Networks, products and their relativity*
An economics of codependence has taken root in technology, accelerated by the newly dominant digital environment. The following summarizes some of the featured aspects, leading to a concluding comment by way of footnote.
Thesis
In the new economy there are two component parts that relate to one another to define and shape each other’s respective form:
- Products (including services, technologies, and applications): Discrete in nature, and surviving only as their useful life allows. The duration is increasingly abbreviated as competition, disruption, and commoditization, are being driven steadfast by technical advances.
- Networks (including platforms, marketplaces, exchanges, and other interconnectivities): Dynamic and more akin to biological ecosystems. Networks grow and resist disruption, aided by network effects that are now becoming data-centric with the emergence of digital communication and information processing.
Products are influenced by networks and must rely on them for distribution, utility, and impact, while networks are supported by and require products as though a source of energy. In essence, each needs the other for similar reasons, but in different ways as will be explained.
From historical to modern manifestation: similarities and differences
Among the earliest observed business networks are the banking houses, some of which have survived for centuries to connect economic points through money transfers and capital allocation. More recently, the electric grid, telecommunications networks, and transportation infrastructure, have been centrally important economic engines. All these cases are based upon the need for connectivity in an advanced economy, and the strength of the fabric that enables this elemental go-between as its application layers multiply.
There are few if any corresponding examples in the product category to match the longevity of the historical network structures shown, and others. In fact, few products (and their companies) have survived intact for long, even if at one time they were massive in their given field.
In our digital era, the characteristic qualities of both products and networks have been magnified by the accelerating pace of technological innovation:
- For products, economic lives have been further threatened by the prevailing influence of software as a production mechanism and efficiency enhancement, as well as, often enough, a finished good onto itself. This is inexpensive to create, distribute, replicate, and build upon. The effect has been of ever greater and more capable competition, faster commoditization, and, in many cases, deflationary economics.
- For networks, the creation of mature topologies has been expedited by efficient, inexpensive, and ubiquitous digital transmission. The management of new network infrastructure has been aided by improved and less capital intensive solutions. (By the same token, some networks have as a result been quicker to collapse or be replaced by newer variants.)
Multiplicity as value driver
Like banks and transportation systems traditionally, new digital networks facilitate the transfer and storage of value, but now these value units are made of data bits, and the systems that are built to process these do so in increasingly intelligent ways. Data stores within the network accumulate data sets from nodes and clusters, package these with improved effectiveness, and create network effects thus on superior computing power. This requires ownership of good product — internal as well as market-facing.
The most successful networks to emerge have been those characterized not only by multiple traffic directions, but multiple dimensions based on a multitude of products. (The leading examples — Apple, Alphabet, Microsoft, Amazon and Facebook — are analyzed in a related article here.) Multiple layers facilitate the aggregation of multiple data sets that in combination shape disproportionately valuable outputs. Additionally, the network’s very presence, and thus its strength and long-term survival, are enhanced through a diversifying multiplicative effect.
In contrast, and as the digital economy evolves and grows — driving a convergence between sectors that now converse in the same digital language of data and its networked bits — the networks with single directions or dimensions are at risk of losing their advantage, becoming more like isolated products, facing the survival challenges of that classification. For example:
- Broadcast networks (including but not only media/entertainment) have generally been one-directional and one-dimensional, and are thus less substantive in the modern digital context. The traditional retail model may be an analogous example.
- Brands have sometimes been confused for networks, due to their market presence and clustering effect, but this is not necessarily the case.
- Messaging applications are multi-directional, but usually single-dimensional, and their network effects can be accordingly fickle.
On the other hand, certain organizations that might be considered product vendors are in actuality multi-dimensional networks in the making. One such example: Tesla. Aside from the bi-directional digital connectivity inherent in the vehicle (based on multiple integrated products and solutions), entirely new network dimensions are invested in, acquired, or marketed by this company — in energy (SolarCity and Gigafactory), in public infrastructure (Hyperloop), and in loosely affiliated space ventures (SpaceX). Although each of these alone is pure product, in combination there is a unique network variation that comes to be, centered around inter-related assets and capabilities, from which the multitude of networked data elements becomes a trove inside the central hub with its enormous footprint.
Product depth and network presence
Given the foregoing reflections — the implied or explicit combinations of networks and products, and the products that are sometimes networks and networks that are sometimes products; given the unique characteristics of each of the two categories and the interconnected dynamic between them; given the influence and dependencies of each upon the other — it may be worthwhile to consider the strategic consequences of these ideas in a market context.
Although we have not yet arrived at a point of macro-economic understanding (e.g., the impact of deflationary product abundance vs. potentially inflationary network scarcity), and our financial analytics do not yet encompass network topology with the same methodical rigor as, say, earnings multiples and leverage ratios, we can take incremental steps towards such ideals by exploring the simpler lessons offered. Here are some:
- Products are useful to networks in so far as these enable new directions, dimensions, and possibilities (optionality).
- Networks are necessary to products, which are otherwise isolated and lifeless. (The life and very character of products can be substantially enriched by networks.)
- It can be easier for a network to launch a product than for a product to launch a new network, because network effects are difficult to create and predict. But a thoughtful combination of products may succeed.
- Many businesses do not operate in pure product or network form, but combine aspects of both to varying degrees.
- It is possible to show long-term success as pure product, but not without continuous upgrade, update, or reinvention… which eventually becomes a network of sorts.
As founders and executives might consider such issues for strategic planning, so might investors, analysts, and, someday soon, an algorithm.
* Note
Einstein’s general relativity showed that the four-dimensional fabric of spacetime was not merely a container for objects, but was determined by and in turn helped to determine the motion of objects within it. Some drew a comparison between this and a choreographed dance of tangled influences. Networks and products, in the new economy, constitute a similar entanglement of relatives that, going forward, is likely to dominate the industrial universe.
Related reading:
Ten questions for the new economist
The artificial-services economy
Networks 3.0: defined by digital dimensions
