As the world continues to be swept by financial and market turmoil many of us are wondering who is pulling the strings behind the scene. Newspapers are generally talking about a market that is losing faith on this or that but what is it, actually, this market? There are people behind it, and corporations. There have been studies showing how the collective perception of volatility in a market actually reinforces this volatility and becomes a cause of it.

Representation of the global companies affecting the financial market

Then we blame the connected world, a world where action may be faster than our capability to grasp what is going on.

However, an interesting study is now graphically showing that the financial market is actually regulated by a small number of global companies. It is a small number but it is at the same time large enough to create behaviors difficult to predict.

The study has analyzed 43,060 transnational companies selected from a database listing 37 million companies and investors worldwide, and looked at their relationships. It turns out that  a subset of these, 1,318, are actually the ones governing the whole. Each of them is connected, on average, to 20 of the others and all together they control the majority of the world’s large blue chip and manufacturing firms that in turn represent 60% of the global revenues.

Further analyses show that there is a super entity formed by just 147 companies tightly connected controlling 40% of the wealth in the network. This means that less than 1% of the companies controls over 40% of the wealth. Among them the usual suspects: Barclays Bank, JP Morgan Chanse, Goldman Sachs.

The study has been carried out, not surprisingly, by three researchers on complex systems theory working at the Swiss Federal Institute of Technology in Zurich. And they are using mathematical models applied to the study natural ecosystems to map ownership among transnational companies.

Once again we see that the natural ecosystem is being mimicked by the artificial ones we create. This is not because of an imitation intention, it is just a consequence of the presence of many actors and connectivity.

Network effect refers to the effect when the value of a product or service increases as the number of users grow. When network effects are present, they are among the most important reasons for consumers to pick up one product or service over another. For instance, when it comes to online shopping website, eBay is clearly the one that stands out among thousands of other similar website.

According to the research of Dr. Gallaugher from Boston College, the value derived from network effects comes from three sources: exchange, staying power, and complementary benefits.

•         Exchange

A network becomes more valuable because its users can potentially communicate with more people. Every product or service subject to network effects fosters some kind of exchange. For instance, an MSN account will not be so interesting if only one person has it on this planet. A mobile phone will simply severely decrease its value of communication if very few people own it. For firms leveraging technology, this might include anything you can represent in the ones and zeros of a data stream, such as movies, music, money, video games, and computer programs.

•         Staying Power

Networks with greater numbers of users suggest a stronger staying power. The staying power, or long-term viability of a product or service, is particularly important for consumers of technology products. The concept of staying power (and the fear of being stranded in an unsupported product or service) is directly related to switching costs, and switching costs can strengthen the value of network effects as a strategic asset. And the elite Boston Consulting Group is really talking about a firm’s switching costs when it refers to how well a company can create customers who are “barnacles” (that are tightly anchored to the firm) and not “butterflies” (that flutter away to rivals).

•         Complementary Benefits

Complementary benefits are those products or services that add additional value to the network. These might include ‘how-to’ books, software add-ons, even labor. Products and services that encourage others to offer complementary goods are sometimes called platforms. Allowing other firms to contribute to your platform can be a brilliant strategy, because those firms will spend their time and money to enhance your offerings.

I just finished to read a nice book, “the Big Switch, rewiring the world, from Edison to Google” written by Nicholas Carr.

What strikes me most is not what Nicholas is saying but what he is not saying: he never speaks of telecommunications.

He starts by looking at the rise of the electricity infrastructure and of its impact on the business and on our everyday life. Then, almost with no gaps in between he starts to speak about the new infrastructure being created by information and computers processing this information. It is this new infrastructure that we are starting to experience that is changing the business and reshaping our lives.

Has he forgotten that this infrastructure exists because there is a telecommunications infrastructure to enable it? Has he forgotten that the telecommunications infrastructure has changed the business and our life? That this infrastructure has made other infrastructures possible, like the network of transport of goods , the network of news and entertainment?

Apparently he has. Probably he considers the telecommunications infrastructure has something that has found its real dimension in the enabling of the information and processing infrastructure.

He may be right. This is something that I feared in the last part of the nineties when I wrote the book “the disappearance of telecommunications”. The success, the pervasiveness, the efficiency of telecommunications is begetting its demise from our perception, it’s making it disappear.

