Wealth of Networks?

Abstract: This article is based on recent discussions on topics such as networks, standards and optionality. The article argues that networks set standards and that taking the networking perspective thus implies imposing standards. The associated coercion makes that networks cannot rise out of the Era of Government. Instead, it makes more sense to regard relations and arrangements as basically bi-lateral and start from there.

A.Networks versus Hierarchy

Back in 1993, an article appeared in Optionality with the title Hierachy is obsolete; the future is networks. This article argued that the networked nature of small businesses is superior to the hierarchical structure common in large organizations. In the typical pyramid structure of large organizations, a single leader sits at the top, giving instructions to managers who in turn pass on these instructions to lower staff. Networking, by contrast, is more dynamic, more decentralized, less hierarchical. Through networking, small businesses can combine to respond quickly to the demands of new growth areas, deliver more innovation, adapt faster to changing demands, etc.

In the Information Age, networking is clearly superior to the monopolies and hierarchical structures that date back to the Industrial and Agricultural Ages. The question is, however, if networking can maintain this superiority beyond the Information Age. Is networking the most suitable organizational structure to face future times? Is it helpful to select any specific organizational structure as the perfect solution? Doesn't it make more sense to assume that there is no organizational structure at all and to regard relations and arrangements as basically bi-lateral?

B. Wealth of Networks?

A classic work on market economics is Wealth of Nations (full title: An Enquiry into the Nature and Causes of the Wealth of Nations), by Adam Smith, 1776.

Someone who is playing with the idea of updating this work, may look at Wealth of Networks as an obvious title that seems to fit the purpose like a glove. Such a new title may indeed better reflect current circumstances, but how far does it look into the future? The strength of Wealth of Nations is that it contained a wisdom that even now, a few hundred years later, few seem able to grasp. How long, by contrast, would any current update remain valid? If measured this way, Wealth of Networks may never rise above a trendy work that is doomed to become out of fashion within a decade or so.

Indeed, there is scope of improvement in the title Wealth of Nations. But why not start with wealth? The term wealth does invoke images of greedy businessmen, corrupt politicians, professors in economics, capitalism, property, money, contracts, financial transactions, law enforcement, etc. Such images have many negative connotations. Therefore, it makes sense to use the term prosperity rather than wealth. Of course, an alternative title such as Prosperity of Networks kind of takes the punch out of the line, i.e. the reference to Adam Smith would be less apparent. If prosperity does count as an improvement, how much of an improvement is the replacement of nations by networks? Can the term network rise above the nationalism inherent in the term nations?

Firstly, what is a network? There are different types of networks, but in many cases there is a single party that sets the rules and that pulls all the strings, as in a headquarters-and-branches network. A network can be centrally controlled or decentralized. In other words, a network is not per definition decentralized. Similarly, a network can be dictatorial in that it enforces standards, etc. The concept network is simply quite vague, it can be just as dictatorial as a national governmment. Many religious cults can be described as networks. So can many of the tribal and feral cultures that are gaining much popularity.

In other words, one can question whether concepts such as plurality, freedom, independence and decentralization are innate to networks. If networks have changed and if we like those changes, should we not focus on what makes up those changes, rather than to try and capture those changes with the word network?

C. The Internet

The word network derives much of its present popularity from the Internet. For many, the Internet symbolizes decentralization and diminishing control of governments. This may well be the reason why a title such as Wealth of Networks seems to appeal to those who welcome such developments. But didn't the Internet grow out of the combined effort of US government departments, in particular Defence and Education? And isn't the Internet just another protocol, largely controlled by governments, in particular the US Government? Does the Internet not impose a single standard on communications, in the very way governments have always tended to control and standardize communications?

In the past, many computer-networks were centralized, with all communication controlled by and taking place via mainframes. The network was not intelligent, terminals were dumb, each hanging at the end of a line in a master-slave relationship with such mainframes. Today's personal computers have much more intelligence, giving network nodes greater independence, if you like a basis of equality. In theory, each Internet address has the same potential. These changes took place in networks not because of the inherent nature of computer-networks, but due to long-term developments such as more innovation, globalization and decentralization triggered by basic, on-going economic drives towards greater performance, reliability, flexibility and versatility, supplied at ever lower prices and with ever higher rates of efficiency.

Such developments defy national borders, they prompt global networks to cross national borders with increasing ease, in the process undermining the authority of national governments and making governments increasingly irrelevant.

