Category Archives: power-laws and networks

Landlord of Blogdom

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Tim Oren’s blog is rising fast in my news reader, where I keep the blogs sorted in a rough rank order.

I highly recomend his recent essay No eBay of Blogs with which I largely agree.

But, on the otherhand… I think many people are missing out on how strong the synergies are between the client and the server in blogdom. That comments, trackbacks, identity, reputation, and moderating will all strengthen that entanglement. If that grows stronger it will be harder and harder to avoid a potent network effect emerging – one that appears to me to be much stronger to me than the document exchange network effect that makes the Microsoft Office so strong a monopoly. If you owned that, you’d get the hub, you’d be the eBay, you’d be the landlord. An embrace and extend strategy looks quite plausible here.

I don’t know if that’s any different an insight than saying the same thing about the client/server synergies around HTTP. Nobody grabbed that hub. Many tried though. The build out was so extremely fast, making hubs easier to grab since that reenforces the power-law. But the early winners were open, so at least the server side has managed to remain reasonably open. The client side remains in contest, but some poeple think the good fairy Ms. Open is starting to gain the upper hand there too.

One reason the landlord of HTTP was hard to grab is that powerlaws are more likely to emerge when new entrants lack the knowledge to make informed choices so they just pick the market leader. In the HTTP case folks installing servers tended to be highly knowledgable about the lock-in risk and hence valued open. I mention this because I don’t think that’s true about the majority of folks that will be adopting a blogging solution. If the client and server become one, as I suspect is likely, then that will further reenforce the emergance of a landlord of blogdom.

Firm Size

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Good article showing that all of the metrics of firm scale are power-law distributed: Zipf Distribution of US Firm Sizes (pdf) by Robert L. Axtel. I betcha that the same shift in exponent found in the wealth distribution has been taking place in the firm size distribution. If true that would shine an interesting light on the ‘small business friendly’ retoric of various parties.

All of Axtel’s work is interesting. He has a agent theory based explaination for why firms scale is that way, along with a simulation. I don’t find the theory all that convincing, but it is a very nice peice of work.

He also has an interesting graph in one of the presentations out on the web that shows that only in Russia are the city sizes not distributed “right”. Presumably that’s telling a strong story about planned economies. It got me wondering if there is a similar story inside firms about the distribution of the size of their various divisions.

Plagarism Hub

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My logs recently have been getting a lot of traffic from TurnItIn.com. They sell a plagarism detection service. Here is an example report from their system. Presumably they are scraping my site to populate their databases.

Interesting business, lots of nice aspects. First notice how they can sell their service to both the creators and the consumers of written works, i.e. they are middlemen. Nothing like a protection racket: sin, crime, fraud, paranoia, etc. Finally you have a great little network effect; only the most a paranoid customer is going to check for plagarism at more than one such site but you certainly are going to be drawn to the #1 site.

In time they could manage to become a standard; any work submitted to anyone might require an originality score from these folks. Maybe then can get some state legislators to make this a requirement for all the state schools. When all is said and done they can turn around and start collecting licencing fees for IP rights holders.

But, they better move fast. Lots of companies have a big pool of data they can use to check for plagarism: Google, Northlight, or even one of the big 80s online info services. They better move fast, get that brand advantage going.

Of course a system like this isn’t much help if your problem is with a journalists who’s just making it up. In fact it could be that what you want your writing to aspire the Goldilocks plagarism score. “Not too hot, not too cold.”

Rumors, Standards, Scarce Knowledge

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It’s amusing to notice that the model that power-law distributions are more likely to arise in emerging markets, ones where user’s are reduced to follow the leader behavior, is similar to Gossling’s phase model of standardization.

One of the roles of standards making is to provide the market with metrics they can use to measure product quality. That’s obviously the function of standards like weights and measures. I suspect that many buyers hold back from entering a market until they see the emergance of open standards. They then use that event as a signal that the market has matured sufficently that they can rest assured that the knowledge institutions have appeared. Such buyers are, presumably, not intending to reap the advantage of being an early adopter, i.e. the chance that by moving early they can trigger a transformation in their own upstream markets.

