The new barriers to entry

At this year’s Foo Camp, I had some really interesting conversations with people about economics. There’s a sense in the tech world that there is a genuinely new economy emerging, and we don’t know what it will wind up looking like.

There are plenty of reasons to feel this way:

• Crowdfunding and microfinance tools like Kiva and Indiegogo;
• The demise of long-reliable economic indicators like GDP;
• The liquidity of online transactions with trust and rating systems that facilitate barter;
• Our ability to easily track new currencies such as reputation;
• A big decentralization of businesses, with the App and eBay workforces swelling;
• Tools that reduce the friction of transactions, making it possible to pay for economic resources by the drink.

Tim O’Reilly stacked the attendee list with disruptive startups and breakout success stories from Kickstarter, as well as smart economists and professors. This is the genius of Foo Camp: conversations happen because interesting people are getting scruffy and unkempt together.

First up: barriers to entry.

If you believe early Internet pundits, the Web would give us a flat, level playing field where anyone could be king or queen.

That’s not what happened. Sure, the Web has disrupted plenty of industries, largely because it’s overcome the inherent friction in many business processes. But there are still huge advantages that large, well-entrenched players enjoy.

This is as true today as it was when Michael Porter described the “hole in the middle” problem: you can be small, and compete on differentiated niche; or big, and compete on cost and margin. But being mid-sized sucks.

Barriers to entry at scale were traditionally related to control over economic inputs and outputs:

• You could corner the market for a particular resource.
• You could lobby politicians and enjoy a sanctioned monopoly.
• You could train the market on a particular way of doing things.
• You could have access to capital.
• You could control a supply chain or means of distribution.

There may be good reason to believe that the dominance of these scale-centric barriers is over. As Geoffrey West observes:

The great thing about cities, the thing that is amazing about cities is as they grow, so to speak, their dimensionality increases. That is, the space of opportunity, the space of functions, the space of jobs just continually increases.

Companies hit a point of diminishing returns, where scale costs more to deal with than it brings in. But cities become more productive as they get bigger. Are new-economy companies more like cities?

Nope. They’ve just changed.

I contend there are three big barriers to entry that companies can erect:

• Attention. Simply, if you have people’s attention, you can direct it at things. Attention is a scarce resource.
• Permission. The right to interrupt a consumer—to send them messages—is a strong advantage.
• Math. The ability to crunch data and make optimized decisions is an advantage. Access to data, and tools to mine it are key.

There likely aren’t fewer barriers to entry, just new ones. Carriers, cable companies, news networks, and others are scrambling to control and consolidate these in order to tax our online lives.

So perhaps one facet of this elusive new economy is the use of math, attention, and permission as a valuable currency for which members of the chain are willing to—or forced to—pay handsomely.