So how much does the Internet, or the concept of contemporary networks in general, symbolize this accumulation of developments? Do networks deserve more credit than, say, computers and telecommunications? Many regard computers as difficult bussiness tools or addictive entertainment. Telecommunications furthermore is typically organized on a national basis, with each country having its own national carrier. Networks seem able to rise above such nationalism, by leasing lines from such carriers and using computers to guide traffic, thus building independent topologies on top of this. For many, the Internet symbolizes the best of computers and telecommunications.

But networks, and the computers and telecommunications that make up such networks, are all part of infrastructure. The struggle to control infrastructure is already quite out of date in the current Information Age, in which content is king. All terms such as the Internet, routers, satellites and fibre optics, reflect control over infrastructure. Technology can only facilitate change, it can only carry the content that has to be considered in the minds of people.

Of course, Marshall McLuhan's the medium is the message clearly applies to telecommunications and computer-networks as well. As such, the Internet does symbolize innovation, globalization and decentralization, as well as empowerment of the nodes. But networks also enforce a standard from above and in doing so they determine the shape of communications and influence the content. This is why networks remain in many respects stuck in the Age of Government. In order to connect to any network, computers all have to abide by a single set of rules, standards and protocols that is enforced networkwide, which again disempowers the nodes. Instead, it is much preferable for the initiators of communication to mutually agree on the best way to communicate, which will most likely result in many different ways of communication taking place simultaneously.

D. Standards

Standards claim to make life easier for consumers - the promise of standards is cheaper products through larger markets, no incompatible, outdated equipment, etc. But today, products become outdated not so much because a new supplier does the same thing differently, but because of the rapid pace of technological innovation.

One example where standards have been very rigidly enforced is telephony. The basics of telephony date back more than a century and have changed little since. Horrific sound quality is the result. It's as bad as the old 78 vinyl records. In sound equipment, the industry has gone through high-fidelity analog to CD quality digital sound. Remember the low quality sound cards on PCs? Now it's all CD-quality. Not so telephony. In the old days, few were concerned about the sound quality of telephones, because the microphones and speakers in those days could not produce a higher quality anyway. Now, at the verge of the 21 century, we are still stuck with sound quality that dates back to the 19th century. All because some misinformed people and some populist politicians believe that it is a good idea to have standards.

The very essence of a standards is to reduce diversity and to prevent co-existence of alternatives. Standards are barriers against change, they restrict innovation and reduce opportunities for new entrants into the market. In order to set standards, suppliers have to compromize on just about everything. Standards are often outdated before they are implemented, thus preventing alternatives that would be far easier.

A standard - by definition - reduces a market, it prevents alternatives to appear and the effect of putting the market into a straitjacket will mean reduced growth. Without standards, market growth and competition will cause prices to come down and this will sort out the non-performers. A 'market' shaped by a standard is a less-performing, undersized market that lacks innovation, that invites corruption, cronyism, nepotism, etc.

The argument that standards result in larger markets and cheaper products and services, is false. Standards prevent growth by restricting innovation and encourage overpricing and unfair exploitation of consumers. In the end, any standard is restrictive and thus inferior. Standardization made its mark shortly after the Industrial Revolution, but is out of step with the dynamics of modern times. Standardization has now become the playball of politics. Politicians being politicians, they like to agree on a standard. Bill Clinton's (or rather Al Gore's) Information Super Highway statements a few years ago took the Internet out of the hands of the technical experts into the realms of brick-and-mortar politics.

There are de facto standards and de jure standards. De facto standards are bad, they make a single company dominate an entire market through control over such a standard. Many therefore call on governments to encourage open standards or set de jure standards that are public, they call for standards that are controlled by governments, by independent bodies or by a multitude of participants. But when big business and governments collude to set standards, the consumer equally is the victim. The end-user is effectively denied input in the matter, and even if there is such input, the technicalities of the standards-setting process are beyond the reach of the common person.

Instead of calling for public standards, it makes more sense to support legal prohibition of de-facto standards by anti-trust and anti-cartel legislation. Standards are increasingly recognized as barriers against the implementation of a pro-active competition policy. In international politics, coexistence of different views and methods is an inevitability, while the methods of dictators who seek to mould people into their standards, are doomed to fail. But again, calling for government intervention is no definitive answer to the problem of monopolies. After all, governments themselves are monopolies. Politically, standards are a more convenient solution than a pro-active competition policy. Therefore, politics can only go that far in consumer protection, politicians tend to prefer replacement of monopolies with business cartels, rather than to empower the consumer.

D. Optionality

In today's world, the basis of power has shifted from possession of territory to control over information. In this Information Age, networking is clearly superior to the monopolies and hierarchical structures that date back to the Industrial and Agricultural Ages.

