In this class, I discuss some of the theory behind ecosystems, firms and coordination costs. And why digital platforms are having such a big impact on business, culture / media, politics / government and society.

You can listen here or at iTunes and Himalaya.

• Theory of the Firm
• Economies of Scale
• Ecosystems and Networks
• Coordination and Transaction Costs
• Pipelines vs. Platforms

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

Note: This content (articles, podcasts, website info) is not investment advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. Investing is risky. Do your own research.

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Welcome, welcome everybody. My name is Jeff Towson. I teach at Peking University and this is Jeff’s Asia Tech class. Now this is the first lecture slash podcast of 2020 so I thought we’d tackle a big, big question and the question for this lecture is why is digital disrupting business, politics, media, culture, and society? Everything. And that’s what we’re gonna take apart and I’ll give you some of the sort of main thinking about this that I’ve come across. And it’s pretty fascinating. And we’re just at the beginning. So that’s gonna be the question for today. But first, if you haven’t signed up, please go over to jefftausen.com and subscribe to our class. It’s first 30 days is free. So no obligation upfront. And also you can go to iTunes or Himalaya. and get the podcast there as well. But the written information, a lot of the sort of deeper thinking that’s coming out only on emails and that only goes to subscribers. Also, if you could give a positive rating at iTunes, I’d greatly appreciate that as well, thanks. Okay, so on to our question. Why is digital disrupting everything? And this is much more of a business question. Five, 10 years ago, this was mostly about business, making money, Silicon Valley, major companies, but now it’s everything. I mean, it’s business, it’s economics, it’s media, it’s culture, it’s politics, it’s personal freedom. It’s impacting virtually every aspect of society, life, business, all of it. Why is it having such a huge impact? That’s kind of the question. So I think we can start in 2011 where Mark Andreessen, who is the famous co-founder of Netscape and before that Mosaic, which was like literally like the first browser was Mosaic and then Netscape. And then now he runs Andreessen Horowitz, which is, you know, amazing venture capital group out of Silicon Valley. Okay, 2011 he writes a now famous article called Software is Eating the World. And one, it’s a cool title. I mean, that’s a really good vivid image. It sticks in the brain. And I like the fact that he kind of didn’t just say it’s impacting business. It’s changing everything. And I also liked that he kind of avoided a lot of the sort of, hey, this is tech. It’s really not tech. You know, it’s really not. It’s digital. It’s software, it’s data technology, it’s things made of ones and zeros, bits and bytes. The battery on your cell phone is okay, but it ain’t changing the world. It’s getting a little better because people are getting a little better at chemistry. That’s fine. The camera’s getting a little better because engineers are learning how to grind glass and the lens is better a little bit year after year, but that’s also not, no, it’s the software that runs on your smartphone that’s just… changing dramatically every couple of years and it’s impacting so many things in the world. It’s the software. So I usually just say digital, but usually what I’m talking about is software slash data technology, everything made of bits and bytes, ones and zeros, because they have very unique characteristics that we don’t see in things made of atoms or services done by people, physical products, and then a tangible sort of digital goods and services is what we’re talking about. Okay, so he writes this article about, you know, software is eating the world, very cool. I think it’s on the Andreessen Horowitz homepage now, because it’s such a famous phrase. You know, what is it that’s going on? Now I’ll give you a couple of views, and then I’ll tell you what I think is going on. But another explanation, so you have sort of Mark Andreessen’s one line explanation. This is all about software eating the world, everything follows from that. Okay, fine. Another view is what people call the Cambrian explosion in digital, which is kind of a callback to the Cambrian explosion. I don’t know much about this, but basically 500, 600 million years ago in a very short window of time, like 300 million years, I think here I can look at it, 540 to 570 million years ago in that little window of time, although it’s millions of years, historically it’s very, very small. Like in that one little window of time, virtually all the modern animals we see emerged. You know, four billion years before that, very little happens. You get some bacteria, you get some algae, you get some plankton, very little happens. And then we get that one window of time about 500 million years ago, and virtually everything emerges. And it’s been kind of mostly stable since. And so there’s this idea that there was a, they call it the Cambrian explosion. that at a certain point, the genetic toolkit, all the pieces fell into place. Suddenly the toolkit to create new genomes, new animals, all came together and then all the animals just started emerging. You needed all the tools in place before it started to happen. So the argument is that, look, something similar is now happening in digital software, data technology, that the toolkits that have been built, really over the last couple hundred years, electricity, things like that. But on the software side, at least the 30 years, the tool kits are now in place, and we’re just seeing an exponential increase in the ability to combine the tools