Meanwhile you can see other analogies in this story about how fast a rumor/panic spread in Hong Kong regarding SARS. Here the prankster managed to yell “fire” in the crowded theater by fradulently claiming to be a reputable local news paper. Individuals who heard the rumor all try to assess it’s quality. After a while they are reduced to looking around and noting that other people seem to be acting on the rumor. That’s all you need, ignorance and users who are ready to act. Ready to link into the graph. In this case the nodes in the graph are behaviors to take regarding SARS rather than vendors in a marketplace.

Time to Market?

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Many years ago I was in one of those perennial meetings where the senior vice president stands up before the entire division and takes questions. These meetings often are nothing more than a study in power politics. Young turks with nothing to loose ask questions that bait the leader. Sycophants ask questions in support of what ever this weeks messaging seems to be.

Occationally someone naive about the stress in the room will ask one of those questions that goes right to the heart of the problem. In this meeting a young engineer asked “How important is time to market?” This was on all of our minds. The product we were working to release was more than a year behind schedule. We were all having a tough time making trade-offs between schedule and creating a virtuous product.

At that time in my life I was working with a very witty coworker who was full of very amusing one liners. For example he’d say “Here at YoYoDyne our leadership toggles betwix avuncular and asshole.” During this interval we were in an avuncular phase.

The senior VP tackled the question: time to market. He stated that he really didn’t know, but that in all his experience first to market was worth a substantial amount. I remember thinking, hm that’s not a very strong answer to what’s our #1 ethical issue around here, but I certainly respected that it was an honest answer.

Today I think we know the answer. It’s not a pretty picture. Capturing users is much more important than creating a virtuous product.

We know this because we know that power-law distributions will arise whenever the new users arriving in a marketplace exhibit a preference for the market leader. We also know this behavior is extremely likely in an emerging market. Consider this scenario. New users show up in the new marketplace. They thrash around trying to decide which vendor to hook up with. They thrash seeking some reasonably rational basis for making their decision. Now recall that this is an emerging market. Almost by definition that means that expertise is very thin on the ground. Users have a very hard time finding any source of expert advice. The user looking for some measure of product quality is left in a bit of bind. The market, because it is new, doesn’t have any mature sources of information about product quality.

At that point the user has to fall back on proxy measures of quality. That users then select the product to buy entirely on the basis of what other users already selected. It’s a fall-back onto almost the only information that user has available. The user is behaving rationally. Meanwhile, the market rapidly locks into a power-law distribution. The few early winners gain huge market share.

Hopefully, over time, markets will mature institutions, people, and collective knowledge to measure product quality in more accurate ways. At that point the early market leaders might start to be displaced. Of course how quickly that happens depends on how sticky the product offerings are. Software products are particularly sticky because of the training costs, and the way they capture the user’s data in ways that, by default, make it hard to switch.

Some markets never get the chance to mature. They evolve too fast. The entire stack of industries that stand on top of electronics revolution are like this. As the cost of computation, storage, and communications all fall, at large multiples each year, new markets keep emerging. Each time one of these markets emerges we get the same story repeated.

Large numbers of new users enter the new market, they thrash around for a measure of quality, they settle for using the behavior of others as a proxy for quality, and that assures the entire market grows up with a power-law distribution of vendors.

So the answer to the question? Time to market is everything when you are dealing with a newly emerging market that lacks matured ways to measure quality. This is doubly true if the customer relationships your capturing are highly sticky.

War in my Wallet

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In my wallet right now there is a little war going on. Representatives of various armies are fighting it out. Let me introduce them.

I have two kinds of Government currencies.

There is a nice 10 thousand yen note in there left over from a trip to Japan I took almost a year ago. I was forced to use Japanese currency when in Japan. They don’t use credit cards or checks much – in fact you could always tell that a restaurant was going to be amazingly expensive if they displayed the ‘flag’ of visa/master-card on their threshold.

There is some US legal tender – “This note is legal tender for all debts, public
and private”. It says “In God we trust” while Japanese note has a picture of the emperor on it and I’ve no idea what it says.

I have some private currency.

There’s a gift certificate from a huge bookstore in a distant part of town. It’s worth $10.33 cents.

I have a gift card that came via a rebate from the purchase of a cell phone.

I have quite a few forms of plastic based currency.

