Edge Perspectives with John Hagel

Ambient Findability

Information architecture – the words themselves are enough to cause the eyes of most executives to glaze over.  It’s abstract, likely to be complicated and expensive and unlikely to produce near-term revenue, much less profit, impact.  “Ambient Findability” – these words won’t help the average executive much either. Even my Microsoft Word application doesn’t like findability – it keeps suggesting that I change it to fundability (there’s a certain perverse logic here because, as I will suggest below, findability will lead to fundability).

So I hesitate to say it – Ambient Findability is a great new book about an increasingly important aspect of information architecture.  Wait! Stop! Before executives tune me out, hear me out.

Companies today realize that push approaches to marketing are less and less effective. As I have written about elsewhere, we are entering the era of reverse markets.  Ask business executives to define a market and they will likely say that it is a place where vendors can find customers and sell them more and more stuff.  Instead, we need to view markets through the reverse lens of customers who are trying to find appropriate vendors at relevant times and get the most value they can out of the their vendor. Powerful forces are re-shaping markets to make this reverse market lens much more helpful in determining how to create value.

If businesses are going to succeed in the future, they need to master pull approaches to marketing – how do you get potential customers to seek you out and how do you pull complementary resources together to become ever more helpful to customers? These pull approaches hinge upon the ability to improve findability. So, what does that mean? Peter Morville, the author of Ambient Findability (and, incidentally, one of the founding fathers of the discipline of information architecture), helps the reader with a dictionary-style definition:

Find-a-bil-i-ty n

a. The quality of being locatable or navigable

b. The degree to which a particular object is easy to discover or locate

c. The degree to which a system or environment supports navigation and retrieval

For those who are interested, Morville posted a fascinating blog entry  preceding his book by a few years where he explores the relationship between findability and information architecture.

Later in the book, Morville sums up why executives need to pay attention: “. . . . findability will be a key source of competitive advantage. Finders, keepers; losers, weepers.” Blunt, but accurate.  In a world of increasing choice, findability becomes an essential dimension of competition.  Of course, it’s always been important – it’s the wisdom behind the maxim in retailing that there are only three things that matter: location, location, and location.

But now the traffic is not just flowing down well-defined city streets - it is working its way through the global web from link to link in highly idiosyncratic ways. And it’s not just the local retailers that are competing for the customer’s attention and wallet – it is every vendor and information producer around the world.  In this environment, becoming findable makes the difference between life and death.

Morville believes that push and pull will continue to co-exist, but he suggests that

. . . in today’s attention economy, fitness requires a new balance between push and pull.  The playing field has shifted, and yet few companies understand the new rules. In their bias towards push, marketing is missing opportunities to make products more findable.

Morville comments that a lot of businesses worry about usability of their products or their web sites, but they fail to recognize that “findability precedes usability.”  If a potential customer can’t find you, usability doesn’t really matter.

Findability is not just about new design or marketing techniques.  Morville observes that “findability is at the center of a quiet revolution in how we define authority, allocate trust, and make decisions.”  Its implications are profound not just for those who want to be found, but for those who are doing the finding.  As the dust jacket of the book maintains, “what we find changes who we become.” This is a thoughtful meditation on the implications for both finder and findee in a world where finding becomes increasingly important and challenging.

Morville provides us with a very well-written, even eloquent, book, drawing much needed attention to a key dimension of competition going forward. Business executives of all types will profit from reading this provocative book.  At the very least, it will put squarely on the table some key questions:

• How findable are your products and services?
• How findable is your business?
• How findable are you personally?
• What can you do to improve your findability for those who matter?

For those who want to find Morville, he has begun a blog findability.org

From Push to Pull

JSB and I just published a new article in the McKinsey Quarterly – “Push to Pull – The Next Frontier of Innovation.”   I've also posted on my web site a longer working paper that I wrote with JSB on “From Push to Pull – Emerging Models for Mobilizing Resources” for those who want a more detailed perspective.

This material is the opening salvo in our research for a new book. Yes, I know, we’ve just barely published our previous one, but we're already starting to work on a new book. As we were writing The Only Sustainable Edge we became convinced that there is a much bigger story yet to be told. Since we are still at the earliest stages of this research and writing, I would welcome any input or suggestions to make the story sharper and more compelling.