that exist and to innovate with them. When people write about innovation, what they’re often talking about is sort of combinations, that most innovations are not, hey, here’s a new idea. It’s putting two separate ideas together and that gets you the third. So the argument is we’re just seeing a surge in innovation combinations because the toolkits are now in place. And we’re seeing an explosion of sort of new use cases being addressed, new products, new services, new business models. And it’s different industry by industry by industry. What’s happening in fintech is very different than what’s happening in health care that’s very different than what’s happening in retail. but it’s this idea that all the digital tools, enough of the toolkits in place that things are just exploding now. So that’s kind of another view with called the Cambrian Explosion. There’s a simpler one, this is from a book called the, what’s it called, The Second Machine Age, which it’s kind of a pretty good book. They basically argue, this is another view of the same thing, that highest level, there’s two machine ages. in human history. The first machine age starts with the invention of the combustion and the steam engine and why that was important. And if you look at human beings, GDP per capita, lifestyle, any metric you want to choose, it was pretty flat for 200,000 years that human beings have been around. And then a couple hundred years ago, it starts to just skyrocket upward. That’s sort of the start of the first machine age. The point this book makes is basically that was the first time that human beings were never really limited by the physical abilities of their bodies. In terms of their ability to use power, speed, physical force, we had always been limited by, look, I can only lift so much. I can only run so fast. I can only walk so far. Maybe I can get on a horse and that helps me, but that’s still another animal. Maybe 10 of us can lift this block together with a lever. but we were fundamentally limited by the limitations of our bodies physically. Once you got the steam engine and you could start to harness force beyond what human beings could produce themselves, suddenly you could do things. You could bend metal, you could build skyscrapers, you could shape engines, you could start to shape the world physically beyond what we’re capable of. And that just led to sort of sustained gradual innovation and achievements, productivity gains. And that’s where you get factories, pretty much everything. If you look around wherever you’re sitting right now in your car, in your house, what could you move physically in that space or bend or shape with just your hands? And the answer is very few things. I mean, you can lift maybe a little table, some handheld things. I’m sitting next to a little fan here. I could lift the fan, but I couldn’t shape the plastic. I don’t have, you know, I can’t do that. I can’t, you know, put the walls up. I can’t put the steel girders in the walls. I can’t, I mean, very, most of the things you walk around in life are beyond human ability to lift in terms of speed, force, flying things through the air. Automobile’s going 80 miles down the road. So the first Machin’ Age was really about the combustion engine, the steam engine. And then from there we saw a good 100, 150 years of innovation from that as what they would call a general purpose technology. And we’ll talk about this in later classes, the idea that once you have a general purpose technology, what you then start to look at is for complements, things that make it more powerful and relate to each other. We’re gonna talk a lot about the theory of complements in another course. Okay, so then you look at say 10 years ago, and how much of… human society, business, economics, politics, all of it, nation states, how much of that is defined by, how much of that is limited by our ability to shape the world physically? And the answer is not very much. How much of that is defined by our inability to move beyond the capabilities of our brains? And it turns out it’s an enormous amount of things. We can only remember so much. Spanish. You don’t learn Spanish because I learned Spanish. We have to get a teacher. That means schools. You have to study and learn and then you can learn Spanish. And then when children are born, they have to learn Spanish. We don’t pass a long knowledge. We can’t remember everything. We can’t do calculations in our heads. We can’t, you know, there’s a whole aspect of like, so much of society and business is based on the limitations of our brains. Well, the idea of the second machine age is digital and software is removing those limits. You know, I can pull up a little simple calculator or spreadsheet and I can do calculations that my brain could never do. A computer, which is really what you’re, I mean, you are basically a cyborg already, so am I. You’re walking around all day long with a smartphone in your pocket. that taps you in to all of human knowledge and allows you to do things you could never do with your own brain. So the limitations on our brains are being removed the same way that a couple hundred years ago, the limitations on our bodies were being removed. And so the argument, this is the start of an entirely new age that’s going to basically combine people with software technology, and we’ll be able to do things that like… You know, airplanes today would be staggering to people 200 years ago. What people are going to be able to do with their brains in 50 years will stagger us. We’ll think they’re like magical. So that’s the idea that we’ll see sort of sustained exponential advancement in computing, in prediction. That’s basically AI. AI is basically just cheap prediction and lots of other sorts of combination. that’s gonna change everything. So that’s kind of the other idea. We’re at the start of