There is a credit card provided by my company that I’m coerced into using when I travel. That let’s them capture a number of benefits. They get the discount points on the transactions. The card allows them to prevent me from shopping in certain venues. It lowers their book keeping costs.

There is a credit card from from a small bank in the Midwest. I’m convinced to use this card because I’m bribed with a 1% cash back program. It’s very complex. I have to accumulate points, and then once over a certain threshold I get 1% back. If I remember to request it. Of course I run the risk they will change the terms or go out of business before I get my money back. They already changed the terms once, I used to get 2% back.

There is a credit card co-marketed by a major credit card processing bank and Beans. I was convinced to get that because it came with 2% cash back. They changed that to half a percent after six months. I’d get rid of it but the news paper subscription is tied to it.

There is a bank card. I had to ask them to send me one that didn’t have a debit card tied to the bank card. I sometimes use this card to buy groceries. They let me have cash back.

Then I have a bunch of cards that let me do transactions at semi-private clubs. All the places I can say one way or another “put it on my account”.

I have my health insurance ‘club’ card.

I have the health insurance ‘club’ card of my previous employer, since showing it gets me certain discounts.

I have my library ‘club’ card. It’s interesting because it gets me into two library networks and a few hundred individual libraries. They have linked all those accounts together.

I have the card that denotes my membership in the car driving club, aka my driver’s license. I need that to be allowed to take cars onto the highways. These days it’s the only card that let’s me fly on commercial airplanes. The phone company also demanded it when I got a cell phone.

I have three cards for gaining access to my job. One gets me onto the landlord’s premises. One let’s me get into various properties around the country my employer does business in. One let’s me get into the garage at work.

I have a card that let’s me enter the building were my son goes on Saturday mornings.

Then there are my charity club memberships, but I don’t carry those; except my ACLU membership card.

My absolutely favorite club card is the one that let’s me enter the Library of Congress.

All these things are there to let me do transactions. All of these are forms of currency, currency substitutes, or representatives of account relationships.

Currency has lots of network effects. Transactions are simpler if the parties have a currency they both agree to accept. Transactions are simpler if each party doesn’t have to include a phase in where they negotiate the means of payment. For example merchants are required by the credit card companies not to offer a discount for cash, but most will if you can deal with somebody in authority. Transactions are cheaper if we all don’t have to run different balance sheets for each kind of currency and then try to reconcile them once a month.

All these are competing forms of money are all trying to balance out transaction costs, bookkeeping costs, relationship stability, loyalties, trust, etc. etc.

Some are just trying to get a share of that market so they can take a bit of each transaction.

I was fascinated to learn recently that the reason that checks are used in the US more than many other nations is because the cost of check clearing is (or at least was) paid for by the Federal Reserve.

For example when you buy something on a credit card the card companies charge the merchants a fee. 1.5 to 6%. The print out from my taxes reports that my Federal tax rate was 17% this year (which doesn’t include the social security), presumably part of that goes to overhead to run the currency, banking, and check-clearing operations.

Maybe someday the Fed will be able to deploy a plastic currency that competes with current plastic currency. That certainly would disrupt a lot of people’s apple carts. It certainly could create some very substantial efficiencies in the economy.

On the other hand, right now my wallet is getting pretty crowded. The Fed might create single card that enables hundreds or thousands of virtual cards to be packed into my wallet. That could enable all kinds of confusion!

Amen Brother!

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A big AOL: “me too” to Tim Bray’s post.

Dave Weiner took it badly when Apple murdered his/their baby. Dave and Apple had co-developed this really cool thing AppleScript. Dave had built a sweet tool for developing code for AppleScript. Apple bundling a lame programming environment for AppleScript with the OS. That’s a deadly combination, two products can not live on that real estate together, at least not when one is bundled like that. Dave took it badly. Who can blame him?

When he wrote his famous chinese household essay in 1994 he was still working thru his anger. Plenty of reason to be angry. Still is.

Dave’s essay is facinating. He admits there that developers are subordinate to the platform’s they build on. Stockholm syndrome? Nope.

