So you want to be a trillionaire

Ingenuism Weekly 42

“It is not easy to convey, unless one has experienced it, the dramatic feeling of sudden enlightenment that floods the mind when the right idea finally clicks into place. One immediately sees how many previously puzzling facts are neatly explained by the new hypothesis. One could kick oneself for not having the idea earlier, it now seems so obvious. Yet before, everything was in a fog.” –Francis Crick

MEDIA

Immigration Equals Abundance – Silicon Valley Examined 31

In this episode of Silicon Valley Examined, Don Watkins and Yaron Brook discuss how immigration fosters progress—and why immigration is so often opposed.

Listen on Spotify or iTunes.

INSIGHT

So you want to be a trillionaire

Robert Hendershott and Don Watkins

There is a class of products, network goods, that exhibit the astonishing characteristic that they get more valuable as more people use them. Business models centered around network goods are called network business models. And they are at the core of every trillion-dollar business, along with most billion-dollar businesses.

Communication technologies are the classic example of a network good: phones, email, Zoom, etc. all immediately become even more useful as their user base grows. We call this a direct network effect. Each new user creates value for all existing (and future) users.

Owning the only phone has no value (phone, not smartphone that does a hundred useful things). But value grows with adoption/usage—as other people buy phones, you can talk to them, even from thousands of miles away! As more people start using phones, each phone gets more valuable. When much of humanity has a phone, it becomes an essential multi-dimensional communication tool that everyone automatically buys. Today if your phone dies, you immediately go and get a new one.

Note that while computer networks are network goods, this idea goes far beyond computers or even information technology. The English language’s wide acceptance sustains itself because it is a network good—the more people who speak English, the more it makes sense to learn English (“i before e, except after c” certainly isn’t enticing people!).

Other products are indirect network goods: they become more useful over time as the larger user base triggers third parties to take actions that make the original product more valuable. DVD players were a network product because as more people bought DVD players, more studios released their movies on DVD, making those original players (and all future players) more valuable. Today streaming is benefiting from an indirect network effect.

Network business models are so powerful that they can produce increasing returns, that is, as the firm becomes more successful, it becomes more profitable—creating a virtuous cycle of value creation and an extraordinarily valuable business. Most business models suffer decreasing returns—at some point marginal profit falls as the business grows. Farmers start by planting their most fertile fields. Companies focus on their most doable initiatives. Moving beyond this low-hanging fruit produces fewer results for each unit of effort. At the margin costs go up and revenues go down beyond a certain point, crushing profit margins.

Network business models turn this standard phenomenon on its head. Costs may go up as the business expands, but so does value and the price that customers are willing to pay! Profit margins can maintain or even grow, particularly for virtual products with low marginal costs. And new customers get easier and easier to acquire because the product become so damn valuable.

Firms built around network business models have what venture capitalists call an “unfair advantage.” Competitors can’t just copy what they are doing and compete. It’s easy to open a grocery store to compete with your local grocer. Maybe you can even do it a little better! It’s hard to start a social network and compete with Facebook—because it is way more interesting to be on a social network with three billion users than with three (or 300 or 3,000) users.

Aren’t unfair advantages bad? Or at least unfair? Here it is hard to argue for that because it’s the additional value to users that provides the advantage. Unlike your new grocery store, your three-user social network isn’t better—it’s worse. Unless it isn’t despite being small, in which case bye-bye Facebook (in fact, this is how Facebook replaced MySpace). An incumbent’s advantage when providing network goods doesn’t preclude better competitors, it precludes slightly better competitors. A new grocery concept that is 10% better can take over the world. A new social network that is 10% better is likely to languish in obscurity forever.

Is this bad? I mean better is better, right? And if so, is there something we can do about it? First, in a world with finite ingenuity, attention, and passion—do we really want entrepreneurs looking for 10% better when 100% is possible? A 10% improvement in the grocery ecosystem would be historic. A 10% or better improvement in technology is pretty much expected every year for every product in every company. 10% better is 10% better than nothing—unless it precludes 100% better somewhere else.

