reputation expanded beyond closed networks and new companies (ex Uber, Airbnb) leveraged information to connect existing (small) assets to consumers in new communities and commercial processes.

Information in isolation delivers little value, particularly if you are the only entity that can act on your insight.  How many assets (and insights) do you have within your company that are discarded or underleveraged?

Internet 3.0 and Boundaries

Internet 3.0 (i3) eliminates traditional competitive barriers (assets intensity, specialized skills, product design, distribution, marketing, brand,…  ) enabling new forms of collaboration and asset utilization within a new set of virtual communities. Swarms of specialized communities are hyper meritocracies which react to serve areas that are: #1 inefficient, #2 opaque (ie wiki leaks, banking, advertising…), #3 poorly serve the consumer or #4 at risk (ie Darwinian).

Today we see this dynamic take place in many areas: App Stores, Uber Drivers,  MOOCs (College Learning), Wikipedia, Blogs (vs Newspapers), …etc. This may be analogous to the end of the Jurassic period (no more Dinosaurs).  The structure of most corporations is at risk (inefficient, opaque, poorly serve consumer, at risk).

Information intensity and the ability to manage across internal boundaries and interfaces will be key to future margin (not economies of scale, asset intensity and competitive hurdles). Large companies must enable many connections to source demand and execute  within their supply chain to reach an amorphous set of new dynamic communities.  The “boundaries” of a company MUST become more open (as they are currently in your marketing and sales sides today).

Boundaries and Collaboration ARE NOT a Technology Thing; It is a business thing.

Example – Uber

What makes Uber so successful? It created an effective market for existing assets, with an infrastructure to manage it. I see the core services in Uber’s network as:

• Risk/Trust (driver vetting, insurance, reputation, insurance, reporting)
• Quality of Service (Time to Pick up, Routing, Availability, Payment)
• Consistent Rules/Terms
• Cost to Connect (Customer Acquisition/Registration, Driver Registration, ..)
• Value Added Services

What other areas of the economy have inadequate markets? Amazon started with books and leveraged to become the starting point for product search and reputation. Traditional university education is being threatened by Massive Online Open Courses (MOOCs), retail banking and prepaid cards, …etc

Platforms vs Networks vs Markets

Is Google a Platform or a Network? Visa? Verizon? All of these terms are over loaded and used too frequently. But there are very important elements loaded in here, with very large economic implications, thus worthy of discussion.

	Platform	Network	Market
Technology Terms	High	Medium	Low
Business Terms	Poorly Defined	Well Defined	Well Defined
Investment Risk	High	Medium	Low
Rule Making	Closed	Closed/Open	Open
Number of Services	+++	++	+
Compliance	Loose	Rigid	Rigid
Pricing	Undefined	Defined	Bid/Ask
Control	1-3 Leaders	Owner	Members

Markets are defined by pricing (ie Supply/Demand) and neutrality. Networks typically have defined participants, value/services and pricing (payment acceptance, transportation, call routing). Platforms are largely technology constructs where collaboration may occur, but business terms are ill defined (example Microsoft and Intel). I discussed platforms in last year’s iPhone 6 blog, my favorite Platform book is Platform Leadership: How Intel, Microsoft and Cisco Drive Industry Innovation. The authors outlined 4 Levers of Platform Leadership

1. Scope of Firm: What is done inside, how they encourage outside investment and focus
2. Product Technology: Architecture, Interfaces, Modularity, What do they expose to partners?
3. Relationship with Complimentors: Support of Complimentors, acting on ecosystem needs, path to consensus and standardization, profitability
4. Internal Organization: What is the “core”, and how are resources allocated to core activities vs support for partners.