the second machine age, and one of the nice things about digital innovation is it’s really easy to combine digital innovations. Much easier, if you have a breakthrough in chemistry, that’s awesome. You have a breakthrough in metallurgy or something, that’s great. Combining those things actually takes a lot of time. Someone invents a new machine that combines both. You can combine digital innovations very, very quickly. You know, it’s a new plug-in, bam, it’s in everybody’s website. You have a new AI tool that someone invents in Turkey, bam, in a couple years, it’s everywhere. If Elon Musk’s cars learn to drive roads perfectly, you can upload that to every car on the planet, right? I mean, it just spreads very, very quickly and so you can combine things. So that’s kind of another viewpoint, the second machine age, okay. Those are all big picture views of what’s going on. I don’t think those are the most compelling ones. I think those are sort of, you know, feeling one part of the elephant with a blindfold, but you don’t know what the elephant is. You’re just, okay, I feel the tusk and the other person feels the foot, but okay. I don’t think that’s the whole big picture view. I think those are compelling, smaller versions, smaller pictures of what’s going on. A quick aside here, there’s not gonna be really a… a case today or a question for you and I’m not going to talk about specific companies today. Usually for each of these I try and spend at least 60-70% of the time talking about specific companies that are interesting and then a little bit of theory. Today’s all theory so no assignment, nothing like that, just sort of kick back and I’ll talk a little bit but over the first 10 of these I’ve been sort of nibbling around the edges. I talked about companies like Luckin, Mobike, a little bit about a JD. But I haven’t really hit the main sort of big thinking about digital. You know, okay, luck in coffee is a more convenient way to buy coffee. And that has some implications for consumer behavior and maybe competition. Those things are all fine, but they’re not the big, big questions. The only one where I really started to touch on the, the, the more sort of deep theory was platform strategy. And I’m going to go at a lot more into platform strategy going forward, but. I kind of wanted to start with a little stuff that’s a little more readily addressable. Okay, today’s going to be a bit more sort of content theory heavy. I’m going to hit on this multiple times over multiple lectures, so this is just past number one. So, you know, if it’s a little too much theory, don’t worry about it. We’ll hit the important stuff again. Okay, so here’s what I think is going on. And this is not really my thinking. This is kind of common thinking. There’s a book called Modern Monopolies. which is quite a good book. I’ll put the link up. They have a good summary of this as well, but you’ll hear this from multiple people who think about digital and strategy. You’ll hear this story. And I think it kind of raises the question of why is everything being disrupted? This is a really solid explanation for that. And basically it comes down to, let’s say coordination costs, ecosystems, and the theory of the firm. Now those are all sort of three big ideas people talk a lot about. Coordination costs, which I talked a bit about when we talked about digital platforms. That platforms, whether it’s a shopping mall, which would be a physical platform, a downtown market physical platform, a credit card, which would be sort of a payment platform. It could be a matchmaker in a small town. That person is sort of a services platform and investment banker is a type of platform you’re connecting different parties you’re connecting different user groups and your role as the platform is not to do a service yourself like Alibaba is a digital platform it’s a marketplace Taobao they’re not selling anything themselves what they’re doing is they’re connecting consumers with merchants and vice versa. So this idea of platforms is really about decreasing coordination costs. that there are costs to do things if, let’s say the matchmaker example, if you’re living in a town, I don’t know where, Boston, and you’re looking for a spouse or a date or whatever, there are coordination costs, they’re also called transaction costs, to find somebody. You need information, you need a lot of people, you need to meet them, you need to sort of, there’s a matching function. All of those things are types of costs, coordination costs. And what platforms do is lower those costs, such that suddenly finding a person to date, marry, whatever in Boston becomes doable. And that’s what Alibaba is doing with their marketplace. They’re lowering the transaction coordination costs between merchants who could be in any random town and consumers who could be in totally other towns. Okay, so that’s coordination costs, which is mostly what digital platforms are doing. There’s this idea of ecosystems that… You know you walk down the street you’re basically an ecosystem there’s roads and there’s power and there’s lights and there’s shops and things you can do and so a village would be a type of ecosystem. The savanna would be an ecosystem made up of animals and grass and water and predator and pray and so and so and industries can be ecosystems. And then there’s this idea of theory of the firm which I’ll talk about okay. The story goes something like this the basically. The story that’s told starts in about 1920, and it goes up till today. And you go back to 1920, 1930, and it’s the Soviet Union versus the United States, and two different ideas of how you organize a country. And the Soviet Union is central planning. That’s the idea. We’re gonna plan everything from the center at the top. with super smart people that are super trained and they’re gonna track everything