Myths and Realities of the High-Tech Economy

I would like to present four myths of the high-tech economy. These are distortions or misunderstandings that seem to be driving strategies and investment decisions in the hightech world. I’ll present these myths as simple statements and in each instance give my own version of reality—a reality that is invariably more complicated. Let me begin by pointing out a general trend. We are seeing a shift in the economy from localized physical markets and physical interchanges to digital networks of all kinds: business-to-business networks, peer-to-peer networks, web auctions, the digital brokering of commodities, genealogy groups, chat networks, and outsourcing networks. All of these networks are made possible by connectivity, and backed by computers. Most people are aware of this shift. Manuel Castells of Berkeley has pointed out that in a sense this is not new: formal and informal networks have been around for a long time, but we are currently entering an electronic age of competing digital networks. In my language, networks are the first emergent structure, the first dominant pattern, that we are seeing in the digitally-based economy. Factories with inputs and outputs are the dominant patterns of the old manufacturing economy. The network is the dominant pattern of the new digital economy. However, this economy of competing networks will be overlaid onto the old economy of factories and inputs and outputs. The old, manufacturing economy will not be entirely replaced. Competition in networks will shake out according to what I believe can be almost called a Law: “Of networks, there will be few.” We currently have 9,500 commercial banking companies in the United States. I believe we will have only a single-digit number of digital-banking virtual networks in the future. Perhaps three, perhaps half-a-dozen. One reason is that digital networks by definition will have global reach, and this will diminish greatly the importance of locality. So a very few networks can cover a full global clientele. A second reason that there will be few networks in any market niche is increasing returns—the tendency of that which gets ahead to stay ahead and go on to lock in a market. The degree of increasing returns present in a market niche will determine the number of viable networks left standing once the shake out of competitors in that niche is complete. Offsetting this, the more networks can be differentiated in a market, the greater the number of networks that can maintain viability. My strong belief is that in nearly all digital-network niches, increasing returns effects will overcome network differentiation effects. And therefore, of networks there will be few. This brings me to the first myth.