Networks are common facilities where heterogeneous nodes interact with a defined service(s) and rules. Networks “sticky”

in small world networks, building and maintaining links between network elements requires energy…. [in a world with limited resources] a transition will occur toward a star network [pg 75] where one of a very few mega hubs will dominate the whole system. The star network resembles dictatorships in social networks

Weak Links by Peter Csermely (viewable on Google Books here)

There are hundreds of platforms, millions of markets, yet only a handful of effective commercial (and social) networks. In layman’s terms could you imagine working across 10 different Facebook alternatives? Or installing rail road tracks next to your competitor? This is what the EU hates about Google and Facebook…  It is very hard for a competitor to break into this model.. as these services are already free (and open).

Networks are much more rare, they enable collaboration and unlock economic value. My top investment hypothesis: find networks where thousands of participants invest billions of dollars to make work (Visa, Mastercard, Nasdaq, Uber, Apple App Store, … ). Companies like Uber and Airbnb demonstrate how new networks can form to tackle inefficiency. It is only a matter of time before the swarm comes after your business. How do you react? Collaboration may be a good first step.

Can you “pivot” to a Software Company?

This is not just about “how we work with young innovative companies”, it is about your boundaries. How does a large company act more like a software company? See my blog on Braintree.  My favorite example today is Visa – See Forbes

“We’re telling [developers], ‘Please dream, please build new applications,’ ” says Taneja.

Don’t roll your eyes… Visa has great potential here. Certainly one of the World’s best networks (with much room to grow). After all, it is much easier for an existing network to expand services than an individual node

First a little “Buzz Worthy: background: Internet 1.0 was the static internet (indexing of publicly available information). Internet 2.0 was about user generated content, interoperability, transactions. Internet 3.0….

• Value Orchestration and Partnerships (OK I planted this one)
• Connective Intelligence
• Internet of Things (IOT)
• Mobilization of Everything
• Big Data
• Sharing Economy (Uber)
• Shift to Hyperlocal
• Innovation (sick of this one)
• Trust/Reputation Portability
• Remaking of businesses (not a web front end to the one that existed 50 yrs ago)

In Internet 1.0 and 2.0 companies treated the internet as a channel, business impacts were around getting your internal stuff into this new place: advertising (targeting consumers), consumer information (ex price transparency, reputation) and local fulfillment (online payments, shipping). The channel was new, and competition changed, yet businesses still created the same products, and didn’t substantially change internal operations.

The impact to businesses/economies from Internet 3.0 will be much more pervasive. How big? Answer these questions:

• How much more efficient has your organization become in last 20 years (ex: net margin)?
• How long does it take your company to launch a major new product?
• How long does it take your company to create a new partnership (with shared economics)?
• How has your company’s core value proposition to consumers changed?
• How long did it take your company to complete a major technology project?

No Design

Opening up your organization is not easy. Most Fortune 50s have system architectures that resemble this unique structure.  No one starts out with a design like this, it is rather a result of a 1000 tactical decisions, acquisitions, one off projects, and evolving technologies. This is not solely the fault of your CIOs, as technology is strategic area where strategic discussion and decision making is most deficient. What other area has so little discussion from lines of business? CEOs see a vision of what they want, but the ability to evolve is hampered by the high cost of reconstruction and inability to create a consensus design across the organization.

One of my favorite personal stories here was from my time as Senior Director or Oracle’s Global Solution Architecture Practice in 2001.  We met with the new CIO of Motorola where he asked our help in consolidating 124 different ERP systems into one (118 or them were Oracle). His quote “It may be our fault for letting you sell us your software 118 times, but you must share in the burden of helping me clean this up”.

Little wonder “big data” is popular, as gaining insight into the internal mess you have is just the first step of realizing where your customers are and how they interact with you. Most of you know JPM is building a Data Division, one driver is Jamie’s view that Banks have better data than Google. As a former banker I can tell you just getting a report on my customers across products and countries within the bank is a major accomplishment! The idea that I can also manage external data for millions of companies and billions of consumers is ludicrous.. and then deliver on a VALUE proposition to consumers I touch once a month is just plain silly (and myopic). Commerce value is unlocked by working with consumers, merchants and manufacturers.. Commerce is interaction. So how are you improving your interaction!?