and they’re gonna tell everyone, we need to grow so much of this and we need to do that and our factories need output of this and centrally planned economies. And then you have the, let’s say the United States at that time, which is mostly free. All those parts of it like healthcare are significantly planned, but overall free markets. mostly free society, people just doing stuff without a lot of central planning. So the first sort of character that emerges in this story of this debate of centralization versus decentralization is Frederick Hayek, who’s super famous. His book Road to Serfdom. It’s amazing. It’s one of these books that blows your mind. And he basically argues in this book, and I think it turns out he was absolutely right. that perfect information is impossible. The problem with centralization is it requires perfect information. You have to be omniscient. And it turns out perfect information is not possible because information doesn’t exist out in the world as a static thing. Information exists between people, between parties, between the person looking for this good right now and the person trying to sell this good right now. It’s never one person. Knowledge is… overwhelmingly local and it’s overwhelmingly coordination knowledge. So the information world we live in is incredibly fragmented, incredibly decentralized. And he would say that to plan a society, you need local knowledge. And that is basically impossible to capture for any central party. So it can’t be done. So therefore centralized coordination of a large scale economic activity is impractical. It’s not possible. And I think that basically turned out to be true, right? What you need is you need a mechanism to sort of aggregate all that local knowledge. That’s the key phrase, local knowledge. You need a mechanism to aggregate the local knowledge and then to react to the local knowledge, the participants can react. And in a free market, that local knowledge is pricing. That’s what the purpose of pricing is. It’s local knowledge. that is continually updated and it allows people to react to it and certain places aggregate that knowledge like a stock market or a downtown shopping center. So everybody in a society, every user is always aggregating and reacting to the relevant local knowledge for them. Okay. So that’s sort of big idea number one. And I think Frederick Hayek is the person to read there. If you haven’t read Road to Serfdom, you actually should. Okay, that goes along for a while, and then comes Ronald Coase. I’m never really sure if I’m saying his name right. C-O-A-S-E, I always say Coase, but I’m not totally sure that’s right. He wins the Nobel Prize, and he raises this very cool question. Okay, if there are efficient markets that can coordinate economic activity, like I just said, then why do you have firms? Like, why do you have a company, a firm? which is sort of an aggregation of a lot of resources and activity in one location. Why don’t we all just go out and do things on our own? If you wanna buy an apple, go find someone to buy an apple from. That’s local knowledge. If you wanna buy a car, go find someone who can make you a car. Why do we see these sort of almost like islands of centralized planning, which is a firm, within the greater market? Because didn’t we just say that that central planning is impossible. And his answer to this really cool question was coordination costs. It turns out when parties interact in a society economy, there are coordination slash transaction costs to doing that activity. If you wanna find the person to date or to buy a… Apple from in Boston, you have to go search them out. You have to argue a price. You have to trust the person. You have to trust that the Apple’s good. There has to be information on both. There’s a lot of costs there, and it is just too complicated. And it’s too, let’s say I wanna find someone to fix my house. I could hire someone or I could go find a contractor. If I want a table, I could build the table or I could buy one from somebody. Why do we do certain things with other parties and certain things ourselves? His answer was coordination costs, that if the coordination costs are above a certain level, if they’re high, it makes more sense to do things within a firm. Instead of going out to buy an apple here and buy an apple there, you have a company that owns an apple orchard. and handles those coordination costs that way. Now if the coordination costs are low, you can just walk out into the marketplace and buy what you need whenever you need. The market is fine for things where there are low coordination costs. When the coordination costs are high, these activities concentrate in firms which are basically like little centrally planned economies within a larger economy. So his thing is companies come into existence to minimize the transaction costs and information deficiencies. that result from coordinating activity through decentralized market exchanges. That’s from modern monopolies. A company internalizes activities where it is more efficient than doing it through the market. Basically a company is a small, centrally planned economy in a larger market system. So think about like the free market with these little islands of centrally planned activities, which is different than the idea of the Soviet Union and it’s different than the idea of a totally free market. So those sort of three ideas, three ways of organizing economic activity right there. Centralized, total free market, or the Ronald Coase version of, it’s a free market with these little islands of centralized planned economy within them which we call firms. Okay. That’s sort of the second person in this story. Third person in this story is Bruce Henderson, Boston Consulting Group, one of the big thinkers there. I think he founded it, though I’m not totally sure. He comes