This fading away from the center stage is flanked by a decrease in revenues that may tend to stop once it matches the operation cost. Zero margin maybe the asymptote.

Not a nice thought of course. How can this infrastructure be leveraged by those who created it and keep investing money in it, a particularly hot question in these days when a huge amount of money would be required to move the present still largely copper infrastructure to a full optical infrastructure. The paradox, as Roberto Minerva pointed out in some of his posts, is that by moving towards the unlimited capacity offered by a full optical infrastructure and its much higher efficiency we will accelerate its demise from our perception as everyday users.

At the same time, this shift will increase enormously the growth of ecosystems that thrive on very low transaction costs.

I was reading Technology Review the other day and I stumble on an article reporting that a team of researchers managed to measure the processing speed of a human brain in responding to visual stimula, http://www.technologyreview.com/blog/arxiv/24030/

I was intrigued at two levels. The first goes back to my youth times when I studied physics and the various aspects of entropy. Of these, and there are many, I did not remember anyone related to measuring speed of some phenomena. This is what was used by a researcher of the University of Provence in France, Fermin Moscoso del Prado Martin -does not sound like a French name to me….

Relation between entropy (bit) and respose time in a human brain engaged in visual recognition

You may want to read the article to know more about this intriguing relation between entropy and measuring reaction time of our brain.

The second aspect that made me think was the amazingly slow speed at which our brain seems to process information, on the one hand, and the incredible results it can derive from such processing, on the other hand. We usually say we need broadband communications to match our visual sensor reception capability. How could it be that we need to transmit at several megabit/s to fool our eyes and our brain into believing it is looking at something real, when it processes visual information so slowly? Indeed, all comments from readers attached to the article were of disbelief. The unanimous outcry was that that scientist got it wrong.

Well, I do not know if he got it right or not but although the result is somewhat unbelievable it is …possible.

This has to do with the power of connectivity in a meshed network. The meaning, the perception we have of the world around us is not coming from an algorithm producing a single value, like 324 is red, 7864 is a rose,…rather it is a state of mind, or better the state of activation of a certain (huge) number of neurons. This activation may result from very few bits, and then create an avalanche leading to the activation of all that neurons’ network. It is like a bomb: it may take just one switch (two bits) to activate it and the results may be felt over a very large area.

It made me think about the similarity with business ecosystems. A tiny action on the part of a single player, generating in comparison very few bits of information, may trigger significant changes in a whole ecosystem and as a result the behaviour of several actors may change, even though there is no direct exchange of information from one to the other. It is the change of state in the business ecosystem that triggers the response.

We see this happening more and more as we move from value chains to ecosystems. The former has a sort of regulated information flow (regulated by contractual obligation from one ring in the chain to the next one and although the efficiency in the value chain may be high the time it takes to perculate to the end of the value chain may be significant), the latter is the result of a change of state and it propagates instantaneously to all actors in the ecosystem. Of course some of them will take notice and react, some others will disregard the information. In an ecosystem all actors are basically autonomous systems and react based not on communications with other actors but based on the change of context.

It’s interesting the relationship made by Antonio in his post with the concept of ecosystem and the Game Theory. A successful ecosystem happens when one engages different and complementary groups towards a common goal, using sided network effects produced by these complementary groups to increase the power of the ecosystem.
The first big challenge is to create an expectation in these groups by transmitting them a message that one is looking for a win-win result, looking for cooperation instead of competition as in Game Theory. One example was when Apple launched a new SDK, communicating that its effort was to facilitate developers’ work.
However, to transmit the message that you are looking for a win-win result is quite difficult because normally, the group or just a few players of the group that you are trying to engage have conflicting goals. Therefore, it becomes a tough job to maintain the image that you are interested in developing an ecosystem; it is tough to reach a unanimous solution and actions among players of the ecosystem. One example could be the Google’s image nowadays. A lot of people are starting to become skeptics about how Google manage the customers’ personal information: Google is failing to transmit the message that it just uses the customers’ information in anonymous way, and maybe for this reason, Google is losing its credibility.
The second challenge is to fulfill the expectation created. The company needs to create innovative solutions that fit in these groups’ needs. Apple Store is a good example.  First, it created a simple way to buy music where it’s possible to buy just one song and not the entire CD. In addition, the price of each song becomes standardized.
Besides, innovation is not just something that we wake up someday and say: “Today I want to create a disruptive innovation.” Google and Apple, two reference companies when we talk about a portfolio of innovative products, really have innovation embedded in their values. Google’s 20% rule is an example. The company allows its engineers to spend 20% of their working time on corporate projects of their choice.

