David Stutz writes a nice essay thinking about the nature of a commodity, the standards that frame them, and the bursts of innovation that seem to happen when new commodities emerge. He obviously is starting to see the ying/yang way that firms and public goods are interleaved to make markets.

I’ve been wondering recently if there is almost a guiding principle that a firm must embrace as inevitable the commoditization of it’s markets. Christensen tries to make a case like this in his new book. I didn’t find it sufficent; but clearly it’s an idea that’s in the air.

I should probably see if I can take a stab at stating my model. A company stands on a foundation of suppliers that are preferably mostly comoditized. It then adds value that creates a sufficently uncomoditized output so that there is a profit to be made. If the firm stands on a fast moving technology – like those associated with Moore’s law and his friends – two things happen. One is that new oportunities are continously being created in front of the firm for new more differentiated products. Meanwhile on the back end the suppliers are becoming more capable of moving up into the firm’s value creation skills. Even if the firm has strong resource endowments (unique geographic position, or strong IP rights for example) sooner or later the fast pace of the underlying technology provides a way to go around or thru those resource endowments. Meanwhile if the firm captures excessive amounts of the value being created as profits it creates a population of users that are unserved because. They can’t afford the offering; that’s a kind of pricing failure. That unserved market provides a green field for competitors. If the firm fails to create the comoditizing standard behind it that green field will create one. The low price point of that one will then displace the firm.

This is very similar to the move that Eric von Hippel’s work on tool kits advocates. You creating a toolkit and that enables customers to seach for innovations that leverage your firms assets. With luck you set standards with that toolkit and the resulting path dependencies lead in your door. Even if these standards are quite open you still get early mover advantages the the resulting mindless power-law growth.

Interesting posting.

…The historical evidence is emphatic – creating universal standards is an important part of the state-building process, not only in autocratic regimes, but also in more market-oriented societies (see, for example, John Brewer

I used to quiz my fellow students if they had figured out what their calling was. I was concerned that many of them didn’t seem to have considered the question.

I see though that Mr. Smoot knew his calling!

Sam’s talk on organizing the Atom standardization activity via a Wiki is quite nice.

Even if you have a desperate community of people yearning for some kind of exchange it is an amazingly complex coordination task finding creating the concrete standard. But, there are few patterns for solving this problem. I’m very impressed by the Atom story. It really looks like we have a new pattern, a more open pattern.

One example one of the patterns people use is to create standards: a small elite group of invited members gathers to create a first draft of the standard. This can work. It approach is not without risks. Even in the absense of bad actors it creates standards biased toward the roles represented by the members of the elite group. All exchange standards have buyers, sellers, and middlemen. When buyers and the middlemen design the standard it’s unlikely to be a best fit for the sellers. Of course all standards activities have to guard against the risk of a stick-up.

The negotiation literature suggests that one way to resolve messy multiparty negotiations is to rondevous around a single document. The Wiki fufills that role. The liturature also suggests having that document cared for by a neutral party. Sam ended up holding that bag. In the talk he uses the term lightning rod; I visualize that at that point in the talk his smoking hair stands up on end and smoke comes out of his ears. The classic example of this pattern was Switzerland, a landlocked country, acting as steward of the Treaty of the Sea. Sam wasn’t entirely a neutral party; but he was a sufficently minor player in the market that other parties didn’t see him as plotting a stick-up; well most of them didn’t.

One of my cartoons for open source is that it’s a substitute for standards making. That a portable body of code is a surprisingly good means get to a standardized way of solving some problem. The code acts as the common-document around which the parties can coordinate their efforts.

But I then tend to say that open source doesn’t know how to do standardization. That we haven’t yet managed to write any new standards using the work patterns of open source. That new standards tend to be written the using the old design patterns. That’s why the Atom example is so thought provoking; it looks like a first case of an open source style of working on a nearly pure standardization problem.

Sam was very close to totally open. Everybody with a stake was welcome to come on down. While that was helped by the highly fragmented and rapidly growing market this standard was targeted into I’m still impressed that it seems like it worked. That’s so cool.

All my friends are sexy. Well, those in Orkut are. Well, they would be but Safari can’t believe it; so it crashes about half way down the list. Maybe it’s a particular friend in the list? Maybe Safari knows something I don’t know?

I was quite taken by David Weinberg’s comment over at many-to-many that prisoner’s in solitary confinement will tap on the walls to communicate with each other. It was just after that that I noticed the amusing way that in Orkut people are finding ways to hear thru the walls of their rating system; so they can figure out what the rules of the road are.

Orkut’s autistic model of a person is trust/cool/sexy. Those linked to you can vote on a scale from 0 to 3 on each of these. To help keep these votes slightly anonymous they don’t display your score (which is just the sum of all the votes you’ve recieved) until you have accumulated at least five votes.

One way that standards of behavior emerge is by mimicing the behaviors of others. If your friends are into the high-five then it’s likely your going to mimic that. If your friends use jargon or cuss a lot you’ll get with the program so as to create cohesion in the group.

Some group standards, like the common handshake, are more coersive than others, like wearing the same color ties. Exchange standards, like handshakes, force the two parties into conformance at least for the duration of the exchange. Where as a the community uniform only signals membership and always has some non-conformance around the edges. Well, to be perfectly honest and remembering the alpha-male behaviors revealed during some handshakes, you get a lot of non-conformance around exchange standards as well.

In anycase people in a community labor to conform to the community’s standards as part of contributing to the public good established inside that community. And since we all know there are risks of being talked-about, scolled, shunned, ostracized, or beaten up in the play ground, if we fail to get with the program.we all expend energy puzzling out what the community rules are.