in with the idea. 50s, 60s, that you should have economies of scale. That as you do things in a concentrated fashion, like we have an apple orchard and we’re gonna do everything there, you start to get economies of scale where by concentrating the assets, the activities, you can start to do things cheaper than someone who’s just doing a small number of this activity. Like, okay, if you have 600 apple trees and you’re making apples and selling them, you’re gonna be more efficient than someone has five. Or, Apple Trees is a bad example. Factory, if your factory’s big and you’re making tables, you’re gonna be more efficient than a little workshop. Because you have sort of learning advantages, you have economies of scale, you can buy things cheaper. So, he also kinda said, look, also when you concentrate things, your costs start to drop. Now, however, that doesn’t go on forever. As you get bigger and bigger as a company, let’s say a factory, eventually the transaction costs start to overwhelm your savings and you don’t get sort of a linear line going down of the more you do, the cheaper you are. At a certain point, the curve starts to bend back up when the transaction costs get higher, when the costs of bureaucracy start to increase. You know, there’s a lot of advantages to scale, but there are disadvantages to scale. So usually companies that have economies of scale, they don’t dominate a market 100%. Usually they get to a certain size within a certain market and then they are no longer getting more efficient. Yeah, that’s a whole nother subject on economies of scale, but basically like trees don’t grow to the sky. Trees are very effective mechanism. They grow very quickly up to a certain height and then their whole system of roots and all that doesn’t work anymore. It’s the same with economies of scale, very powerful. They don’t go on forever. Okay, so at a certain point in size at a firm, your transaction costs start going up again, you lose the efficiencies of Connovey’s scale, you don’t get any more efficiencies, and so you don’t see that become one company doing everything in a society. Okay, now Michael Porter comes along, so this is sort of the fourth person in our story, and he more or less agrees with Henderson and basically says that’s true, that if you look at, Michael Porter had a couple things five forces amazing but also he talked about value chains the right way to think about a company is to break it into a chain of activities and You know you do design then you do manufacturing then you distribution then you do marketing then you do sales then you do after service you have multiple, you know activities that are linked together and If you break down a firm that way he calls it a value chain the linkages in the chain between design, manufacturing, the linkage points are transaction costs. That’s when you sort of create, why should we do manufacturing at one plant, but then we have the warehouse, which is kind of another set of assets over here, that’s inventory, why aren’t they all the same? And why isn’t that just one activity? It’s because they’re transaction costs and that kind of defines the breaks in the value chain. And… What people talk about now is one of the things digital is doing, which is interesting, is it’s changing transaction costs. Alibaba is just laying waste to transaction costs, coordination costs. And when that happens, not only can they start to do things like, hey, we’re a marketplace. You can be in a little workshop in Wuhan and sell in Bangkok. Not only can you do things like that, but you also change the structure of a business because you can start to reorder the value chains because the linkages, those costs have disappeared. Again, that’s a whole nother subject, but firms tend to be organized around the value chain and those linkages tend to be transaction costs. Okay. So that gets us to the big question here, and this is when digital enters this whole question. If we say the economies that we’ve looked at, not just economies, business, culture, media, broadcast television, all of this stuff, has been overwhelmingly created by this idea of we’re gonna have a mostly free market economy with these islands of central planning, which we call firms. And what is done within a firm versus what is done by just, let’s do something in the marketplace, we’ll contract someone, well, those boundaries have been defined by coordination costs. And then within firms, the way they structure themselves have also been defined by coordination costs between the value chain. Okay, but I just kind of started this talk by saying what digital is very, very good at, and especially digital platforms is decreasing coordination costs. So suddenly, what used to happen within a firm, like a shopping mall, can be done outside of the firm in the marketplace. And that’s pretty much what Alibaba does. They’re a marketplace platform. Alibaba is not buying and selling goods like a retailer. What they are doing is enabling connections between various merchants and various consumers by decreasing the coordination costs and… They’re becoming basically an orchestrator of a larger ecosystem as opposed to being a firm that does these activities themselves. And that’s kind of the key phrase, I think, for today’s lecture is we are seeing a new type of firm emerge. As digital tools keep coming, keep coming, keep coming, we are seeing a new type of business emerge, which is not like the businesses I just described. They are not business that concentrates certain activities like I have a factory. They are businesses where their primary activity is to coordinate a larger ecosystem. They’re starting to stitch together parts of the ecosystem and allow things to happen in a marketplace that had never been able to happen before. Suddenly, if I need a ride, I don’t have to call a taxi company