Welcome to the ICE District:
Embrace the Swarm and Follow the Freebie

by gregoryp™

Recently, while sitting in my favorite coffee shop in Santa Fe, I had a conversation with a local man who spent most of the past year unemployed, surfing the net as a small-time investor. He bought all the right stocks, fortunately - Dell and Yahoo! were among his better purchases. Cashing out in October when he was well enough ahead of the game to get through the winter, he was nevertheless disappointed by his own gutlessness–after all, in the time between November and now, the market has seen additional surges that to his mind, rooted in the era of hard products and increased productivity, seem to be part of an economic game of three card monte.

"They don't make anything," he said of Yahoo! "They don't sell anything. The entire thing is based on an emotional roller coaster ride of hype. I cashed out with more than I started with, which is good, but I'm wondering what it all means, really."

And he's not the only one. During the July, 1995 Netscape IPO, I was sitting in a caravan of would-be web millionaires driving from Silicon Gulch in San Francisco to the Siggraph conference in Los Angeles, watching in awe as the price of Netscape stock skyrocketed from the initial price of $20 a share to over $110 by the end of the day. Since then, Internet stocks have sent analysts from all levels of the economy back to the drawing board of how market valuation is determined in this new world order.

In Kevin Kelly's book New Rules for the New Economy, we may have found a few decent answers behind the hype-economics of "established brand names," "potential earnings," and the most hideous buzzphrase of all time, "mindshare." Extrapolating on noted economist and Santa Fe Institute fellow Brian Arthur's theory of "the economics of increasing returns," Kelly, the executive editor of Wired magazine, attempts to break down the ideas "governing" the stratospheric and perplexing behaviour of the growing network economy. Backed by the stellar view that such a position provides, and offering anecdotal real-time examples of who's done what, New Rules provides ample food for thought to anyone trying not to guess the future, but to make sense of the present.

Presented in ten essays that examine of the buzzphrases of the digerati and deliver them in bite-sized chunks, Kelly plots a haphazard course that can be distilled into a basic equation for understanding the world of software economics:

1. Create a business
2. Give your products away,
3. Create solid relationships with your customers and related other businesses
4. Allow for your customers to interact with one another (peer-to-peer communications)
5. Let the economics of increasing returns make your product an essential part of everyone else's business.

The economics of increasing returns, (EIR) as popularized by Arthur and as practiced by such industry leaders as Microsoft, Netscape, AOL, HotMail, and Yahoo!, holds that, theoretically speaking, "the value of a network explodes as its membership increases, and then the value explosion sucks in yet more members, compounding the result." Practically speaking, increasing returns holds that "if you give it away, more people will want it. And someday, you'll be able to charge for it."

While EIR has become buzzphrase of the decade in describing economic trends in the computer industry, Kelly explains why increasing returns actually works. Increasing the membership of people who are involved with your product, service, or e-zine builds brand loyalty not just because of the product itself, but also because of the other members. Imagine a popular restaurant, bar, or café. Each has its own "bests"–steak, martini, and latté. What brings people back day after day is not the actual product, but the comfort in knowing that all their friends will be there. This ties in with Kelly's ideas on relationship tech, which posits that you should use the network power of the Internet to build relationships with your clients and allow them a forum to build relationships with one another. Whereas linear growth in a non-networked system meant that each additional customer resulted in a linear increase in business, customer interaction forms additional networks of new relationships, meaning an exponential growth curve rather than a linear one.

With a nod to Buckminster Fuller's "abundance over scarcity" theories, Kelly's EIR also posits that there is greater value in ubiquity than scarcity. The more a resource is used, the more opportunities become available by using it. Where the old model held that value came from scarcity, in the new model, the opposite is true. For example, when RealAudio™ was first released, it was next to useless, because the only feeds you could get came from the company that made the product. But by giving the product away, people could create their own feeds–thus requiring others to have the software in order to listen to the feeds. More giveaways meant more content to explore, and more content to explore meant more users. This is why companies will spend millions of dollars to advertise a product that they simply give away; the product itself holds no value, but the network that develops around it–the relationships with customers, vendors, and even competitors–is absolutely priceless.