And finally, even if you want to risk 100% better for 10% better (a bird in the hand you know), what do you do? Cap the number of users allowed in any social network? That would lead to more social network that might compete, and all of them would be provide a fraction the user value that they could provide if they were one. Remember the network effect: more users equals more value for every user. In this framework, big tech equals good tech (from users’ perspective). You might not like it, but that is the unavoidable economics of the network effect.

Communication technologies, entertainment platforms, social networks, and businesses that depend heavily on data analytics all tend to have strong network effects that make increasing returns possible. 

This is the force that has been creating MegaUnicorn (trillion dollar) technology firms and remains the great opportunity of the 21st Century.

QUICK TAKES

Make prioritizing progress a top priority

Over at Vox, Kelsey Piper raises an interesting objection to the value of a progress movement.

A fairer criticism, I think, is that the cross-disciplinary questions posed by progress studies are simply too broad to be answerable. Maybe our inability to build cheaply or halt the rising cost of medicine or accelerate the slowing pace of technological innovation are three problems that don’t really have all that much to do with each other, and there’s little point in building a movement around fixing all of them.

Imagine a movement called the “solutions” movement. We’re going to get a bunch of people together and share ideas for solutions. To what? To problems!

I mean…good luck?

But I don’t think that objection sticks. First, even if there are important differences in the various problems that concern the progress movement, what they all have in common is that answering them depends on an understanding of what creates innovation and abundance.

And second, the precondition for solving these problems is a shared commitment to progress. As Kelsey points out:

[A] key idea of progress studies is that progress hasn’t been the default in human history. When progress isn’t prioritized, it doesn’t happen. And prioritizing progress is not at all the same thing as vaguely thinking it would be nice.

The progress movement’s key contribution is to argue that progress should be a cultural priority—and then to help us understand what makes progress possible.

Space selfie

The James Webb Space Telescope just went live and sent back its first images, including history’s first non-cringe selfie.

As Smithsonian Magazine notes, “The inaugural shot is much blurrier than the ‘unprecedented views of the universe’ it will begin capturing when set-up is complete this summer.”

If you want a look at what “unprecedented” means, check out this video.

Super-cool.

Biden’s tech doctrine

Adam Kovacevich has an interesting piece on the Biden administration’s approach to Big Tech, which he summarizes this way:

1.    Tough on big tech at home, but defending abroad

2.    Regulators with aggressive barks, uncertain bites

3.    Broadband & competitiveness moonshots

Overall, what emerges is that the Biden administration is made up of what Virginia Postrel called technocratic stasists: people who “promise to manage change, centrally directing ‘progress’ according to a predictable plan.”

The problem is, trying to control progress has always led to the squelching of progress.

There’s only one right answer

Peter Diamandis recently polled Twitter asking about the next disruptive technology on the order of silicon chips replacing vacuum tubes.

Lots of good answers, but for my money, there’s only one right answer.

Scientists at the Joint European Torus, a nuclear-fusion experiment based in the UK, announced on Wednesday that they had more than doubled the record for sustained nuclear-fusion time in December.

Nuclear fusion would be the ultimate game changer. As the Morning Brew piece notes, we still haven’t crossed the crucial threshold of net-energy generation. But it’s realistic to think we’ll get there by mid-century, with commercially-deployed fusion coming in 20 to 30 years.

Maybe I’m getting old, but that doesn’t sound like a long time at all.

On the other hand, maybe I’m not old enough. Yaron Brook has assured me that longevity breakthroughs are the real disruptive technology to be excited about.

I vant to suck your progress

Tyler Cowen riffs on the relationship between Bram Stoker, Dracula, and progress studies.

The novel Dracula contrasts the backward world of Transylvania with the advanced world of London, and it shows the vampire cannot survive in the latter. The Count is beaten back by Dr. Van Helsing, who uses science to defeat him and who serves as a stand-in for Stoker and is the de facto hero of the story.

We usually think about science fiction as the only genre relevant to progress. But, yeah, why not fantasy?

Like, maybe you could have a story where a teenage girl has to choose between a vampire who represents progress and a werewolf who represents the degrowth movement, and then people could debate whether they were Team Progress or Team Degrowth, and Team Progress could get very upset because Team Degrowth keeps taking off its shirt every five minutes…

Someone get on that, quick!

Until next time,
Don Watkins

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