So I’ve noticed that most people in orkut seem to vote either zero or three. And I suspect that they tend give the same vote to all their associates. I infer this from the tendency of my scores to step forward in units of three. People seem to vote early, but not often.

It looks to me like a lot of people have decided to either opt-out of the rating system; or they have decided to turn all the dials to eleven. The second choice seems kind of friendly than the first; though both signal that we’re too cool to take this autistic model of acquantance seriously.

This is not dissimilar from the tendency of eBay ratings to be effusive and over the top; or a similar patten I’ve noticed at epinions. I don’t think I quite know what this says about the hypothisis that diffuse internet based rating systems can displace proffesional reviewers – a theory I generally agree with. But, you just can’t stop them – people trend toward nice and cooperative.

The Oxford English Dictionary assures me that the oldest known use of the word standard was as the name of this battle; The Battle of Standard.

In Eng. the word appears first with reference to the `Battle of the Standard’ in 1138. A contemporary writer, Richard of Hexham, relating the story of the battle, describes the `standard’ there used as a mast of a ship, with flags at the top, mounted in the middle of a machine which was brought into the field. He quotes a Latin couplet written on the occasion, which says that the standard was so called from `stand’, because `it was there that valour took its stand to conquer or die’.

The editors of the OED also spend far too much time fighting the losing battle that a standard is a triangular flag while a rectangular flag is a banner; except of course the Queen’s standard which is a rectangle.

Because I’m interested in how standards emerge I have a few models in my noodle. The classic model is that the king tells everybody the rules and they obediently follow them. The institutional model is that powerful institutions act like little kings in their dominions and then negotiate with each other when necessary. The bottom up model holds that exchange standards emerge spontaniously from pairs engaging in exchange and then others mimic those behaviors until groups emerge with similar behaviors. These groups a little like institutions but since their governance tends to be very diffuse the accumulation of new members is more due to network effects and less transparent influencing devices than then top down commands.

The bottom up standardization is somewhat more interesting to me than the top down. Open Source for example tends to be a bottom up phenomenon, and the marketing of platforms and tool kits tends in that direction as well. The bottom up ones are also the common pattern as technology disrupts from below and suddenly large populations of new players enter a domain.

No surprise then that I’m reading the early chapters of Sync: The Emerging Science of Spontaneous Order by Steven Strogatz In these chapters he describes a model that he along with a colleague developed for explaining how a population of cells, insects, whatever might come to beat in sync. The model began with an observation that in a number of natural systems, fireflies and the heart’s pacemaker cells for example, fall into synch. If you look into the mechanism of individual cells they have an oscillator that generates a beat. That beat is the beat of the heart cells, the applause of a audience, the flash of the firefly.

If you get a dozen fireflies (actually you need south-east Asian fireflies) in a room and let them go they strobe rhythmically but randomly at first. After a bit they begin strobe in groups and then in a bit they all strobe in synch. What drives them into synch? Etymologists had figured out that some species fireflies react to the flash of other flies by advancing their oscillator while other species retard it just a bit. This slight coupling turns out to be enough to bring them all into synch.

That turns out to be all you need to get these system to synch. Well almost.

The proof is a very pretty thing.

The first part of the proof is pretty simple. If two ossolators get into synch with each other that’s that. They won’t fall out of synch. They call that absorbtion. The individual cells, fireflies, etc. are absorbed into a group that all behaves the same. You can see now why I’m interested since that sounds like community or standards talk. The act of absorbtion is equivalent to the concept of sticky in a business model, or switching costs in a standards discussion.

The second part of the proof involves a beautiful bit of geometric thinking. If you have a set of fireflies, toilets, etc. You can make a geometric space with the firing time of one of the as the origin and for each otherone he’s off on one axis of your space some distance from that origin depending on how out of synch he is. The state of the system is then the point in the N space defined by those cell’s offsets from our favorite cell.

Now imagine that the system doesn’t synchronizes. That means there is some set of points in the N space that are “terrible.” Each time our favorite cell fires the state of the system moves to another point in the space. For these terrible systems they obviously just have to move from terrible point to terrible point. For my purposes such systems aren’t “terrible” they are just ” nonstandardized” system; or systems that fail to form groups.

They were able to prove was that whenever our favorite cell transforms the state of the system from one set (terrible or not) the new set is larger than the old set. Which, if you think about it for a moment, means that either all the points in the space are terrible, or none of them are.

It only works for certain kinds of lightly coupled rhythmic systems will come into synch, some won’t; but it doesn’t depend on the initial system state.

To see which kind come into synch and which don’t you need to visualize the inside of the blinker a little. Presumably inside the blinker some tension builds up until finally it triggers and the flash is emitted. You could plot tension v.s. time on a graph. Maybe it’s a straight line from start to finish. Maybe the tension rises fast at the beginning and then it becomes cautious and slows down before it goes pop. Or alternately it goes slow at first and then in a fit of enthusiasm it rushes into the blink. The systems that are start fast and then grow careful; those are the ones that synchronize. Because they spend a lot of their cycle type nearly triggered the little kick from the loose coupling is enough to push them over.

For my purposes, thinking about exchange standards (for example handshakes), then the repeating oscillation is the repeated application of the standard. Each time two people execute a coordinated handshake they are in sync. If other people observe that event and adjust their behavior a bit to increase their alignment with the ritualized handshake then you have a very similar system to the one described above. To get a curve shape similar to decelerate as you approach full – well I’ll admit I can’t quite see how that fits – but possibly the analogy is that exchange partners approach quickly at first but close the deal much more slowly.

Neat huh? Clearly is has something to says something about when groups and standards are more likely to form.

No King Required.