Hypereconomics

What happens after we’re all connected?  When I asked that question, seven years ago, well over eighty percent of all Australians had their own mobile, and the bulk of the nation had signed up for broadband Internet access.  The answer led me on a journey through the future of media, education, politics, and now, economics.

In July I started to set down the outcomes of my research in a book titled THE NEXT BILLION SECONDS.  A billion seconds is just a bit over 30 years – a generation, if you will – and it’s my belief the billion seconds from 1995 to 2026 will be as important in the history of human affairs as the birth of language, seventy thousand years ago.  Being connected means being something new.

We, here in this room tonight – along with everyone else on the planet – are in the middle of this transition, halfway between what we were, and what we will become.  That’s always been true, but just now the transformation of our civilization has gone into overdrive, because all of the frictions which kept it chugging along at a lazy pace are evaporating.

We’re moving into a superconducting phase of development, with no resistance holding us back.  Stripped of all baggage, we’re accelerating wildly, unpredictably, into a future which looks almost nothing like the recent past.

 

ALPHA: Fisher, Farmer, Barber, Disruptor

For thousands of years, fishermen from the Indian state of Kerala, sailed their sturdy boats into the Indian ocean, dropped their nets, said their prayers, then pulled the sea’s bounty aboard their craft.  Once they’d filled their hold, the fishermen would head back to the mainland.  At this point, they’d be faced with a choice: where should they sell their fish?  The Kerala coastline, dotted with ports and markets, offers fishermen numerous choices, and the markets need fish every day.  Working from instinct and memory, the fishermen would pick a port, and sail into it.

Inevitably, other fishermen would have had the same idea, would dock at the same port, at near the same time, their holds also filled with freshly-caught fish.  Suddenly there’s a problem of oversupply: Too many fish for sale means low prices in the fish market.  A fisherman might just barely cover their costs, no matter how hard they worked, or how many fish they caught.  Meanwhile, just a few kilometers up or down the coastline, another fishing port had been forgotten by the fishermen that day.  No fish for sale in that fish markets, at any price.  The Kerala fishermen had grown used to their subsistence lifestyle, and Keralan fishmongers to their inconstant supply.  It’s just the way things were, the way they’d always been.

In the 1990s, the Indian government auctioned radio spectrum to telecommunications companies, and in 1997, mobiles came to Kerala.  As is the case everywhere, the first mobiles were expensive to own and use, so only the wealthy could afford them.  The cheapest mobile cost a month of an average fisherman’s income.  (In Australian terms, that would be around $4000 for a mobile, or about the cost of five top-of-the-line smartphones.)

Cell towers began to spring up all over Kerala (no government paperwork required, just raise a mast and plug it in) including the coastline.  This gave the beaches of Kerala excellent mobile coverage, and, because radio signals travel in straight lines, it also extended that coverage out to sea for over twenty kilometers.  Anyone could make a call from the middle of the Indian ocean, almost out of sight of land – if they had a reason to make a call.

The most prosperous Kerala fishermen owned more than one boat.  Proceeds from that fishing fleet gave one fisherman enough spare cash that he could purchase a mobile.  The mobile went out to sea with that fisherman, and at some point – no one knows precisely who, or where, or when – someone called the fisherman while out to sea.  Over the course of that conversation, the fisherman learned about a fish market going without fish that day.  The fisherman immediately set his sails for that port, and made a tidy profit from his eagerly awaited fish.

The next day, while still at sea, the fisherman phoned around, calling each fish market in succession, learning which markets most needed fish.  That day the fisherman made another excellent return on his catch.  The same thing happened the day after that, and the one after that.  With his mobile to check the markets, every day brought a very nice profit.

The fishermen of Kerala are a community, and although they may not reveal to one another their favorite fishing spots, news of the mobile fish market spread quickly throughout the length of the state.  Within a few months, every fisherman, from the poorest to the most well-off, owned a mobile, using it to check prices at several markets before selecting a port of call.  Three things happened as a result: every fish market now had a supply of fish; the price of fish at one market matched the price of fish in every other market; and the fishermen now got the best possible price for their fish, every day.  That mobile, which had cost them a month’s income, paid for itself in just two months.