because Uber or DD or Grab. can enable me to coordinate directly with one person who owns a car who happens to be nearby. Those companies are orchestrating the transportation ecosystem. They’re not providing the service. Alibaba is doing it in marketplaces, payment vendors, content creators. These new firms that are emerging are very different because they’re externally focused as opposed to we’re going to concentrate a lot of assets and do the activity in the sort of traditional coasts. Bruce Henderson sort of way. And what these ecosystem orchestrators do is they’re built on networks, they’re built, they’re platforms. They keep increasing their processing speed because computers keep getting better, they keep dropping transaction costs, they keep enabling people to coordinate all these activities across the economy in a way that always used to have to be done by a firm. and the value chains are starting to fall apart. Media companies are just falling to pieces. You know, I watch YouTube most of the time. Virtually everyone I watch on YouTube is not a media company, it’s just someone with a camera. They’re wreaking havoc with retailers right now, communications, banking is coming, although there’s regulatory aspects there. You’re seeing these big centralized firms that were very good at operating within a marketplace and ecosystem getting sort of killed by these nimble competitors and these ecosystem orchestrators. The other thing that these companies can do, one of the reasons they’re so powerful is they don’t use their own resources. They use resources out in the environment. I’ve said this before, like if you’re building a factory, that’s like building your own house. If you’re building a platform, that’s when the village builds your house for you. They do all the work. They provide all the effort. YouTube does not create any content. Mark Zuckerberg does not create any content. He just enables other people to share. And so this kind of gets us back to the first point, which was… Okay, we just said that, you know, when I started, I said, look, Hayek’s point was, the reason you use a marketplace is because local knowledge is fragmented. It’s hidden. The best information we ever had back then was prices. That was our proxy for local knowledge. That is coordination knowledge. It’s fragmented. Market prices are a very crude measure of that, which is why central planning Soviet Union style never worked. Here’s the thing. These new digital creatures, these new platforms, these ecosystem orchestrators are providing a level of local knowledge that is actually incredibly sophisticated. And they may be doing what the Soviet Union couldn’t do. So we look at companies like Facebook. they’re effectively a monopoly. And a lot of these new digital platforms are basically monopolies. That’s why this book is called Modern Monopolies. And a monopoly is not a bad thing in terms of, hey, there’s no local knowledge, so it’s gonna be very inefficient and impractical. Not only do these sort of digital monopolies have incredible local knowledge, but when you have all that local knowledge on one platform, it’s actually better. You know, you can talk to more people on Facebook because everyone’s on Facebook. That makes the service better than if it was 10 smaller companies doing the same thing. If there’s one big digital marketplace, the marketplace is actually superior to five smaller marketplaces. So it brings us back to Hayek, which is what if digital monopolies not only don’t have the local knowledge problem. that the Soviet Union had, that they actually do have incredibly robust local knowledge, far more than just pricing. Not only do they not have that problem, but their service to users, which is us, is superior because they’re monopolies. That’s the really weird thing here is the more people that are on Facebook, the better it is for all of us. The more merchants that are on a platform, the better at all. The monopoly actually serves users and participates in. participants in the ecosystem better. It’s a good thing from the user perspective, at least in some aspects. So it kind of confronts this whole idea that what if digital monopolies are really, really good for consumers, which is by and large how they’ve grown so quickly. not by concentrating supply and taking over a resource and doing all sort of the monopoly stuff that would be get you a, you know, an FTC problem. But they’re becoming monopolies because the bigger they are in a marketplace, the better their service actually is for everyone because they’re ecosystem orchestrators. And the more that the ecosystem is coordinated and there’s lower coordination costs, it’s better for all of us. So that kind of throws, I think. this whole discussion out of whack. And I think that’s kind of there’s actually four ideas that I think are happening here at the same time. And this is why I think politics, you know, everyone in Washington, DC, even pretty much every government around the world that you know, of these other major companies, Japan, Germany, the UK, China, things like that. They’re all grappling with the implications of tech right now, because it is changing things. You know, one, these companies have tremendous power, say, in Silicon Valley. You know, if Mark Zuckerberg wants a presidential candidate to lose, he can make it happen. That’s how powerful they are. It impacts politics. It impacts government. It impacts media. The newspapers and the traditional publishing houses are freaking out because they have to, you know, they have to get their content on these platforms, whether it’s Twitter or whatever. So it’s impacting culture, media, and then there’s this idea of freedom of speech. If one of these big orchestration ecosystem orchestrators, these digital platforms like Twitter decides they don’t like a particular opinion, that