Will ecosystems become the basis of competition in a digital world driven by IoT?
What does a 9th century scholar and algebra have to do with ecosystems, digitization and IoT? Well, a good guess would be that Al Khwarizmi, the father of algebra, also invented the algorithm. However, in our case the link we are looking for lies in the system at Bayt al hikma, Baghdad’s house of wisdom, which helped make those inventions possible.
With paper making technology from China and a translation infrastructure, Baghdad’s house of wisdom significantly reduced barriers for scholars to access knowledge. As more scientific texts from Persia, India, China and Greece were sourced and translated to Arabic, more scientific knowledge was leveraged by more scholars. These scholars’ innovations generated greater prosperity for the translation movement to attract new translators to source and translate more texts.
It was in this environment that the scholar Al Khwarizmi combined Greek mathematics based on geometry with Indian mathematics based on calculations to create a disruptive way of thinking in mathematics.
Al Khwarizmi merged visual intuition from geometry with precision from calculations, by representing numbers as symbols such as X and manipulating them with the precision of calculations, to solve problems like X+1=2. We commonly know this new unifying way of mathematical thinking as algebra.
In the same way algebra unified mathematics and changed the way we represented and solved problems in many sciences, digitization (the process of converting books, audio, video into ones and zeroes) has unified the representation of information. Digitization is currently changing product development and distribution to such an extent as to alter the basis of competition. The McKinsey Global Institute identified the digital economy as being the second economy the first being the economy resulting from the industrial revolution. By 2025, McKinsey has estimated, the second economy will be as large as the global economy was in 1995 (when the digitization age was about to begin).
Digital companies like Amazon and Google have pampered their customers to the point where all other businesses are now expected to provide almost limitless choice of products and services at a speed and a low cost. No firm can deliver this equation of choice, speed and low cost alone. Companies are realizing the only solution is to create an ecosystem of thousands of partners. Thuraya, for instance, bundles products with those of its technology partners to offer complete and differentiated solutions, while relying on a network of service partners to distribute its solutions. Thanks to its partnerships, Thuraya competes as effectively as it does against much larger rivals in the industry.
The formula for synthetizing ecosystems requires two elements:
- An enabling technology/platform - reducing barriers of entry for users and innovators and empowering them to develop new solutions.
- An operational model - creating economic network effects, fostering relationships between and among innovators and users.
Network effects create a positive feedback loop where the value of the ecosystem increases with the number of participants. There are two types of network effects:
- Same-side network effects - where the number of participants from one category impacts the ecosystem’s capacity to attract new participants from the same category. For example, as more people use WhatsApp, the more interesting it becomes for other people to use WhatsApp. In sum, more users attract more users.
- Cross-side network effects where the number of participants from one category affects the ecosystem’s ability to attract participants from another category. As more innovators create more solutions inside an ecosystem, more users find solutions within that ecosystem, growing the potential user base for solutions. This in turn will attract more innovators. In summary, more innovators attract more users, and vice versa.
The cross-side network effects between translators and scholars as well as the enlightened and inclusive system in place in ninth century Baghdad helped Bayt al hikma source a great deal of the world’s knowledge, making it accessible to a growing pool of scholars. Those scholars then made new discoveries in medicine, astronomy and other scientific areas.
Can companies successfully apply the same formula in IoT? The short answer is it’s still too early to tell what formula will work. IoT can be conceptualized as a network of heterogeneous hardware (“things”) with software enabling developers, data scientists and other innovators to generate insight and create inventive interactions from “things”. Currently, the number of connected “things” is growing at a rate several times higher than the number of innovators. In parallel, partly due to a lack of standardization, many companies have their own view of IoT and are looking to carve out their own IoT ecosystem with their own proprietary software stack/platform.
All of these factors are leading to a situation famously described by an app developer just before the arrival of the iPhone of “three million platforms with a hundred users each”. Yet Apple and Google have managed, even with closed platforms, to outcompete rivals. They did this by significantly reducing barriers to entry for developers and users through iOS and Android platforms while linking them together through the App Store and Google Play. This approach generated both same-side and cross-side network effects.
Now, in IoT, several companies have reduced barriers of entry for innovators and users alike, and they have created direct links between these two groups. With a growing bottleneck on innovators, firms may only be able to attract a limited number of innovators. They will need to look at other methods for generating cross-side networks effects. One idea is to create direct links between different platforms, which could result in a framework more attractive for both innovators and users in each platform. However, relationships need some level of integration, which in turn requires platforms to be more standardized and open, which runs counter to current operating models in IoT.
In Baghdad, linking geometry and calculations to create algebra didn’t make geometry or calculations disappear. Instead, the link was mutually beneficial to mathematicians, who developed new mathematical tools; and to those other scientists who used the same tools to model new phenomena across the natural sciences.
In looking ahead to what might be possible if we adopt a constructive and collaborative way of working, we are well advised to look to such examples from the past.