Powerful Network Hubs and their Brands

Back in 2012 I wrote about the Network Theory and Power in my MBA thesis *). The thesis studies he relation between Network Power and Network Brand Management.

The latest issue of Harvard Business Review features an article by By Marco Iansiti and Karim R. Lakhani where the two Harvard professors discuss today’s situation where a few digital superpowers, or Hub firms, are capturing a disproportionate and growing share of the value being created in the global economy.

Hub firms such as Alibaba, Alphabet (Google), Amazon, Apple, Baidu, Facebook, and Microsoft play central positions in a winner takes all world, and their role is growing, not diminishing.

It’s starting to look like powerful networks are not that worried about their brand, but perhaps they should.

The emergence of these hubs is rooted in three principles of digitalization and network theory.

First, there is Moore’s law that explains the computer processor power will double every two years. This in turn will drive the augmentation and replacement of human activity with digital tools.

Second, Metcalf’s Law states how network’s value increases with the number of nodes or users. Most computing devices now have a built in connectivity capability, which means digital networks are spreading rapidly at a near-zero marginal cost and encouraging significant growth in value across economy.

However, as the professors write “But while value is created for everyone, value capture is getting more skewed and concentrated. This is because in networks, traffic begets more traffic, and as certain nodes become more heavily used, they attract additional attachments, which further increases their importance”.

This is the notion that digital network formation naturally leads to the emergence of positive feedback loops that in turn create increasingly important, highly connected hubs, as described by physicist Albert-Laszlo Barabasi. It’s a self-feeding cycle of growing, increasingly important hubs.

The professors use iOS and Android as examples. The iPhone just celebrated its tenth anniversary. It’s only so long ago when my former employer Nokia was world’s #1 cellular phone manufacturer, and hardware was king. With the introduction of iPhone and following app economy, companies who used to compete with innovativeness and products were wiped out.

The new software and network centric economy rules. Each new iOS or Android app makes that network stronger and more valuable creating a powerful network effect that turns away anyone wanting to enter the competition. Apple and Google reap most profits of the situation, and the value captured by individual app developer is modest at best.

This trend threatens to exacerbate already dangerous levels of income inequality, undermine the economy, and destabilize society. It’s ironic that Internet and digitalization were supposed to make us all equal but instead it’s making a handful of hubs very wealthy and the rest are left fighting over pennies.

So what’s the answer?

The hubs, like Apple and Google often compete against each other. Phenomena like “multihousing” are new trends where people consciously act against the trend by mixing services from different hubs. Consumers might use Uber and Lyft based on the best price, or retailers implement various e-payment forms such as Apple Pay, Google Wallet or Samsung Pay in the check-out cashier points and have platforms drive prices down through competition.

Another form of collective, conscious action is the use of open source platforms where possible. The European Union favors open source software in its internal organizations, and the EU – a power representing hundreds of millions of European consumers – is strongly pushing back on monopolistic setups where Microsoft and Google are centered in.

Facebook is pre-emptying potential clash with the American authorities by cooperating in investigations that relate to Facebook’s role in the 2016 presidential campaign.

However, while there are ways for companies that depend on hubs to defend their positions, and consumers to voice their concerns, the hubs themselves have to do more to share economic value and sustain stakeholders.

The leaders of these hub companies must realize the more powerful they get, they are becoming not just influencers but de facto drivers of the long-term health of our economies. The authors compare these hubs to “keystone” species in biological ecosystems. Without keystone species, the ecosystem would be dramatically different or cease to exist altogether.

Google and Apple earn billions of revenue from apps that run on their platforms. They create and launch new tools and support for app developers, but they need to step up improving on business models that will allow the app developer to thrive, too.

A latest chapter to this same story is the launch of Matterport, a Silicon Valley startup company that launched a 3D camera for real estate and accompanying software stitching and hosting service. Thousands of people have bought the camera and created 3D models out of hundreds of thousands of homes around the world. Matterport owns the rights to these models and is hosting them on their servers, they also launch aggressive marketing campaigns to sell more cameras. Many of the individuals who bought the camera are complaining Matterport is in direct competition with their own community members by targeting to sell new cameras to the clients of existing camera owners.

“Preserving the strength and productivity of complementary communities should be a fundamental part of any hub firm’s strategy”, write Iansiti and Lakhani.

As I wrote in 2012, the shape of the institutions and organizations that construct human action depend on the specific interaction between power and counter power. Power is multidimensional, and it is constructed around multidimensional networks programmed in each domain of human activity according to the interests and values of empowered actors. It would be foolish as a powerful hub to allow your own brand owners – your networked user community – to become the counter power.

 

*)   Thesis_Soderling_FINAL

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