opinion disappears and this happens. And I just kind of said, Oh, they’re monopolies. There’s a lot of good reasons for that. But if one party can censor effectively the entire town square. That’s a huge deal. So you can see this sort of discussion rippling out in every, in all these areas that I just mentioned, business, politics, government, media, culture, all of it. And it’s these digital platforms that are just reshaping, not only are they super powerful, which they are, but they’re reshaping how the ecosystems work and coordinate with each other. That’s kind of huge. Now I actually think within this, There’s four ideas. So the people I just mentioned to you, this series of characters, I actually think each of those people was actually talking about a different subject. There’s actually a couple big ideas that are here. First is this first one of coordination and transaction costs and how they shape local knowledge and activity. and therefore create value. If you can be a platform business model that enables lots of parties by dropping the coordination costs to start to do things, you’re creating a tremendous amount of value for them. That’s a very, very good thing. So there’s this idea of coordination and transaction costs being lowered, and these major digital platforms are actually creating enormous value for so many people, small businesses, content creators like myself, everybody. And… these platform business models actually create more value the larger they are to a certain extent. So the monopolies actually create more money than the smaller companies for users. That’s kind of a big idea and I’ve mostly talked about that one. The idea of centralization versus decentralization of an economy or ecosystem, I actually think that’s a different question. I think, you know, there’s a difference between saying we have lots of local knowledge, which a company like Facebook has. And then, oh, by the way, Mark Zuckerberg, who can never be fired, controls it all. Well, that’s a centralization question. If that local knowledge power was all controlled by the ecosystem, the platform, but it was not controlled by one person at the top, that would be very different. There’s a way to decentralize authority. and still get all the coordination benefits. So a lot of people, when they get mad at Facebook or whatever, it has to do with the fact that they’ve centralized authority of the platform as opposed to the platform existing at all. If you had broken that, my kind of standard rant on this, which I go off on every now and then is, Facebook is more or less a private government. That’s what they do. I mean, they operate mostly like a government. They’re coordinating activity. They’re setting rules. They’re setting behaviors. for these digital world that they have created. There’s nothing wrong with that. The problem is the type of government Zuckerberg has chosen is dictator for life. Okay, that’s a problem. If this was shifted out where it was run by lots of groups and there was a, you know, then it would be very different discussion. So I think those two ideas are different. This idea of coordination, transaction costs, orchestrating an ecosystem, and the idea of centralizing versus decentralizing authority for the platform. That’s a second idea. The third idea is the role of competition. When you only have one player without competitive behavior, I think the innovation grinds to a halt very quickly. So that’s kind of a negative effect. It’s hard to look at the fact or ignore the fact that Silicon Valley is incredibly boring on the consumer side. China, Asia, where I focus, is incredibly exciting. There’s new stuff every week. I mean, there are new companies popping up, companies are rising and falling, WeChat is crazy. You know, everything is so dynamic and then you go back to Silicon Valley and it’s the same friggin five companies we’ve heard of for 10 years. Try to think of one compelling, exciting new consumer company, B2C, that’s come out of Silicon Valley since 2010, which is 10 years ago. Uber? Uber was before that. Airbnb? Before that. YouTube? Gmail? Facebook? Twitter? Has anything been created in the last five to seven years out of Silicon Valley? Compare that to China, Asia, Singapore, where things are just all over the… Now I would point to that as look, well it’s because these companies don’t compete with anybody. They’re, you know, and not only are they not innovating, creating new companies, Twitter’s the exact same as it was in 2010. Facebook looks exactly the same. I don’t use Facebook. I mean, they look exactly the same. It’s so stagnant, it’s ridiculous. Now I would argue that has a lot to do with the competition aspect. That regardless of sort of high X look, we need local knowledge idea, you need competition. and these monopolies don’t have competition and they’re stagnating. Okay, that’s idea number three. Idea number four is freedom of choice. Freedom to use a product, freedom to have alternatives, freedom to be left alone, freedom to not be part of any of this. You know, there’s a consumer rights aspect to this, freedom to control my data and who uses it and why information about me is being sold left and right by people I never heard of. There’s a freedom role in here, which I think Hayek actually was speaking a lot to that point as much as anything, freedom for the individual. So I think there’s probably four ideas that are all sort of competing with each other in here. And when I hear these discussions out of Washington, D.C., or Beijing, or Bangkok, or London, or Germany, usually people are emphasizing one of those four ideas more than another. And That’s why I keep telling people, you know, this is a huge issue and it’s not just business, it’s politics, it’s culture. And each major economy and people are gonna come to their own sort of balance on what