The problem of networks is that they come with standards that, by their very nature, restrict innovation. Fighting over standards only endorses calls for government intervention, i.e. restrictive solutions. From an ideological viewpoint, networking is unable to go beyond the Era of Government. Consequently, networking as an organizational structure will lose its glance as governments - as institutions that control our lives to such a large extent - are gradually phased out. All governments, being tied to geographical borders, will become increasingly unworkable and irrelevant. Governments derive their power from coercive control over specific territory - if they lose this control, their power fades away.

In the current Information Age, success is measured in financial terms as if it abides by the economic rules of cycles and of supply and demand. Both science and economics are part of this world that is about to become irrelevant. Economics is about money, contracts, ownership, etc, all of which are controlled by governments and their laws. Education and science is largely funded, controlled and exploited by governments to keep up the false appearance that rules make sense. Worship of rules makes people pawns in the hands of governments that struggle to survive. Laws, rules and standards are all part of the old world that is rapidly fading away into irrelevance.

Governments are fighting a desperate struggle for survival in which they find it increasingly difficult to cope with modern times of global realities. Governments follow the simple strategies of enforcing territorial borders, fabricating scarcity and privileging those who collaborate. This scarcity principle fails in regard to information - the fact that someone uses specific information does not stand in the way of someone else using the same information elsewhere. The fluid nature of information also makes a mockery out of territorial borders. The easier it gets for information to cross borders, the more difficult it will be for governments to exercize their control. Globalization will expose the local monopolies set up by governments. These monopolies will be recognized more and more for their evil character, their inclination towards corruption, cronyism, nepotiosm and unfair exploitation of consumers, their prevention of innovation, their denial of responsibility for the huge damage they inflict, etc. etc. As the pillars of government power collapse, governments will become increasingly irrelevant. The ideology of territory-based rules enforced by coercive control will evaporate. The most prominent ideology in future times will be optionality!

Ownership laws over information become increasingly hard to enforce, while at the same time, there is ever less reason to worry about this. Costs to access information will become negligable. Consequently, debates about copyright and other intellectual property rights effectively become non-debates. The wealth that is perceived to be reflected by and incorporated in standards, networks and information will be eclipsed by the prosperity resulting from conditions that nurture creativity. In future times, the key to prosperity will not be control over networks or the information they carry, but the key to prosperity will be the ability of people to develop and express their talents and creativity. Instead of passively adopting standards that are imposed by networks, people will prefer bi-lateral arrangements that are self-initiated and guided by optionality.

Appendix A The Microsoft Monopoly

In the world of datacommunications, IBM once ruled the networks and there still are many who prefer such a centralized approach. But despite IBM's control, a single processor that controls many dumb terminals has proven to be inferior compared to multiple processors.

The biggest problem with networks is their inclination to enforce a single standard. From the computer perspective it used to be IBM's SNA, while for a long time the telecom carriers cartel fronted by the ITU tried to enforce X.25 and OSI. Innovation didn't like either of the bullyboys and chose TCP/IP, hence the victory of the Internet. Thus, the victory of the Internet was more a choice between alternative evils, than that the Internet offered something intrinsically different. The fact that we have once more ended up with a single standard shows the limitations of network decentralization, and indeed the very limitations of applying the concept of networking to social and cultural change.

With the statement The nice thing about standards is that there are so many of them, IBM tried to convince people that IBM's own, proprietary standards were as good as public standards such as by IEEE and ISO. It turned out that public standards were more acceptable, not because they were necessarily superior in a technical sense, but because innovation was even more restricted by IBM than by the standardization bodies. IBM's fate was to repudiate its own network protocols such as APPN, and the PC and networking in general. IBM's salespeople were simply more interested in selling one new, larger mainframe to replace various existing computers, than that they were serious about networking the existing computers.

For a while, the Internet appeared to demolish the positions of IBM, the ITU, the ISO, as well as Microsoft. The one-click hyperlink of the World Wide Web simply was more appealing than the double mouse-click of existing computer operating systems. WEB-browsers enhanced with dynamic HTML, Java and Javascript appeared to challenge even the standard Windows and DOS platforms of Microsoft. When Microsoft realized this, it set out to dominate the Internet browser market, using all the muscle-power it had as a software monopoly.

