Thesis #1

Digital technology is significantly different from other technologies

One of the reasons digital technology is proving more disruptive than some earlier technologies is that it has five distinctive properties. These are:

  1. Zero (or near-zero) marginal costs. To create a digital product or service, you obviously have to make some up-front investment. But once the product has been created, stamping out millions or billions of copies is almost free. This is different from making physical things, because although one can get economies of scale by making lots of them, there is still an inescapable material cost involved in making every copy of the original.

  2. Powerful network effects. Such effects are common in many walks of life — they determine that the power or usefulness or value of a network increases not linearly, but exponentially. (This is sometimes known as Metcalfe’s Law.) Because of zero marginal costs it’s easy for digital products and services to spread rapidly, which means that network effects kick in very quickly. And of course the quickest way to grow to the point where network effects take hold is to give your product away for free.

  3. Power Law (or long-tail) distributions are much more common in digital networks than are so-called ‘normal’ distributions (the Bell Curve). This means that in almost every digital system most of the value, activity, revenue, attention is captured by a small number of sites or vendors, while everyone else struggles in a ‘long tail’.

  4. Technological ‘lock-in’. Because electronic devices and services are complex and need to be able to interact with one another, common technical standards are essential for the industry to grow. In the early stages of a particular sector there are usually lots of different and incompatible standards. But eventually one emerges as the sector’s standard — either by agreement (e.g. a trade body or a government body organises a consensus (think of GSM for mobile phones in Europe in the 1980s), or because a particular company’s technology becomes the de-facto standard for the industry (as Microsoft Windows and Office were for the PC, and Apple’s IoS and Google’s Android operating systems have become for the smartphone industry).

  5. Surveillance. Because (i) everything one does on the Net leaves a digital trail, (ii) every networked device has a unique address and (iii) most mobile devices now log their owners’ GPS co-ordinates, the Internet has become the most powerful tool for surveillance in human history. And this power is exploited both by state agencies and tech companies.

These distinctive properties have shaped the way the networked world has evolved. Nos. 1 to 4 explain why so many digital markets generate winner-takes-all outcomes, and why monopoly seems to be the default outcome in areas like search and social networking. No. 5 has provided a business model for Google and Facebook, and huge opportunities for the national security agencies of various states.

Further Reading

Ross Anderson: “Privacy versus government surveillance: where network effects meet public choice”, 13th Annual Workshop on the Economic of Information Security (WEIS 2014). Pennsylvania State University, June 23-24, 2014.

Bernardo Huberman, The Laws of the Web: patterns in the Ecology of Information, MIT Press, 2003. Amazon UK:

Metcalfe’s Law:

Wikipedia on Power Law distributions:

Tim Worstall, “Microsoft’s Windows And The Technological Fragility Of Monopoly”, Forbes, 5 April, 2014.

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