Platform vendors thrive when they can attract lots of developers to their offering. The platform becomes an essential component of their offering; a supplier they can’t negotiate with. They can only plead their case with the platform vendor and hope for the best. The platform is like real estate and the vendor is like the local zoning board. Except that the local zoning board has both democratic goverance and appeal to the judical system as a fall back on when they misbehave. When the platform vendor cuts off your air supply there is no appeal.

Platform vendors can get lots of developers in two ways. The most durable way is to share big part of the jointly created gains with the developers. Dave’s metaphore, love, is better than “share of jointly created gains”. It is a better metaphore because before you can get to those gains you have to climb over a lot of hurdles, developing a successful product takes years. The commitment to climb over those hurdles demand a tremendous amount of trust.

The other way a platform developer can get a lot of developers is by becoming the dominate standard. Then the platform is so essential that if you want to practice your craft at all you have to go thru them. Microsoft, at least on the desk top, is in that position. If you make a peice of hardware, say a printer, you have to develop drivers for Microsoft. Note that sentence doesn’t say “you have to develop drivers with Microsoft”. Same story on the the software application side of the bridge.

Some people believe these problems can be solved with contracts. That doesn’t scale. For a platform to succeed you need to have tens of thousands of clever developers take a stab at making something neat happen. A few of these will succeed, after years of trying. Insisting that a contract is made prior to each one of those experiments is insane.

There are lots of other solutions to these problems. For example the developers could organize into aggregates – call these guilds or unions – until they have enough power to negotiate. Developers could encourage substitutes – call that open-source. Some developers could become powerful enough to become essential and then negotiate on behalf of their brethren – call that Lotus, Netscape, or Sun. The industry could appeal to the law, say the anti-trust law. Developers could repurpose their skills and go work in some other industry – call it the web, or enterprise systems.

Trust is key. Trust between the platform vendor and the developers. Call it love. Call it an understanding about how joint gains will be shared. When it becomes clear that a platform vendor is too greedy then over time the developers will find a response. Developers aren’t powerless. They create the innovations.

Cooperation requires a regular supply of forgiveness, but some people and some firms abuse that. Walk away.

Value of the Network

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Two small items about attempting to value the network:

both a little rough, but the first one has a pretty picture.

The most interesting thing about the first one is that it appears that he tried to give an estimate of how many ‘relationships’ of each kind he has in his drawing. I wonder what the statistics of that is? For example how many metcalf’s-law style relationships do I have. How many reed’s-law style relationships do people usually have? Are the distributions different in different venues: cities, towns, cultures?

The question of network valuation is important. Of course it’s important to capitalists, because it’s the driver of great wealth. Owning the platform that supports a planet worth of Reed’s law groups could be even more valuable than Microsoft’s platform.

The question of network value is more important than that. First because it helps to think clearly about what drives the emergence of new tangles of connections. New species of networks. For example it’s reasonably obvious that as technical or regulatory barriers fall and it becomes possible to create new tangles of connections. These processes create joint gains for all the parites involved.

Then, the chance for abuse by any one dominate network declines. The chance that one network can blindly displace the value of other networks is reduced.

Tilly’s book “Durable Inequality” is interesting in that regard.

The risk of the network owners exploiting the participants rises with the reach of what he controls.

When you turn the knob on that capture toward 8 or 9 you get explotation, when you turn it to eleven you you get tyranny.

Tilly has interesting things to say about how catagory boundries evolve over time as the inequality becomes durable. Ideas that brand marketing folks know by other names, when the knob set at less painful settings.

Lawyers & Dentists

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Here’s a curious fact. The number of dentists per person has risen since the 1960s, and unsurprisingly the wages of dentists have declined, but curiously the number of lawyers has increased and so have thier wages.

One straight forward explaination for this is that each time a lawyer is engaged to prosecute a case it generates work for two other lawyers (the judge and the defense attorney). More if they decide to appeal.

Wonderful! The lawyering proffesion creates it’s own positive feedback. Each act of lawyering can create a positive externality for the proffession of lawyering.

The people that built my house created work for other carpenters, but it took almost a century for before the work began to show up in quantity. I guess you could argue that every time I write a line of code it creates work for other programmers to debug it. But, I’ve yet to notice a profession with as strong a self reenforcing quality as you see in lawyering.

This insight is taken from “The Economics of Network Industries” by Oz Shy.