Microsoft's behavior should of course be rejected, but is legal anti-trust action against Microsoft the answer? Aren't the monopolies controlled by governments, such as in health care, law, science and education, security and finance just as bad or worse, because their sheer size and scope dwarfs even a company the size of Microsoft? Instead, how about withdrawing the support governments now give to Microsoft in the form of copyright protection? Also, legal solutions can only go that far, in the end a far more effective deterrent will be the insight that investors make a bad choice by backing monopolies. Investors - not the Department of Justice - should demand such a monopoly to be split up in such a way that the subsequent parts can each compete equally in each area. While condoning Microsoft's position, or even a compromise in this matter may result in some short term profits for Microsoft, continuing down the monopoly road will do tremendous damage to Microsoft's reputation and thus its share value in the long term.

As discussed in appendix B, in future times, success will be measured more in terms of asset appreciation, than in short-term profitability. This will similarly apply to information as well, information will become more easy to access and cheaper all the time. There will be no problem with monopolies as it will be futile to fight over access to information when information will be available in such abundence. In terms of prosperity, the emphasis will be on stimulating creativity and developing vision, not on controlling existing information.

Slogans such as Wealth of Networks and New Rules of the Information Age do not express much vision. The Information Age is still part of the Era of Government. To envisage future times that DonParagon refers to as the Post-Government Era, let's try and look beyond computers and information, let's try and look beyond networks, let's envisage optionality!

Appendix B Reflections on where the Markets are going

At present, investors that seek short-term profits still have a big influence on politics and society in general. But dividends will become a poor measure of success as all around the world local monopolies have to give way to global competition. As a result, the focus of investment will gradually shift towards appreciation, rather than profits. There will no longer be huge profits, as there will no longer be monopolies to exploit. There will only be small profits for the ones that deliver attractive services. As a result, increases in appreciation will be more attractive to speculate on for those with money to spend.

Intangibles such as developing products for new growth markets, establishing quality contacts, the constant improvement of services, software and content and building up a name, reputation and goodwill are all vital to success.

Improvements and innovation of products and services includes the ways they are marketed and presented to users. Many companies have understood that the new paradigm is: appreciation through creation of new options! They structure themselves in flexible, dynamic and versatile ways that allow them to change rapidly to respond to new demands and to technical innovation. They examine, evaluate, analyze and rethink everything on an on-going basis. They look out for new trends, watch the competition, are prepared for change.

If there is a shortage of funds, they issue extra stock, spin off parts and sell them, pay staff in stock rather than salaries and seek partnerships and alliances where there is synergy. Conversely, they sell off non-essential parts that restrict such dynamics, thus creating more flexibility to adapt, raising money and giving themselves choice where to get services that were previously supplied in-house. Growth makes it possible to constantly issue new stock. Consequently, they do not bother about investors that seek short-term profits, instead they enter into partnerships and alliances aiming for long term appreciation! The policy of paying staff in stock adds too much new stock anyway.

There is also a risk attached to this policy. Microsoft now is the third most valuable company on Wall Street, its shares were worth 56 times its earnings in the past year. As described in this article, a company cannot sustain such rates of appreciation in future, purely based on the prospect of future earnings. Such high earnings can only be achieved by exploiting a monopoly and the Department of Justice has clearly moved against this.

One can argue that Microsoft owns sufficient assets to back up its share value, such as patents and copyrights, and a talented staff of software developers. By comparion, a company like Dell that merely assembles computers from existing components, has reached a stock market value greater than General Motors. Dell is selling at a price-earnings ratio of 68, all without proprietary technology.

Many companies pay staff in stock options as an instrument to inflate profitability. According to London financial analyst Smithers & Co, had Microsoft accounted in the full cost of issuing stock options, its 1996 profit of $US2.8 billion would have been a $US10 billion loss. Of course, many Microsoft employees would have accepted lower salaries than what they achieved through stock options. But creative accounting such as paying staff in stock options and selling off parts and buying other companies, makes it difficult to predict a company's real profitability.

As more and more companies adapt the new paradigm, companies that now have built their high asset value on such creative accounting, will lose their edge. Instead, investors will seek for more than a flexible business structure. Companies will flourish that can link the creative talents of many people into innovative new products and services. But as soon as such linking develops into an elaborate network, its flexible character disappears. Microsoft, through its shere size and its continued ambition to maintain its monopoly and exploit its intellectual property rights, is heading in the opposite direction, to the point where Microsoft will isolate itself by default. Many short-term investors may gamble that Microsoft will generate profits. But long-term, Microsoft is more volatile due to the constant threats of anti-trust and other legal action against it, and its reliance on continued copyright protection. This makes it less attractive as a predictable long-term investment.

[Editor's note: the above article was written for appearance in Optionality Magazine in May 1998. Like other articles, it's added for reference purposes. It should be obvious that parts of the text may be out of date.]


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