“Push to Pull” is only one slice of this bigger story - it is not the whole story, but it is an important slice.  It describes a fundamental shift in the way we mobilize resources.  Organizational success depends upon effective mobilization of resources.  Getting the right resources to the right place at the right time makes the difference between desired impact and catastrophe – something we learned in graphic detail from Hurricane Katrina and New Orleans.

The distinction between push and pull

Over the past century, institutions have been perfecting highly efficient approaches to mobilizing resources.  These approaches may vary in their details, but they share a common foundation.  They are all designed to “push” resources in advance to areas of highest anticipated need.

In the past decade, we have seen early signs of a new model for mobilizing resources.  Rather than “push”, this new approach focuses on “pull” – creating platforms that help people to reach out, find and access appropriate resources when the need arises.

Now, when JSB and I talk about pull platforms, many executives immediately think of the lean manufacturing techniques pioneered by companies like Toyota back in the 1950’s. In fact, lean manufacturing represents a hybrid between push and pull models – it still contains significant elements of push. We are talking about something even more profoundly rooted in the principles of pull.

Pull and push approaches differ significantly in terms of how they organize and manage resources.  Push approaches typically use “programs” – tightly scripted specifications of activities designed to be invoked by known parties in pre-determined contexts.  Of course, all push approaches are not software programs – this is a broader metaphor to describe one way of organizing activities and resources.  Think of thick process manuals in most enterprises or standardized curricula in most primary and secondary educational institutions, not to mention the programming of network television, and you will see that institutions heavily rely on programs of many types to deliver resources in pre-determined contexts.

Pull approaches, in contrast, tend to be implemented on “platforms” designed to flexibly accommodate diverse providers and consumers of resources.  These platforms are much more open-ended and designed to evolve based on the learning and changing needs of the participants. Rather than seeking to dictate the actions that people must take, pull models seek to provide people on the periphery with the tools and resources (including connections to other people) required to take initiative and creatively address opportunities as they arise. Pull platforms are designed from the outset to handle exceptions, while push programs treat exceptions as indications of failure.

Push models treat people as passive consumers (even when they are producers like workers on an assembly line) whose needs can be anticipated and shaped by centralized decision-makers.  Pull models treat people as networked creators (even when they are customers purchasing goods and services) who are uniquely positioned to transform uncertainty from a problem into an opportunity.

Once again, we’re not using platforms in the literal sense of a tangible foundation, but in a broader, metaphorical sense to describe frameworks for orchestrating a set of resources that can be configured quickly and easily to serve a broad range of needs. Think of Expedia’s travel service or the emergency ward of a hospital and you will see the contrast with hard-wired push programs.

The value of pull models

Why are pull platforms emerging and spreading? Many organizations adopt pull platforms as a way to create more flexibility and cope with greater uncertainty. But early adopters are realizing that there is another more compelling value.  Pull platforms are particularly powerful in fostering innovation, learning and capability building.  In fact, pull platforms are creation platforms.  You can’t anticipate if you are going to innovate, so push programs are not useful in innovation environments.

Here’s the irony.  Push models were originally designed to promote efficiency, yet even here they are failing to deliver.  Advocates of these models acknowledged that these approaches might limit flexibility and constrain creativity, but they argued that was a small price to pay for the opportunity to cut costs.  Yet, as uncertainty increases and competition intensifies, it turns out that push models are less and less able to deliver efficiency.

Push models assume that demand can be predicted reliably enough to define the procedures required to deliver resources to pre-specified locations before the demand actually materializes.  Push models therefore require accurate forecasts to function effectively.  Uncertainty undermines the ability to forecast. This in turn undermines the ability to push resources to the right place at the right time. So, even if efficiency is the primary goal, push approaches are becoming less useful. Pull platforms become extraordinarily efficient in uncertain markets.

Pull platforms are highly scalable as well as flexible because they embed specialized capabilities into distinct layers that can evolve independently.  The lower layers of pull platforms, including such activities as communication and logistics networks tend to focus on high tech capabilities. Upper layers, concentrating on mobilizing individuals and communities to innovate and create new value, tend to focus on high touch capabilities.

Early arenas for pull platforms

These new pull platforms are emerging in very diverse arenas:

• Pull platforms are helping to transform the production and distribution of digital media in areas like blogging and music remixing. But it would be a mistake to view pull platforms as limited to digital “fringes”.
• Global process networks built upon pull platforms are reshaping the global operations of such different and demanding industries as apparel, motorcycles and consumer electronics.
• Learning institutions as diverse as the University of Phoenix and Brown University are deploying pull platforms.

