Some entrepreneurial support organizations (“ESO’s”) apparently operate under the assumption that information and connectivity are scare and, therefore, can be monopolized (mea culpa).  However, times have changed.  The location of intelligence – and value – is shifting, and ESO’s must adapt in order to succeed.  Where is your organization adding intelligence to the network?

• Information is Power
• The Desire for Monopoly is No Paradox
• ESO Monopolists Inhibit Entrepreneurship
• The Changing Economics of Information
• Where Value Lives in a Networked World
• The Power of And
• Examples from the Emerging Social Software Industry
• Implications for ESO's

Information is Power

As astute thinkers such as Ron Burt have noted, the lack of complete network connectivity creates “an opportunity to broker the flow of information between people and control the projects” that bring people together[i].  We all know this to be true.  We also know that it’s easier to gain and profit from such power if we can monopolize the brokerage of information and social connections.  Monopolies may be good for the monopolists, but they aren’t particularly good for society at large.  That’s why, over time, they tend to fail.  That doesn’t stop the incumbents from protecting their turf, however.  Even today, monopolists protect their franchises by inhibiting others’ ability to connect and interact – even to the point of purposefully restricting their ability to learn to read.

The Desire for Monopoly is No Paradox

That’s why I was a little surprised to read David Isenberg’s thoughts on what he calls the paradox of the best network – it seems no paradox at all.  Writing in the context of U.S. telecommunications industry, Isenberg and his colleague, David Weinberger, note, “The best network is the hardest to make money running.”  As a consequence, incumbent telecommunications service providers have been very reluctant to heed the admonitions of The Rise of the Stupid Network, in which Isenberg called for a network architecture that focuses on moving the largest amount of bits of information the fastest at the lowest cost, leaving the intelligent application of the information to end-users and their increasingly capable and inexpensive data storage and processing technologies.

It’s easier to make money as a monopolist or oligopolist.  By making connectivity and information flow relatively scarce, incumbent telecommunications companies make more money.  They don’t want to compete, because they don’t want to share[ii].  That’s no mystery, even though Isenberg is quite right in decrying the economic burden the telecommunications companies are foisting off on the rest of us.

ESO Monopolists Inhibit Entrepreneurship

In the process of deconstructing Isenberg’s paradox, I got to thinking about attempts to monopolize other kinds of information and social networks – entrepreneurial networks, more precisely.  The implications hit very close to home.

Entrepreneurial support organizations (“ESO’s”) exist, presumably, to help entrepreneurs be more successful.  Increasingly, a key to success is the ability to tap what Mark Granovetter identified years ago as critical “weak ties.”  These are the connections to the friends-of-friends that can help you achieve your goals.  Burt’s brokers play a valuable role in facilitating weak ties – an essential source of innovation and value.  Furthermore, these brokers or “hubs” tend to play (over some period of time, at least) an increasing returns game.  That is, the more connected they are, the more connected they get (a process Albert-László Barabási calls preferential attachment).  If the brokerage of connectivity is valuable in a rich-get-richer world, we should not be surprised to find that ESO’s too often attempt to engage in monopolist behavior – even if that’s to the detriment of the entrepreneurs they presumably exist to serve.

In the words of that eminent commentator Pogo, I have found the enemy, and he is us.

The initial architecture of Pioneer Entrepreneurs reflected my (unconscious) desire to be a connectivity monopolist.  Access to our network was proprietary and available only to those who had the password.  After all, why should I be satisfied with a fair return when I could aspire to earn a monopolist’s profits?

My dream of monopoly was, of course, just that.  Members stayed away in droves, which is a shame, because prospective members incurred an opportunity cost, and we made less money.  Although my motives were pure[iii], my actions were out of step with a new reality that is corrosive to walls built to inhibit social interactions.  By pursuing the wrong business model, I caused harm – at least in the sense that some entrepreneurial potential might have been delayed.

I’m not a particularly quick learner, but I think my realization that network monopoly was a delusion has hit home because my livelihood is directly related to the value delivered to, and perceived by, my members.  My company’s existence as an ESO is not subsidized.  No matter the intentions, subsidies cause distortions that are particularly problematic in rapidly changing environments – like the one we live in today.  The implication is clear:  To the extent that ESO’s are subsidized, be on guard for network monopoly seeking behavior.  The very organizations whose mission it is to cultivate and develop networks for the benefit of entrepreneurs may perceive an incentive to restrict access to those networks in an uneconomic way.

The Changing Economics of Information

Even so, as I discovered, any attempt to monopolize general connectivity and information flow between entrepreneurs is likely to be short-lived.  As explained in Power to the Edge, in a world of high cost processing and communications, centralized networks made sense.  It was a world characterized as “smart-smart-push.”  The center had to be smart enough to know who needed what information, and it had to be smart enough to know how to make the connection.  Alternatively, in a world of cheap processing and bandwidth, “smart pull” makes more sense.  In other words, a highly responsive but stupid network architecture is called for.

So is the answer to give away information and connections?  Where’s the sustainable business model in that?