None of these ideas are very new, and they don't particularly require the Internet or even computers to begin to see the logic of their basic premise. Kelly hasn't invented these rules - nor has the appearance of the Internet. But as Kelly further points out, the economy is shifting from a marketplace to a marketspace, and access to that space requires using at least a dumb terminal and a modem. Computers as number-crunchers and data storage devices are long gone, according to Kelly. The computer is now a tool for managing our Internet-relationships, and it is the Internet–through careful observance and study of its rules and dynamics –that best illustrates the changing economic picture. The grand theme of this book is that communications, not information, marks the significant change in our economic superstructure.

While critics like Jeremy Rifkin like to plot graphs of technological explosion leading towards a society of massive joblessness, Kelly sees a lot of work to be done in the new economy. But Rifkin is right on one point: jobs will be eliminated. They'll be eliminated in favor of work. Kelly argues that the "Interconnectedness of All Things" (to pull a phrase from psychedelia into the world of economics,) will morph us all into full-time opportunists leaping from gig to gig, or perhaps even having several different projects happening simultaneously. That seems to be the case for most of the people I know who have some kind of skilled trade–whether that trade is writing, web design, computer repair, or plumbing.

While one of Kelly's major premises is that the world of the "hard" industry–steel, automaking, and the like–will soon follow the rules of the soft, his analysis falls short of making the case. Also, Kelly wants us to believe that increasing efficiency, a necessary component of any growing business, is a waste of time. Despite Kelly's analytical shortcomings, it is enough that he's offered forth an explanation as to why the companies in his domain–the so-called "ICE district" of information, communications, and entertainment–are doing so very well in the market.

In his final essay, "Don't Solve Problems - Seek Opportunities," Kelly manages to tie up his ideas in a way that may finally give us a glimpse of the valuation of info-tech stocks. As Kelly points out, the hallmark of the Industrial Age was the measure of one company's productivity, but in the ICE district, how does one measure production? Kelly explains, "An increasingly greater percentage of work takes place in the [ICE] industries where the 'volume' of output is somewhat meaningless...A better benchmark than productivity would be to measure the number of possibilities generated by a company or innovation and use the total to evaluate progress."

When I first picked up this book for review, Netscape Communications Corporation had just been sold to America Online for US $4billion, a princely sum for a company that never really sold anything. But bearing in mind where the web was four years ago, and armed with Kelly's analysis, it was easy to see why Netscape was worth $4 billion, and probably a lot more. When Netscape Navigator first hit the world, the web was an innocent child, a integrated text-and-graphics world where Mosaic could show us the most arcane scientific data on the planet, but not much else. Netscape increased the standards by creating the standards, and then went on to give away software to people who previously never would've purchased it. Whereas Mosaic was the product of a university laboratory that didn't give a hoot about media relations or responding to the public's cry for "More!," Netscape's drop into the global economy created new ways to use the web, new ways to expand the web, and new opportunities for everyone who ever used it more than once.

So what does a Netscape or a Yahoo! really do? They create opportunities. They build relationship. If you buy into Netscape or Yahoo!, you purchase not just their members but also their relationships to customers, to vendors, to other websites. It could be argued that all Netscape really did over the course of four years was to spend a lot of money making software and building relationships. Their revenue stream was negligible, since what they built was a portal and a community. What they built was a vehicle for opportunities. And for that alone, Netscape is worth far more than $4billion. AOL got a bargain. And based on Kelly's assessment, Yahoo!, with a global audience and an astounding 144 million page views per day, is still totally undervalued at $20 billion.

I strongly recommend this book to anyone attempting to understand the new economic reality in which we are living. Despite its flaws, New Rules for the New Economy is a winner in what it offers to established businesses and anyone thinking about starting one in the new digital economy.

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