These are not just isolated examples - powerful forces are shaping the need for an alternative approach to mobilizing resources. These forces ensure that this new model will spread to all arenas of human activity.

Forces shaping pull platforms

Five broad forces are shaping the emergence and evolution of pull platforms:

• Increasing uncertainty
• Growing abundance
• Intensifying competition
• Growing power of customers
• Greater emphasis on learning and improvisation

In environments shaped by these forces, push models are breaking under the strain and pull models are beginning to fill in the gaps.

The push to pull spectrum

Of course, pull platforms and push programs are not mutually exclusive.  In fact, pull platforms often contain push programs that can be accessed through their platforms. For example, Amazon or eBay provide robust pull capability for consumers to access on demand an extraordinary abundance of products like books and CD’s. These products were originally made using traditional push manufacturing programs. On the other hand, reflect on the opportunities to further build upon these pull distribution systems by reconfiguring production processes to deliver publishing on demand.

More broadly, however, the forces outlined earlier make it more and more attractive to deploy pull models rather than push models.  At the same time, broader deployment of more flexible technologies, tools and infrastructures makes it more viable to design and manage pull models. As a result, pull models will increasingly displace or marginalize push models in broader arenas of human activity.

Look to the edge for pull platforms

Like many of the most profound business changes, this architectural shift is beginning at the edge:

• It is starting at the edge of enterprises, rather than deep inside of the enterprise, because it is here that the greatest uncertainty exists. It is also here that push models, with their assumption of centralized control, are less viable (unless a company has enormous market power like Wal-Mart).
• Pull platforms are also beginning to take hold in emerging economies like China and India because these platforms are particularly powerful in supporting bootstrapping activity.
• Finally, pull platforms are emerging at the demographic edge – younger generations more comfortable with the technologies and tools emerging on electronic networks are pioneering both the creation and use of pull platforms to create businesses that grow extremely fast with relatively modest investment.

Pull platforms require very different mindsets and management techniques.  At this point, they represent an opportunity for all institutions to embrace.  Over time, however, they will represent a significant competitive challenge for those who remain wedded to push programs. While pull platforms are emerging first on the edge, we all know that the edge eventually becomes the core.

Delphi, Detroit and Dead-Ends

Delphi, the largest supplier to the automotive industry, filed for bankruptcy last Saturday.  This is not an isolated event – it is only the latest filing in a series of bankruptcies among American automobile suppliers. Their American customers, the large automotive manufacturers, are hardly doing much better.  Both GM and Ford have achieved junk bond status as investors worry about mounting pressure on their businesses.

The business press coverage of this story has been disappointing.  Almost without exception, the story has been reported as part of a broader effort within the American automotive industry to realign its cost structure. In particular, the news reports focus on the challenge of dealing with the inflated wages that American automotive workers enjoy relative to their counterparts in other countries and the legacy costs burdening American auto companies. So, if one takes these reports at face value, the problem is labor costs and the greed of workers who won’t face up to reality.

Look, there is no question that wage rates of American automotive workers are too high and painful readjustments will be required.  But is that the whole story?

The Delphi story is a rich one that can be read on many levels.  It provides significant insight into the mindset of a lot of American executives across many industries - not just the automotive industry - and drives home in stark form the consequences of that mindset.

At one level, this story provides insight into spin-offs. Delphi is a spin-off from General Motors.  When the spin-off occurred in 1999, it was heralded as a bold move to provide more focus and flexibility for both entities.  In fact, an article on "Spin-Offs That Won't Go Away" (registration required) in Business Week almost a month ago cast the spin-off (along with a similar spin-off of Visteon from Ford a year later) in a very different light:

The two parts makers remain GM’s and Ford’s largest suppliers, but there’s a bigger reason why the auto makers are still on the hook for these offspring: Except for their stock, they never completely cut all ties to make them independent companies. . . . Indeed, Delphi and Visteon . . . may have been destined to fail.  GM and Ford lumbered them with huge labor costs while extracting promises from them to cut their prices.

Visteon, while it has avoided bankruptcy court so far, has lost $3.2 billion since its spin-off and survives only through subsidies received from Ford.

In retrospect, these spin-offs are much better understood as financial engineering – get under-performing assets off the books while still preserving effective control of the assets through tight business relationships. Competitive pressures are forcing an unbundling of large enterprises, but too often executives pull back at the thought of losing control and strive instead to create the illusion of independence. In some respects, the Enron debacle stemmed from exactly this inability to let go.