All of the inefficiencies and friction in human communication (markets are one aspect of communication) fell away as the Kerala fishermen used their mobiles to extend their reach, improving  circumstances for both sellers and buyers, a true win-win.  The friction that kept the fishermen poor and poorly informed melted under the heat of connectivity, and the dross of market inefficiencies boiled away, leaving only the gold of commerce.  This happened not because of some top-down mandate, but from a bottom-up process in which people connect, share what they know, learn from one another, then put that learning into practice.

Kerala was an early example, but far from the only one.  Farmers, forever at the mercy of the weather, insects and crop blights, suffered from ‘informational asymmetry’ in the marketplace: the buyers have always known more than the sellers, using that information to their advantage.  Hyperconnectivity has disrupted that informational arbitrage: farmers in Kenya use DrumNet, a mobile service that allows them to check the current market prices for their produce at a range of locations.  When a farmer readies his crop for sale, he sends a text message to DrumNet, using the response to choose the market which will give him the best return for his efforts.  Just as Kerala fishermen phone around for the best price for their catch, a Kenyan farmer can quickly learn where he’ll get the best price for his vegetables.  Hyperconnectivity makes informational asymmetries a thing of the past; every party to a transaction can negotiate a sale fully informed.  With DrumNet, Kenyan farmers have been earning as much as 40% more for their crops – a rate of return which makes the service a very good investment.

The DrumNet concept has spread across the developing world.  In India, Nokia mobiles come equipped with apps that illiterate farmers employ to get information about crops, weather and market prices.  Nokia makes a small profit off the service – which is expected to grow to serve tens of millions of users – and farmers in India, Bangladesh and Pakistan earn more for their produce.  Each of these farmers, hyperconnected, has access to informational resources as great as those available to the most well-resourced farmer, anywhere in the world.

Moreover, the mobile frees the market from a place, attaching it to a person.  In Karachi, barbers have always had to rent an expensive stall in the pubic markets to ply their trade.  When Pakistan crossed over into of hyperconnectivity, a different kind of commerce became possible.  An enterprising barber can buy a bicycle and a mobile, printing signs reading “FOR A HAIRCUT CALL 03XX-YYYYYYYYY”, and post these throughout the city.   Clients contact the barber directly, mobile-to-mobile, receiving on-call service in their homes.  Everyone is better served by this relationship: the client gets a shave at a time and location of their own choosing; the barber cuts his own costs dramatically, while establishing a closer relationship with his clientele.  For the ancient market civilizations of South Asia, this displacement of place by person means that the market has altered permanently because of hyperconnectivity.  The intersection of commerce and society has suddenly become something quite different.

The hyperconnectivity created by the mobile dramatically improves an individual’s ability to earn a living.  To own a mobile in Bangladesh or Peru or Nigeria means you have a capability to earn more to keep you and your family alive.  This effect is completely obvious, so everyone in the developing world has been acquiring their own mobile handsets.  In the decade from 1999 to 2009, we went from half the world’s population never having made a phone call to half the planet owning their own mobile.  We’re now well past that point.  There are over six billion mobile subscriptions and almost five-and-a-half billion individuals using mobiles right this minute, and, if current growth patterns are maintained, in five years’ time everyone on Earth – over seven billion people – will have their own mobile.

 

BETA: Aggregation and Collapse

Under the pressure of hyperconnectivity, all friction within all markets, everywhere, has begun to melt.  Everything is becoming smooth, slick, slippery, and very fast.  Not just in the developing world.  But here in Australia it takes different forms, because we come from a different technological base, with excellent connectivity.

One good current example from our own market is Ruslan Kogan’s eponymous – and quite profitable – consumer electronics enterprise.  Kogan realized that the value chain created by the large television manufacturers – the Samsungs and Sonys – rested with a few Chinese companies assembling the raw components for flat-screen televisions according to specifications that varied hardly at all from model to model.  Kogan knew he could get these Chinese manufacturers to build televisions for him, if he could order them in sufficient quantity.  Kogan turned to the Web to create enough demand to overcome the frictions to the transaction.  The Web provides a frictionless environment where purchasers can pool their buying needs around Kogan’s capacity to build a value chain.