One of the obvious challenges of opening up your organization is opening up the ugliness of your infrastructure. For example, FirstData created the OfferWise API a few years ago. Unfortunately this API only worked for merchants that were on its IBM mainframe (not it’s 3 other systems). Similarly its new Clover API is one of the best in the business, yet it only works on the Clover platform. As an advertising partner.. how are you to know what to develop on?

Google, Facebook, Apple and Amazon have huge advantages in design as they operate like software companies run by engineers where design matters. In Amazon for instance, each and every service in the company can be leveraged by any other part of the company. It’s own systems architecture allowed it to create Amazon Web Services (AWS).  Integrating internal heterogeneous systems is hard. Exposing these services externally is even harder.

Another of example involves Google/Citi.

Citi was a launch partner for Google Wallet in 2011 and asked the Google team to freeze software deployment while the card provision application was certified. Google said “what is a freeze”? Citi said “you know stop any changes while we certify”. Google “we operate under continuous integration, changes are pushed out every day… we can’t do that”. Citi “what part can you freeze?” Google “I guess we could freeze our API to you”.  The old and new worlds of software design collided here (waterfall vs. Agile), integration is very complex…

How massive is the complexity? Here is a simple advertising picture… you tell me how card data fits in here. To get around the systems integration complexity, companies have begun the dangerous process of sharing the raw data. In the Datalogix model, 340 odd Retailers give DLX a daily copy of all loyalty card information and SKU level purchase information. If you are a CEO.. do you even know where your data is going? Who has it? What would consumers think? There is a better way (shameless plug call CommerceSignals).

Back in 1997, while I was at Gartner Group, my collegue Roy Schulte coined the term Service Oriented Architecture (SOA). An evolution of what he had referred to as software through contracts. Central to both of these models are the concepts of modularity (specifiability, predictability, measurability) and abstraction. What was missing in SOA was the CONTRACT or commercial agreement. There can be no economic success without a clear understanding between participants of their responsibilities, risk, costs, consumer permissions and revenue (see Open Banking and Open Payments)

Today we have protocols for technology integration and secure environments where messages can flow between trusted parties in a permissioned fashion. But what is “trust”?  Trust is driven by an assured understanding of HOW information will be used, with clear definition of who will bear the costs, risks and revenue.  I founded Commerce Signals on the basis of fixing this contract problem. The availability AND value of data is based upon how it is used (see blog). Data integration must be within the context of a commercial agreement.

While presenting consumer data for the use of budget planning (ie Mint) bears no costs for a bank, sending data for instant authentication prior to an ACH transaction (see blog) brings on significant costs for the RDFI and account owner.

Action Plan

Where should a fortune 50 CEO start? People would make the most sense, but big companies are getting a BAD name. For instance  in 2011 JPMC had 600 world class mobile engineers working out of Palo Alto.. and assigned 300 of them to Mortgage compliance.. not something you emphasize in your recruiting.

The US is fortunate to attract the World’s best software talent, and the best people attract the best people. The US amplifies this advantage by giving this world class  talent access to capital (willing to take risk).

Apple, Amazon, Google have all taken very different approaches to creating platforms and operating within networks (see Google Creates Platform for Mobile Economy). Most would agree that Apple is the worst partner, whereas Google partners heavily in areas it controls (search, advertising, ..). Amazon is the only company that has made great strides in creating a platform for 1000s of other businesses (retail store, distribution and AWS).

Common to all three companies is their senior management attention to technology and software. Execs get their fingers dirty in it and hire the best people.. then they LISTEN to their technology people. Google’s problem is that they don’t listen to anyone else. Apple’s problem is that software is a second stepchild to hardware/design.. but I digress.

Action plan

1) List out your most valuable consumer insights

2) List your top growth opportunities

3) List the top sources of new revenue from existing customers

4) Where are your greatest threats?

5) What are you not acting on?

6) Who can act on them more effectively?

7) How can you partner one time?

8) How can you enable 100 companies to run with the opportunity?

9) What needs to be measured?

If you don’t take action.. the swarm will …