At a second level, the Delphi story illustrates the destructive impact of supply chain relationships in large parts of American industry.  Over the past couple of decades, we have seen a pronounced trend towards consolidation of supply chain relationships by American business.  Only last month, both GM and Ford announced another round of thinning the ranks of their suppliers.  Why is this being done?  The Wall Street Journal headlines of the stories covering these announcements cuts to the chase: “GM Unveils Cost-Cut Program to Press Suppliers, Halt Losses” and “Ford Seeks Big Savings by Overhauling Supply Systems”.

If you dig deep into the stories, you may find an occasional reference to new technology and innovation, but the headline and bottom line are clear: these are simply the next wave of efforts to squeeze suppliers.  By reducing the number of suppliers, the automotive companies tighten their control over the remaining suppliers and gain more bargaining power in negotiating even deeper price concessions. In this environment, trust is in short supply and relationships become adversarial rather than collaborative.

This leads to a third level of the Delphi story. Executives in the automotive industry are reaping the consequence of decades of focusing heavily on cost cutting as the primary approach to driving profitability.  Under the best of circumstances, cost cutting yields diminishing returns. But it has an even more insidious effect: it creates a zero-sum game among participants.  There’s a fixed set of economic resources available and I win only if you lose.  It pits suppliers against customers and labor against management. Dysfunctional friction ripples throughout the business and, in focusing on keeping what they have, people pay less and less attention to what new value they might be able to create together.

Delphi’s story can also be read as a cautionary tale regarding consolidation.  Major auto companies in the US and Europe (both suppliers and assemblers) have been pursuing aggressive M&A programs in a defensive effort to bulk up and achieve further cost savings through economies of scale.  If Delphi, as the largest automobile supply company with revenues of $27 billion and 185,000 employees, could not avoid bankruptcy, we might want to question how much economies of scale really help.

Delphi’s bankruptcy should be a wake-up call.  Cost-cutting is absolutely necessary, but it is not sufficient – pursued in isolation, it rapidly approaches a dead-end.  Economies of scale may be important, but mergers can be a distraction. The only way to succeed as competition intensifies is to find ways to create more value with less effort.  Productivity determines success and innovation is required to drive productivity advances.  Innovation requires people to come together, often across institutional boundaries, and discover new ways of operating.  The dysfunctional friction that pervades the American automobile industry must be converted into productive friction if these companies are to survive.

Accomplishing this will require a fundamental shift in executive mindsets. We can blame the troubles on greedy workers, but that will only harden the battle lines that hamper forward movement.  The only way out of this box starts in the executive boardroom. Senior management needs to challenge itself to find ways to get better faster by working with others.  If senior management teams can tap into this potential for innovation, they will have a much more compelling case to make to their workers and their suppliers.

The automobile industry is on the cusp of profound transformations, as highlighted in two recent books: The Second Century by Matthias Holweg and Frits K. Pil and Time for a Model Change by Graeme P. Maxton and John Wormald. For an interesting account of the growing importance of modularity in the auto industry, see Mari Sato's essay on "Modularity and Outsourcing: The Nature of Co-Evolution of Product Architecture and Organization Architecture in the Global Automotive Industry" in The Business of Systems Integration by Andrea Prencipe, Andrew Davies and Michael Hobday. The potential for innovation, both in the cars themselves and the methods used to design, produce and sell these cars, has never been greater.

The World Is Spiky

Two writers that I admire greatly – Tom Friedman and Richard Florida – appear to clash with each other.  Tom in his best-selling new book says “The World Is Flat” and Richard in a new article in the October 2005 issue of Atlantic Monthly asserts “The World Is Spiky".Richard’s article is a great read (supported by highly visual maps) and I highly recommend it. Tom and Richard are both right, but they both risk missing the real point.

Richard focuses on one particular quote from Tom’s book: “In a flat world you can innovate without having to emigrate.”  Richard responds that location still matters and that, by a variety of measures, the world is extremely spiky – meaning that activity is very concentrated in a relatively few locations.  Richard looks at

• population concentration in urban areas
• light emissions (as an interesting proxy for economic activity)
• patent filings
• citations to scientists in leading fields to demonstrate this spikiness.