Gerry Harvey complains that Kogan undercuts his retail business, but the innovation is more fundamental than simple e-commerce.  Kogan is using the Web as an aggregation mechanism, not a sales channel.  Eventually, others will copy the Kogan model, aggregating demand for almost every imaginable product or service.  Groupon and Spreets cut off-price deals with businesses, taking a cut of the sales as the price of customer aggregation.  The most disruptive businesses of 2011 identify a demand, build a value chain to service that demand, aggregating demand in sufficient quantity to produce a substantial price differential.

Kogan itself is built upon frictions in the marketplace.  It is not easy to go directly to a Chinese manufacturer and order a huge and cheap flat-screen television.  Kogan is an at-present-necessary intermediary between the manufacturer and the marketplace, the point of aggregation.  This interface between manufacturer and marketplace exists only for as long as the manufacturers hold themselves aloof.  One of these manufacturers will develop a value chain which allows them to accomodate single customer orders, and at that point the Kogan model collapses, just as Gerry Harvey’s has already collapsed.

A number of businesses take advantage of the frictionless environment provided hyperconnectivity.  One, named Uber, has begun to disrupt the taxi market.  Launched late last year in San Francisco, Uber requires users to download a mobile app to their smartphone, uses GPS to locate the user, showing a map of the locale, with any available cars also shown on the map, positions updating in real-time.  Uber transmits a request for a pickup to each of these cars, and one car accepts, the others disappear, while the user watches the car approach the pickup location in real-time.

The cars employed by Uber are standard black limousines, used for airport and executive transfers throughout the USA.  The drivers run a companion iPhone app in their cars, receiving offers for jobs as users requests pickups.  As these drivers add Uber jobs to their scheduled pickups, driver downtime – generally around 50% of the driver’s time – is sharply reduced.  The driver makes more per shift worked, because the inefficiencies in hiring a driver have been removed by Uber’s aggregation of both supply and demand.

I had the opportunity to interview several Uber drivers, who uniformly praised the service.  Although more expensive than a taxi, Uber makes the process of booking a pickup and paying the driver so frictionless –  the payment is charged to a credit card supplied when signing up for the service – it make sense for all but the most cost-conscious.

Uber transformed a discrete and disconnected army of cars into a single, cohesive entity, aggregating demand for that fleet, ensuring that there would be work.  This innovation proved so disruptive to the existing San Francisco taxi companies they filed suit against Uber – originally named ‘Uber Cabs’ – getting a judge to order Uber to remove the word ‘Cabs’ from their name.  That hasn’t stopped Uber’s growth; they’ve now entered New York, Chicago, Seattle and Boston.  Every city that has a fleet of underutilitzed limousines is now ripe for disruption.

AirBnB is another disruptive business employing similar strategies around aggregation.  Allowing property owners to list rooms, apartments or homes for short-term rental, AirBnB simultaneously aggregates people looking for short-term rental properties.  What was once done informally and clumsily through word-of-mouth and Craigslist, is now smooth, efficient, and effortless.

AirBnB is disrupting the hotel market in cities such as New York and San Francisco, where room prices are high, and where there are also a pool of homeowners looking for cash to defray their enormous mortgage payments.  The same market forces which make these cities expensive to visit drive supply and demand to AirBnB.  AirBnB has created a fluid market in very-short-term rental properties where none could have existed before, because of marketplace frictions which made it very difficult to connect property owners to renters.  Hyperconnectivity has eliminated those frictions, so AirBnB represents the first pass at a frictionless the rental market.

The hotel industry is soon to follow, with Room77.com building an individual database for every hotel room everywhere in the world, so an individual renting a room in a hotel will know which room might be the best for their particular needs.  It’s only a short step from that kind of in-depth information to a system allowing individuals to bid for particular rooms on particular days, a disaggregation of a hotel into a set of rooms with prices driven by individual demand.  Such a system would have been almost impossible to create and maintain just a handful of years ago.  Today, it’s the kind of task that software-as-a-service cloud computing is designed for.  Hotels, under pressure from AirBnB, will be forced to disaggregate themselves, in order to compete.

