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Tuesday, April 12, 2005

Notes on the Revolution: How Internet Aggregation is Replacing Economy of Scale

Buzz Machine's Jeff Jarvis ticks off a list of markets and describes in a sentence or two how the New Economy made possible by the Internet's power of aggregation - empowering individual choice to guide production - is replacing the Old Economy made possible by economy of scale.

"Scale Doesn't Scale" by Jarvis is the most effective illustration I've found to help understand how the Internet is having the same kind of revolutionary impact on our daily lives as the Industrial Revolution that brought about mass production via centralized control to capture economies of scale in serving large markets.

It is important to understand that New and Old economies are both forms of capitalism and represent significant advances in freeing the individual. The difference is the underlying paradigm shift from centralized production control to distributed networks of production control. The New Economy advances the individual's ability to determine the choices made available in the market.

Consider these three illustrations from Jarvis' lengthy list:

  • "Insurance: In New Jersey, folks fed up with expensive insurance created their own not-for-profit insurance companies for cars and now malpractice: They aggregated the underserved. Oh, how I would kill for that with my health insurance.
  • "Labor: If you don't need your employees to be in one place, on one old assembly line, how much more efficient it is to employ them wherever they are, whether that's at home in the 'burbs or at home in Bagalore. You aggregate the work instead of the workers.
  • "Consumer products: Customized Barbies are about aggregating a customer base of one. I'll be that car consumers will revolt against having premium packages shoved down their throats. Imagine how this could work even with Coke, which has to fight and pay for shelf space for all its many products trying to attract ever more tastes. If the let me go online and order what I want -- caffeine-free C2 cola in bottles -- I'd order a few cases and Coke would have a loyal customer and save shelving and even marketing costs... and also learn what consumers would want if they could control product design. Aggregate me, baby."

Think about it. And read Jeff's whole post.