Using topographical metaphors, Richard divides the world into

• peaks - the cities that generate innovations
• hills - “the industrial and service centers that produce mature products and support innovation centers”
• valleys - “places with little connection to the global economy and few immediate prospects”

Focusing on the peaks definitely highlights the spikiness of the world.  For example,

When it comes to actual economic output, the ten largest US metropolitan areas combined are behind only the United States as a whole and Japan.  New York’s economy alone is about the size of Russia’s or Brazil’s . . .  Together New York, Los Angeles, Chicago, and Boston have a bigger economy than all of China.  If US metropolitan areas were countries, they’d make up forty-seven of the biggest 100 economies in the world.

But what does all of this mean?  Flat or spiky? Who is right – Tom or Richard? Here is my take on it – framing the debate in these terms is misleading.  It obscures what is really important.

Flat or spiky – these are metaphors of space.  More importantly, they are static metaphors – they describe a point in time.  The world is either flat or spiky.  What is missing is any sense of trajectories or relative pace of change. Instead of studying snapshots, we need to study movies showing change over time.

Richard’s article offers relatively little in terms of dynamics – with the notable exception of population movements.  Here the evidence from the article is clear – the world is becoming much spikier.  In 1950, only 30% of the world’s population lived in urban areas – today, it is more like 50%. More and more of the world’s population are clustering into cities in search of economic opportunities. Cities are, as they have always been, the flywheel of innovation, talent development, productivity improvement and economic growth.

To the extent that Tom believes that cities will become less important as centers of economic growth, I would disagree with him.  So I would amend his observation and say that, if you want to innovate and you are not in a major urban area, you might want to emigrate to one of these areas, even in a flattening world.  Even though you can participate in innovation from more remote locations, if you want to develop your talent more rapidly than others, you are more likely to be able to do that in a major urban area.

Richard makes an important point: 

Because globalization has increased the returns to innovation, by allowing innovative products and services to quickly reach consumers worldwide, it has strengthened the lure that innovation centers hold for our planet’s best and brightest, reinforcing the spikiness of wealth and economic production.

So, here is where we see the beginning of a paradox – some of the forces that Tom Friedman eloquently describes as flattening the world are at the same time helping to reinforce spikiness.

But then the question becomes, which urban areas will become the most fertile ground for innovation and talent development?  Richard has written extensively and eloquently on this topic in The Rise of the Creative Class and The Flight of the Creative Class. In these writings, he makes clear that creative talent seeks out environments that encourage and reward innovation.  He also makes it clear that talent will migrate to urban areas that provide more promising environments for creativity and innovation.

This is one of the missing elements in Richard’s article. In its focus on describing the spikes that exist today, the article loses the dynamic element of competition among spikes and the speed with which new spikes can emerge - themes that are front and center in his books. Because the world is flattening in terms of connectivity, it is easier for new agglomerations of creative talent to come together and connect into the global economy, whether they are in Shenzhen or Bangalore.

Now, by Richard’s topography, Shenzhen and Bangalore don’t count – they are mere “hills”, not spikes, because they focus on manufacturing and support services.  This distinction reveals another limitation of Richard’s article – he defines innovation much too narrowly as either product innovation (things that can get patented) or more fundamental scientific innovation (citations to scientists).  Shenzhen and Bangalore are extraordinarily innovative as well, but their focus so far has been on rapid incremental process innovation, something that is not so easily measured by Richard’s indices. It is this form of innovation that accounts for extraordinary economic growth in a very short period of time.

By leaving this rapid incremental process innovation out of the picture, Richard misses some of the key dynamics that are already reshaping the spikiness of the global map. Companies in some of the rapidly growing urban areas like Shenzhen and Bangalore are pursuing a powerful form of innovation bootstrapping that starts with relatively modest incremental innovations pursued in rapid iterations and amplified by rich interactions with dense local business ecosystems. This bootstrapping is powerful because it accelerates learning and capability building and ultimately bridges into more fundamental product and technology innovation, as is already happening in areas like wireless technology in both China and India. With aggressive use of bootstrapping, even the most modest hills have the opportunity to become formidable peaks.

In this world, patents and scientific journal citations may be lagging indicators.  What we need to find are the leading indicators that will help us to understand and anticipate the dynamics reshaping the global economy. 

Most of all, we need to move beyond the snapshots – instead, we have to make and study the movies.  This is where real wealth creation will occur. Tom and Richard both understand this, but let's not frame the debate in terms of flat versus spiky. The greatest insight will come from understanding the paradox that the flattening of the world is creating opportunities for even greater spikiness.