Transport and housing, two primary industry sectors, are fundamentally transformed by hyperconnectivity.  But the cut goes deeper, and closer to the root.  Labour itself is becoming subject to the same forces.  Consider the tweet I received last week:

Who wants to go to woolies for me
and buy dog and cat food and chocolate teddy bear biscuits?

This is the kind of humorous message we hear all the time, and on the occasional lazy day, wish for ourselves.  But it has always remained in the realm of fantasy, unless we are fortunate enough to have a personal servant.  However, if there were some way to aggregate the demands of all these lazy people, matching that demand to a supply of free labor – well, then you’d have Zaarly.

Launched in May, Zaarly offers Americans a smartphone-based interface to a competitive labor pool.   As someone who needs labor, you post a particular task, locale, timeframe and payment to Zaarly.  That request is shared with everyone in the labor pool.  Anyone interested in the job responds with their own price and time frame for completion.  You review these responses, select one, and, after the transaction completes, money is automatically transferred from your credit card into the account of the individual who accepted the job.

As with AirBnB, Zaarly is a radical simplification and acceleration of the services once offered through classified advertisements and in the ‘Gigs Offered / Gigs Wanted’ sections of Craigslist.  Zaarly aggregates the pool of short-term labor just as AirBnB aggregates the pool of short-term accomodation, and Uber aggregates the pool of transport vehicles.  Zaarly could not have existed before the widespread adoption of smartphones, because the friction of connecting laborer to labor was too great.  Now there is no friction, and no resistance to aggregation of either labor demand or labor supply.

For a few years, websites like Freelance.com have been providing a frictionless way to aggregate individuals offering high-value services, such as programming and web design, with organizations who need those services.  A colleague in California, Tyler Crowley, used a distributed development team – in Russia, the Ukraine and India, to rapidly prototype and release Skweal.com, a website that creates a channel for restaurant patrons to send feedback directly to restaurant management – keeping those comments off of websites like Yelp, where they could be very damaging.

Although it wasn’t particularly easy managing a highly virtual, global development team – California is on the other side of the world from Russia and India – Tyler got the work done quickly and at a price he could afford, funding Skweal entirely from his own savings, something that wouldn’t have been possible if he’d been competing for the high-priced Web developers available to him in Southern California.  Labour, like transport and accomodation, has become entirely fluid, subject to none of the frictions which prevented aggregation of supply and demand.

In fact, the law of supply and demand amplifies under the influence of hyperconnectivity.  We are more likely to go to those who can provide a room or a ride or a piece of code cheaply.  In short order this brings us to the ‘race to the bottom’.  In an environment freed from the frictions of the marketplace, there is no room for rent-seeking or even the kinds of labor practices which keep developed economies stable.  When I pit my $75/hour rate against someone in Pakistan asking only $30/hour, how do I survive?  And if I cut my rate to $35/hour, does someone else offer the same service for $15/hour?

At the moment, Uber sets the rates for its drivers, preventing a race to the bottom.  But Uber is just software.  Someone will come along and create a similar piece of software, one which allows transaction participants to negotiate the price – just as Zaarly does.  As these designed-in frictions are designed away, the market opens to economic forces accelerated to the speed of light, and all price supports sustained by market frictions begin to collapse.

The frictionless free-fall of markets doesn’t end with the individual labourer.  Businesses born out of hyperconnectivity, aggregating demand and supply – firms such as eBay, Uber, and AirBnB – face another round of disruption.  The connectivity which made eBay possible also allowed the firm to centralize its aggregation, bringing all buyers and sellers to a single website, where their traffic could be channeled, and a tariff placed on all transactions.  In the virtual marketplace of eBay, sellers pay ‘rent’, in the form of a transaction fee, a cost passed along to the buyer.

Centralization is a form of market friction, in that it grants whomever controls the central point the power to act as taxman, tollbooth, and censor.  Apple has been notorious for the strict controls it puts upon apps available for iOS devices, which must be purchased through its centralized iTunes store.  If your iPhone app does something Apple doesn’t like – or considers a potential competitive threat – Apple has the power to deny you access to its centralized retail channel.  Because the hyperconnectivity of Apple’s iOS devices would normally allow peer-to-peer exchanges of software and other items of value, these market frictions had to be engineered into the operating system.