Ecosystem is becoming a fancy word. This is bad since it risks losing the value that can bring to the field of modelling economic systems.

When is it worth looking at a business environment in terms of an ecosystem?

There are several characteristics that can be considered. Here let me mention just one, that probably should take precedence.

In order to apply the ecosystem paradigm there should be a significant number of players in that environment having mutual active interactions. Just buying something does not make you, per se, an active player. If, however, you buy and you loosely interact with other players, e.g. by selecting other products and services based on what you bought, and your choices create ripples in the business environment, then you can be considered an active player (these ripples shall go beyond the simple fact that any buy increase the value of that market).

If the number of players is low, it is most likely that a modelling based on value chains is more effective.

It is, in the end, the issue of efficiency, that is the evolution engine of all economic systems where there is competition, that rules. Once the number of actors grows beyond certain limits the contractual obligations ruling value chains become too complex and they lose efficiency.
This loss of efficiency shifts the paradigm towards the one of ecosystems since there we dismiss contractual obligations (we lose their efficiency along with their cost, it is a balance issue, what is greater).

The rise of interest in ecosystem is a fall out of better and more efficeint communications, bringing together many more players than in the past.

We still have plenty of value chains but the communications fabric brings together many value chains (look at the entertainmente environment with value chains like digital terrestrial television, satellite, IPTV, Blockbuster, YouTube). Users move seamlessly from one to the other creating a complex web of interactions (where are the ads going? It depends on the fleeting users’ behaviour) and these can be better modelled in terms of ecosystem, an ecosystem that embeds various value chains.

Yesterday I gave a talk at the Milan Science Museum on the morphing of cell phones and services into a complex ecosystem in the next decade. The occasion was the presentation of results of a European Project, http://www.angel-ist.eu/news.php , on the theme Light and Well-being.

What surprised me were the talks given by architects, by Philips and by bTicino that emphasised a new world based on ecosystem. Everything is connected, no one can play the game alone. bTicino said that they used to look at their competitors, sometimes they partnered with them to work out standards. Now they have to look to other constituencies to understand what to do and if what they are doing will be in synch with the overall evolution.

The value is shifting from the single object, service, to the context. In turns, this context is the result of the ecosystem evolution.

Light has been marked as a way to create ambients within an ambient, but that cannot be done in isolation, independently of what is inside and what will be inside that ambient. A television with an aura created by a lightning around its frame needs to interact with the lights in that ambient and change accordingly. As it is changing, it changes the ambient and this one will react. The presence of a specific person leads to a specific lightning. It was even mentioned that (medical) doctors may have a saying on the lightning since blue light lowers blood pressure…

I said in a previous post that after the “integration” and then “convergence” mantras the new one would likely be “ecosystems”. Unfortunately, this is becoming true at an incredibly fast pace. Probably the “convergence” has run its time, it has not brought the benefits most people expected and something new, and intriguing, has to be found. The sooner, the better.

I was looking on the web the concept of cloud computing, that some people mistake as a different name for “grid computing” whilst it is a much broader concept.

To explain the “reach” of the concept one paper, http://infreemation.net/cloud-computing-linear-utility-or-complex-ecosystem/, and several others, made reference to “processing” in an ecosystem. Here we go with the new word.

I am not going to dispute if cloud computing is an ecosystem in itself, if it finds its value within an ecosystem, if it creates an ecosystem or if it is better understood, modeled in terms of ecosystem (although I would love you, readers, to start commenting on what relation may exist between the concept of cloud computing and the one of ecosystem).

The point I am making is twofold:

One, ecosystem is now mainstream and it seems good to relate anything to an ecosystem

Two, today’s business, technology, enterprises are developing, fighting for the market success in an environment that it is not just complex, it has very diverse players, constituencies, relations and this whole seems to be better described using the ecosystem paradigm.

Probably, it is a bit of the two. From my point of view, I would forget the former, and focus on the latter. Once you do that, however, it is not sufficient to state that “cloud computing” is …an ecosystem. You need to explain why. And I feel that it is in this explanation that lies the value of the ecosystem approach.