Mary's Back - The Internet, China and Bubbles

Mary Meeker is back.  As a Managing Director at Morgan Stanley and leader of their global technology research team, Mary was one of the leading analysts of the companies emerging during the first wave of Internet commercialization.  After the bust in 2000, Mary maintained an uncharacteristically low profile but she appears to be resurfacing.

She spoke this week at the Web 2.0 conference in San Francisco on the global mobile platform-driven Web – slides available here (hat tip to Peter Merholz).  The bloggers in the audience seemed overwhelmed by the torrent of numbers but, hey, I like numbers.  I did not get to hear the presentation, so I have to be careful about reading too much (or not enough) into the slides.  Some numbers did stand out though:

• VoIP minutes in Denmark now exceed landline voice minutes
• The market cap of 5 leading Internet companies (Amazon, eBay, Google, Yahoo! And Yahoo! Japan) stood at $178B at the NASDAQ peak on 3/10/00 versus $261B now
• There are 1 billion Internet users in the world today but 2 billion mobile phone users – and Asia trumps North America in both categories with 36 % versus 23 % of users and  41% versus 11 % respectively

Mary also gives an interesting twist on the eBay-Skype merger that I blogged about earlier. She featured it as one of the best examples of a US-based technology company buying a leading non-US technology company with leadership in foreign markets with the intent of bringing the technology into the US market, suggesting this was just the beginning of a lot more of these kinds of transactions.

Even though Mary was featured as giving a global perspective on the Web at Web 2.0, you could tell that her heart was really in Asia, especially China and Korea.  This is perhaps not surprising given the fact that Mary just came out with a major new report on “Creating Consumer Value in Digital China” (pdf of the report available for download), initiating coverage of the China Internet industry. It is a useful overview of some of the leading Internet segments (especially Mobile Value Added Services, Online Advertising, Online Gaming and Online Commerce) emerging in China. The tone is set by a quote from Meg Whitman, eBay’s CEO: “Whoever wins China will win the world.”

Once again, the numbers are interesting.

• China is now No.1 in the world in mobile subscribers and No.1 in Internet users under the age of 30 (there’s a much higher skew in Internet usage towards the younger generation in China – 70% of their Internet users are under 30 and 54% are under 24).
• The US still has more than twice as many users of the Internet, but China has twice as many mobile phone users as the US. At least half of China’s Internet users appear to be accessing it through their mobile phones.

Mary’s report appropriately focuses on the mobile phones as access devices and the corresponding growth potential of mobile content in China:

China, in many ways, is leading the development and monetization of mobile content (i.e. KongZhong, TOM Online) in ways that are still nascent in the US; we believe investors underappreciate the secular trend at work within mobile computing, and the value, both in terms of wealth and consumer satisfaction, that mobile value-added services can contribute.

US executives and investors, reflecting the PC centric infrastructure that prevails here, don’t yet understand the growing importance of mobility in reshaping how we connect together.

Despite the relatively early stage of development of the Internet industry, there are clear early leaders in each of the major Internet segments covered by the report.  Even with these leadership positions and operating margins that typically are 30-40% better than their US counterparts, “China Internet companies are currently trading at 40-60% discounts to their global counterparts.” As the report points out, there are some good reasons for this, given the uncertainty as to how this very large but very early stage industry will evolve. While warning about the challenges facing foreign companies as they seek to carve out larger positions in the China market, the report also worries about the relative lack of innovation by Chinese companies which, to date, seem largely focused on copying successful business models emerging in the US, Korea and Japan.

Based on its assessment of market dynamics and company fundamentals, the Morgan Stanley report highlights three companies as the top investment picks:

• Ctrip – a dominant player in the online travel industry
• NetEase – a leading innovator in the online gaming market
• Tencent – growing off a strong base in the instant messaging market.

Mary’s reappearance and the general atmosphere at the Web 2.0 conference (not to mention some of the recent acquisition prices of early stage Internet companies) have prompted a lot of people to worry about whether we are entering another bubble (of course, they’re not really worried about the bubble, what they’re concerned about is a Bubble 2.0 - there's actually a blog by this name, with the slogan "Please, God, just one more bubble!" - to be followed by a Bust 2.0). For what it’s worth, Mary apparently suggested that we are experiencing a “boom-let.”