The market frictions of centralization become harder to maintain as we become more hyperconnected.  The recording industry profited enormously in the transition to digital recording, because of the friction associated with the distribution of hundreds of megabytes of music.  As compression techniques improved, and broadband spread throughout the developed world, the barriers to peer-to-peer distribution of music progressively collapsed.

We are now sufficiently hyperconnected that it is not only technically possible to build a peer-to-peer competitor to eBay, but inevitable, as hyperconnectivity tends through time to remove all frictions in the market.  The frictions that eBay uses to generate revenue are being smoothed away by a diffuse, distributed, decentralized, global aggregation of buyers and sellers, less bazaar than switchboard, more MapReduce than website.  The same fate will inevitably befall Uber, AirBnB, even Zaarly – any business seeking to conduct aggregation-based arbitrage.  Hyperconnectivity does not support the inefficiencies needed to make these businesses a continuing success.  They are all intermediate forms, leveraging the brief moment between the disconnected and hyperconnected worlds.

 

RC1: Runny Money

The transition to hypereconomics – economics where friction has vanished – has a few years yet to run.  The sudden rise of firms like Zaarly and Freelance.com has given us some sense of what the labour market will soon look like: will we be ‘gigging’, rather than working; our gigs may be small tasks, ephemeral moments when we contribute our particular expertise to an overall project, even if that expertise is simply being in the right place at the right time.

As we move further into a hypereconomy, we need to assemble value chains from the resources available to us.  We need to be able to bring this material together with that design expertise, married to a fabrication capability, delivered via the appropriate transportation logistics.  When we can do that, every individual will have the same capabilities to fashion an assembly line that Henry Ford once commanded.

To do this right now would be difficult.  The amount of friction associated with many of these tasks is still quite high. Indeed, because that friction is so high, Ruslan Kogan is still in business.  We may be hyperconnected, but the businesses we run have not grasped the nettle of hyperconnectivity.  Businesses have not moved to reduce the frictions which frame their sales channels.  Only a small percentage of businesses present their sales channel through a website, and only a tiny portion of these provide any sort of interface – an Application Program Interface, or API – which would allow that sales channel to be rolled into a larger, more flexible tool.

This is the gap – and the great opportunity of the present moment.  Every commercial entity, whether an individual offering up labour and expertise, or an organization offering products and services, will soon present themselves through an interface that removes all of the frictions of the business transaction.

Let’s use Kogan as an example.  With appropriate APIs to the manufacturers of LCD panels, television electronics, electronics assembly, and transport, I could have a TV built-to-order.   This may seem like a bit of work, but once someone has put together a particular supply chain, by mashing-up the appropriate APIs, that supply chain can be shared.  I won’t have to do much more than call up that supply chain widget on my mobile, and press ‘order’.

Seen in this way, the transportation logistics provided by Uber, materials offered on eBay, and a design consultancy facilitated by Freelance.com are no longer destinations in themselves, but APIs, each offering a specific element in a production value chain.  The recipe which strings them all together, turning an idea into reality, is the innovation, an innovation which can only emerge where friction has been been removed in every component of the recipe, via an API.

Like everything else within the culture of hyperconnectivity, these recipes will be shared within communities of expertise.  People who care about televisions will trade recipes to cook up custom models; people who care about coffee or cookware or carpeting will be able to do the same thing.  Being part of a community of expertise gives you access to all the production value chains associated with that community.  This is already true: consider how hobbyists trade tips on where to find particularly obscure bits of mechanism, recordings, and so forth.  But enough friction still exists to keep these production value chains very short.  As that friction disappears, these production value chains grow long enough to span the whole distance from raw materials to finished product.

A hundred years ago, when Henry Ford established his River Rouge assembly plant, he needed nothing more than iron, sand, coke and raw rubber.  From these basic ingredients, he manufactured millions of Model Ts, because River Rouge encompassed a production value chain able to refine, fabricate and assemble every part of the automobile.  We are at the threshold of a similar, individual Industrial revolution: as businesses publish their APIs, customers gain unprecedented control over the means of production.   A given customer can optimize for price, delivery time, carbon footprint, or any of a countless number of variables, crafting a production value chain which precisely meets their needs.