Because the marginal cost of delivering connection and transmission services is rapidly approaching zero, a competitive market will ensure that the marginal price of commodity information transmission and connectivity will continue to fall.  Today, the problem for most entrepreneurs is neither a dearth of information nor a lack of prospective connections.  For many, the problem is an information and social networking glut.  It’s not information that is valuable; intelligence is the scarce resource.

Where Value Lives in a Networked World

Two years ago, Mohan Sawhney wrote a Harvard Business Review article titled Where Value Lives in a Networked World.  In it, he noted that in the face of more robust and effective networks, intelligence – and, hence, value – migrates to where it can be created, maintained, and applied the most economically:

In the absence of a network, intelligence is static; it can be only applied where it lives.  If different kinds of intelligence are needed to perform a task, they must all be bundled together in the same place…The bundling of…intelligence necessitates compromises…networks push back-end intelligence and front-end intelligence in two different directions…Back-end intelligence becomes embedded in shared infrastructure at the core of the network, while front-end intelligence fragments into many different forms at the periphery of the network, where the users are.  And since value follows intelligence, the two ends of the network become the major sources of potential profits.

According to Sawhney, these are the aspects of intelligence in networks:

• Configuring – arranging information in a way that responds to a need
• Dispatching – moving information from its source to its appropriate destination
• Storing – collecting information so that it can be accessed quickly and easily
• Processing – converting raw information into useful outcomes
• Interacting – facilitating the exchange of information
• Coordinating – harmonizing activities performed by multiple entities toward a common goal
• Learning – using experience to improve the ability to act
• Sensing – detecting and interpreting signals in the environment

It seems to me that the most promising strategy for many ESO’s is what Sawhney calls reassembly: reorganize pieces of intelligence from diverse sources into coherent, personalized packages for customers.  Only a few will have the resources, scope, and scale to successfully offer back-end types of intelligence – the kind that enables generic, large scale, market-making functions.

The Power of And

To often, we revert to binary thinking.  That is, we consider the value of  weak or strong social ties; open or closed networks; computer-mediated or face-to-face interactions; intelligence and control at the center or the periphery.  More often than not, there is greater value in considering the conditions under which and is a useful construct.

Sawhney argues that there is opportunity – indeed, a requirement – for intelligence and value at the center and the periphery.  Burt has concluded that weak ties are important sources of value, but strong ties are required for implementation.  Similarly, open and inexpensive access to information and connections is valuable, but so are closed, private networks that facilitate the cultivation of trust and intensive collaboration.  The trick, I believe, lies in understanding the kind of intelligence you have to offer and where it is best applied.  Applying the closed network model too broadly inhibits rather than enables value creation.

Examples from the Emerging Social Software Industry

There is an almost 1999-ish buzz in the air concerning a slew of social software companies.  LinkedIn and Friendster recently raised $4.7 million and $13 million of venture capital, respectively, in rounds headed by all-star firms Sequoia and Kleiner Perkins.  All these companies and their investors believe that Web-centric technology can be applied to facilitate social connections and information flows and create value in the process.  I’m not sure that any of them are close to creating a platform that will really serve the core function of providing sufficiently robust and generalized social connectivity, but somebody is likely to figure it out over the coming years.  (It’s interesting to note how some observers are calling for social software service designers to forego building too much intelligence into their services and, instead, focus on delivering a robust, stupid network.)

In contrast to these core services, we at Small World Networks have been banging away at using technology to add value at the periphery with our Water Cooler™ concept.  When you boil it down, we’re attempting to build upon standard Internet messaging protocols by adding context and convenience to purposeful conversations regarding the process of entrepreneurship.  In some respects, it will be a closed network – at least in regard to its targeted function, but boundaries are the price of context.

Implications for ESO’s

Although ESO’s might be tempted to monopolize connections and the flow of information, such a strategy is shortsighted, damaging, and bound to fail.  Even though the easier monopolist’s path is unavailable to us, there are a number of other viable routes to success.  ESO’s are situated to be the best in the world at understand the needs of their entrepreneurial constituents.  It seems to me that strategies that include drawing upon robust, scaleable sources of information and connection services; interpreting, validating, and repackaging information; and helping in the application of concepts and connections in order to help entrepreneurs achieve their goals will be effective.

While the old model of grants may have encouraged fragmented and uneconomic development of redundant capabilities, a newer model is being advocated by the likes of The Lowe Foundation, which exists to offer shared infrastructure, information, and connectivity in collaboration with a network of ESO’s.  By sensing, learning, configuring, and coordinating, ESO’s can add value in use to the information and connections offered by Lowe and others.

[i] See “Bridge Decay” by Ron Burt for more.

[ii] Now there is the real paradox.  Competitive markets yield the highest economic performance, but competition requires the motivation to share.  That is, owners of competitive firms have to share profits with employees, vendors, and customers in order to succeed.  Competitors share, while monopolists hoard.

[iii] My assertions of pure intent sound too much like the telcos’ explanation that they need monopoly in order to ensure “quality of service.”