I’ve never been one to consult on stock tips or real estate investments (speaking of bubbles!), but I don’t have the sense that we are at a bubble yet in the Internet arena.  The IPO market is still demanding and most of the new generation of Internet businesses have not had the benefit (or curse) of huge VC funding – they’ve had to bootstrap their way into existence and as a result are generally more firmly grounded than the bloated cash cows wandering around in the 1999-2000 window (with apologies to Boston Consulting Group, these cash cows consumed prodigious amounts of cash, rather than generating it, treating VC funding as a substitute for revenues).

The time to worry is when the VC’s line up to pour large amounts of money into businesses founded by untried venture teams who rely on soundbite business plans (“it’s like an eBay for the plastics industry”).  One red flag came from a report from the Web 2.0 conference posted by Fred Wilson, a venture capitalist from New York, warning about the re-emergence of “second derivatives”:

I heard one business described as Google Maps meets delicious, and another described as Skype meets MySpace.  When the first derivative hasn't fully figured its long term business model (other than getting bought), the second derivatives are pretty scary.

Here’s another red flag. In the last bubble, financial analysts, desperate for a way to value Internet businesses that had precious little revenue, much less operating profit, hit upon traffic numbers as a key basis of valuation.  That gave rise to some very perverse business practices as Internet sites began to do whatever they could to boost their traffic numbers while ignoring anything that might be required to build a real sustainable business, like building enduring relationships with customers.  Internet start-ups essentially became brief stops for venture capital money on its way to advertising firms designing marketing campaigns to draw the next wave of traffic.

As we move into Web 2.0, we see a similar struggle for quick and easy valuation metrics that might free the weary investor from understanding whether there is a sustainable business behind the numbers.  One recent blog posting sought to assess the recent acquisition price for WebLogs, Inc. by AOL in terms of the number of links to WebLogs blogs from external sites.  I sure hope that method of valuation doesn’t take hold.  Like traffic, it offers some interesting information but, if it becomes a primary metric, it can lead to some very dysfunctional behavior.

We’re not quite into a full-fledged bubble yet, but I do worry about some of the early signs that the investment floodgates are opening up. In times like these, I guess it pays to be philosophical.  Periods of great innovation are generally accompanied by boom and bust cycles – booms and busts help to accelerate learning.  They can certainly be painful for individual entrepreneurs and investors, but the lessons will be valuable for everyone.

By the way, Henry Blodget is back, too.  He was sighted at the Web 2.0 conference and has launched a blog – The Internet Outsider.

Web 2.0 Redux

The blogosphere has been grappling overtime with the Web 2.0 meme over the past week. Perhaps the most significant event was the release of Tim O’Reilly’s long awaited What is Web 2.0 article. I have no doubt that this paper will become a seminal work much like the Open Source Paradigm Shift paper he produced last year. In a separate posting, Tim even overcomes his hesitation about trying to define concepts too concisely to offer Web 2.0: A Compact Definition.

Tim is clearly reluctant to craft formal definitions with hard and fast boundaries.  As he notes in a blog entry, “I tend to think about the gravitational core that holds a solar system of ideas and experiences together, rather than some kind of box to contain them.” This instinct is certainly a healthy one – especially in emergent areas characterized by rapid change. Stories and examples work far better in capturing the texture and richness of what is going on than abstract concepts. Trying to impose boundaries too early limits the imagination.

On the other hand, if we treat definitions with a little less respect - not as "formal" or "official", but as tentative efforts to identify and debate the essence of new phenomena - they can help to shed light on what is really new and different, engage those who are still on the periphery and perhaps shape on the margin the next wave of initiatives. If we approach them in the right spirit, debates around definitions and boundaries can help to generate productive friction, allowing us to see new dimensions of complex phenomena and leading to new insight.

In his What is Web 2.0 article, Tim offers a rich exploration of the Web 2.0 terrain in a way that certainly spurs the imagination and helps to clarify the diverse elements coming together to form Web 2.0.  In particular, he offers seven principles that are shaping Web 2.0:

• The Web As Platform
• Harnessing Collective Intelligence
• Data is the Next Intel Inside
• End of the Software Release Cycle
• Lightweight Programming Models
• Software Above the Level of a Single Device
• Rich User Experiences.

As these headings suggest, Tim is focused on characterizing the technology elements that provide the foundation for Web 2.0. This is totally appropriate since Web 2.0 is made possible by new technologies and new ways of organizing technology. From my perspective, there are few people better equipped than Tim to identify and understand these technology elements.