One remaining point of friction within this system is financial.  Businesses can present themselves to a global market of customers via an API, but flows of capital remain stubbornly territorial, hemmed in by the macroeconomic policies of central banks, blocking flows of capital to bring stability to national economies.  That friction has always made global commerce difficult, creating a place in the value chain for import/export arbitrage.

As soon as the world had become sufficiently hyperconnected for these frictions to become a real barrier to commerce, PayPal arrived on the scene.  Using PayPal, it is possible to transfer funds internationally, and almost immediately, with very little effort.  PayPay propelled eBay into international viability – undoubtedly the reason the auction website purchased PayPal in 2002.

While it is conceivable that PayPal could become a ‘financial API’, capitalizing all of the pieces of a production value chain, PayPal, like eBay, is an artifact of the transition to hyperconnectivity, an arbitrageur exploiting imperfections in hyperconnectivity.  Once everyone is directly connected, it is possible to transfer capital between peers, without any mediating exchange service.

Given the capital flow restrictions of central banks, fiat currencies can not be employed in transactions crossing international boundaries.  Instead, individuals and organizations will begin to develop their own exchange mechanisms, perhaps based on precious metals (a de facto return to the gold standard), but more likely employing virtual currencies: perhaps kilowatt-hours, abstract ‘labour units’, or other measures of value.

It is not necessary for all parties within a production value chain to agree to use a single virtual currency.  Where multiple virtual currencies exist, trading markets will flourish, accessible via APIs.  Although currency conversion is a point of friction, an API-based approach to currency conversion makes any virtual currency portable enough that its use presents little friction.

If this sounds a bit fanciful, consider the recent introduction of BitCoins, a cryptographically secure virtual currency, which has value only relative to itself, but which can be exchanged for fiat currencies across a range of websites, several of which offer APIs.  A number of businesses now accept payment in BitCoins, and although the currency has been more influential as an idea than as a medium of exchange, it points toward the possibility of a hypercurrency, designed to slot smoothly into the frictionless universe of hypereconomics.

As more businesses present themselves as APIs ready to be wired into production value chains, the need for a frictionless medium of exchange will become more pronounced.  Just as PayPal came along to take eBay global, a hypercurrency will arrive on the scene just as we need it, because there will be a universal demand for it.

As capital migrates from friction-filled national and international finance markets into hypereconomic frameworks, institutions dependent upon those frictions will be threatened.  Banks will not be able to collect interest.  Governments will not be able to tax – customs duties and user fees look to be the only ways governments can generate revenue.  Courts will not be able to seize assets.  The peculiar arrangement of laws and regulations which keep our economic system stable will grow increasingly meaningless.  Governments and courts will try to follow capital flows into hypereconomic zones, only to learn that their mechanisms of control and enforcement are poorly matched to such a fluid environment.

 

CONCLUSION: Open Your APIs

Many businesses will not welcome a broadly frictionless hypereconomic environment, as they have adapted themselves to harness these frictions profitably.  This resistance leaves those businesses vulnerable to new competitors, offering the same products and services via frictionless APIs.  Businesses will be forced to change their sales channels, or they will simply wither away.  Australia somehow managed to avoid the allure of retail e-commerce for fifteen years, but now retailers see their businesses being hollowed-out as Australian consumers find the online shopping experience sufficiently frictionless to attract their dollars.  The decision to ignore e-commerce was a mistake that is proving fatal to Australian retailers.

If we want to avoid massive business failures, we must learn from this mistake.  The future does not look like the recent past, with massive, comprehensive websites offering everything to everyone.  The future belongs to tight, focused APIs of products and services, written to be easy to use, easy to mash-up, easy to share, and easy to roll into other tools.  The future belongs to businesses which can effortlessly accept payment in any currency the customer cares to offer.  The future belongs to the entrepreneurs building tools that make constructing a production value chain a simple matter of dragging and dropping a few icons on an iPad’s screen.  The future belongs to the hyperconnected, learning to skate on this very slippery ice.

What happens when there’s no more friction, anywhere?  Open your APIs.  We’re  about to find out.