they think is acceptable and the right way to go. And you’ll get different answers coming from Brazil than you will get from coming from San Francisco. So anyways, I call that sort of the great digital debate and it raises this, you know. So my sort of question for today’s lecture was, why is digital disrupting everything? Why is it disrupting business, politics, media, culture, and really society? Well, my working answer is kind of that story because it is reshaping how the ecosystem functions and how we interact with each other, whether it’s marketplace transactions, communication, public debate, culture. all of it is, you know, it’s all being changed. And these tech companies are at the center of that debate because they’re basically the ecosystem orchestrators. So that’s kind of where I look at it right now. I think it’s fascinating, but you know, we’ll be dealing with this for a long, long time, which is, it’s exciting. So that’s my best answer so far. I’ll leave you with a positive note, because that kind of seemed a little bit of a, not a downer, but a little bit. I’ve been talking about this a lot in the last month or so. Why is digital so different than other technology? You know, I call this like an Asia tech class, but it’s, I’m 75%, 80%, I’m talking digital. And then 25%, I’m talking hardware and a little semiconductors, but that’s kind of a different story. It’s just that one depends on the other. And what I love about digital, is it’s the first type of technology we’ve ever seen where it’s totally inclusive of the whole planet, that it’s not about the wealthy countries. Now, if you’re gonna make really advanced automobiles, you already had to have an auto supply chain in place. You already had to have a population that could afford cars. You had to have a lot of sort of tech advancement that this builds upon. and economic advancement that this builds. When most digital, a lot of digital stuff doesn’t require any of that. The threshold for adoption and usage is so low that a farmer in India can download TikTok on their cheap smartphone with their cheap data plan, watch a video, turn the camera around and make their own video and share it. Like it’s nothing. You don’t even have to be able to read. Right? Isn’t that amazing to be about TikTok? It’s so usable by everyone on the planet. You don’t even have to be able to read to use that. And you can watch videos all over. So I love the sort of inclusive aspect of it. I love the fact that innovation’s coming from everywhere. It’s not a story of the US and Europe and Japan, which is how kind of a lot of tech got developed in the 70s, 80s and 90s. Now China, it’s everybody. We’re seeing really cool stuff all over the place. So I kind of love that about it. and e-commerce, communication, media, they’re all moving pretty quick. Okay, I think that’s enough for today. That’s a lot of theory, and I really like theory, but I try to keep this to about 25% and then stay in the details of companies most of the time. So, anyways, I’ll go into this more in future stuff, and we’re gonna get a lot more into sort of this deeper theory, because once you start viewing the world in terms of platforms and ecosystems, Business really does start to look different. I mean, it’s amazing how much of our thinking is shaped by this idea of a firm and sort of a linear process for creating a physical good or service. Now, the industrial age really shaped our thinking. You have a factory, it makes a product, it goes down the assembly line and goes out. You’re a company on this street with this factory. Once you start thinking about ecosystems and networks first, And that what we’re really building is a platform to orchestrate the ecosystem. Everything starts to look different. I mean, how things happen in the world start to look different. How you think about business really, it kind of, you have to kind of bend your brain around that. And we really start thinking in terms of ecosystems and networks, not companies and factories and so much of the digital world, that’s how things work because digital’s information. It’s bits and bytes, ones and zeros. And if the information revolution had happened before the industrial revolution, we’d all think that way. And our balance sheets and income statements would reflect that type of business, not the industrial business. I mean, the balance sheet starts with cash, accounts receivable, inventory, tangible fixed assets, PP&E. I mean, it’s clearly a factory. And then at the very bottom, they have intangible assets as one catchall item. Most of the digital world is in that last item. You know, so it’s almost backwards. Anyways, this is something to sort of think about, but I think that’s it for today. Now, separate subject, I’m gonna put up a video which is basically a New Year’s challenge, which is to come up with a, try and create a positive daily habit for 2020 by sticking with me for 20 to 30 days to build the habit. So. There’ll be a video about how to do this, but I’m sort of putting this out to everyone. Come up with a positive habit to build in your life and then commit to doing it in 30 days. And over the next 30 days, I’m gonna do one too, and we’ll all sort of do it together. And there’s more explanation for that because that was like not an explanation at all. But go to the video, it’ll be on the site, and consider doing that along with me. Okay, that’s it for today. Thank you so much for watching. Watching Happy 2020. If you haven’t subscribed, please do so. It’s at my website, jefftausen.com, or you can go to iTunes. Join the class, commit to it. Come on, it’s a lot of fun. And I really wanna build this into a much, much bigger thing. This is sort of version 1.0, but 2.0’s coming. So anyways, it would be great to have you on board. That’s it, have a great week, and I will talk to you next week.