Tim remains technology focused in his Compact Definition:

Web 2.0 is the network as platform, spanning all connected devices; Web 2.0 applications are those that make the most of the intrinsic advantages of that platform: delivering software as a continually-updated service that gets better the more people use it, consuming and remixing data from multiple sources, including individual users, while providing their own data and services in a form that allows remixing by others, creating network effects through an "architecture of participation," and going beyond the page metaphor of Web 1.0 to deliver rich user experiences.

His definition emphasizes the role of the network as a platform, but spends the bulk of its time highlighting what is different about applications in a Web 2.0 world.  I particularly like his formulation of the Janus nature of Web 2.0 applications, facing in two directions at the same time – on the one hand, consuming and remixing data from multiple sources while at the same time providing data and services in a way that allows remixing by others. These two faces explain both the opportunities for bootstrapping or scaffolding and the network effects that shape the potential for significant value creation. (By the way, I am intrigued with one possible definition of Web 2.0 that goes something like this: a network centric platform for bootstrapping businesses. I touched briefly on bootstrapping in general here, but I am struck by how powerful Web 2.0 is as a bootstrapping medium.) When you combine these two faces with the notion of software as a continually updated service, you have the formula for much more rapid movement in building large scale businesses.

This is a great definition for application developers.  It helps them to understand both what is different about Web 2.0 applications and why developers should care about these differences. It is particularly appropriate given the Web 2.0 conference that Tim O’Reilly will be hosting this week.  This conference will serve as another kind of “gravitational core” drawing technologists from all over the world trying to make sense out of the latest developments on the Internet.

But I spend most of my time dealing with business execs who view technology as an enabler - their natural (and not unreasonable question) is: so what does this enable? In his paper, Tim hints at some of the implications, but they are still largely framed in terms of implications for technology companies and especially software developers.

Tim talks a bit about Amazon and eBay as examples of companies that emerged in the Web 1.0 world and transitioned successfully into the Web 2.0 world - these are clearly much more than software companies. Many have written about the potential impact of Web 2.0 on media businesses and retailers and other kinds of distribution businesses.  I, for one, do not believe that the impact stops there – it ultimately re-shapes virtually all forms of business activity (with the possible exception of snow removal businesses and lawn cutting services).

Since I deal with business executives in industries ranging from software to petroleum (no snow removal businesses as clients), I tried to frame a definition of Web 2.0 that makes it clear that the impact extends far beyond the technology arena:

an emerging network-centric platform to support distributed, collaborative and cumulative creation by its users

(This definition is developed in greater detail here)  All businesses will be using this platform.  All businesses had better figure out what it means to engage in “distributed, collaborative and cumulative creation” and adjust their business models and capabilities accordingly. This is not just an issue for technologists. (And, by the way, I have tried to frame the definition in a way that is not just relevant for business executives – think about the implications of “distributed, collaborative and cumulative creation” for policy-makers, educators or consumers).

Once business execs start to get their minds around the implications of distributed, collaborative and cumulative creation, two things happen: They begin to see how profound this is in terms of reshaping business activity and opportunities for value creation They are deeply motivated to understand the technology drivers that are making this more pervasive.

In reflecting on the many discussions of Web 2.0 that have surfaced online over the past couple of weeks, I have found it useful to step back from each contribution and ask three questions to test the value of the contribution:

• Does it really make clear what is different about Web 2.0?
• Does it tell us why we should care?
• Does it make assumptions about who should care – i.e. are we explicitly or implicitly addressing technologists, business people or some other constituency?

With these questions in mind, you might be interested in surfing through some of the other contributions to the Web 2.0 conversation that have surfaced over the past week:

• Chris Anderson at The Long Tail - where he suggests that "the lack of a crisp definition is a feature, not a bug"
• The Devil's Dictionary (hat tip to Pete Cashmore at Mashable)
• Barb Dybwad at The Social Software Weblog
• Dion Hinchcliffe at his Web 2.0 blog
• Steven Berlin Johnson at his own blog who helps us to understand why Web 2.0 is like a rainforest while Web 1.0 is like a desert
• Richard MacManus at Read/Write Web
• and, last but certainly not least, Ken Yarmosh at Technosight who helped to orchestrate a first-ever blogoposium where contributions can be accessed through del.icio.us or technorati.

There are some interesting graphic attempts to capture the essence (or complexity) of Web 2.0 at Flickr here (for Tim O'Reilly's original meme map), here, here and here.

Also, check out Richard Veryard’s early attempt to trace out the contours of SOA 2.0 - he suggests there is more to come on this one.

Technorati tags: Blogoposium1 Web2.0