Umair Haque / Bubblegeneration

Tuesday, November 08, 2005

Peer Production

Peer production, sometimes called "consumer-generated content" � communities of prosumers collaboratively producing goods and services � is fundamentally reshaping industry economics and structures across markets. Its implications are as radical as are the opportunities it offers.

Peer production is a mode of production distinct from firms and markets, combining elements of both. It is premised on a fundamental economic innovation that 2.0 technologies make possible: cheap coordination.

Firms arose because information � the costs of negotiating, monitoring, and enforcing contracts in markets � is costly for many kinds of goods and services; particularly high-value or high-frequency goods and services. But firms face an internal tradeoff of their own: it is only economically efficient to specialize in value activities to the point that specialization gains are not outweighed by the costs of coordinating the labour necessary to achieve those gains. That is, firms trade specialization gains against coordination costs.

This is one reason why so much thought and innovation has gone into models of next-generation organizational and management techniques: reducing coordination costs is an extremely powerful means of unlocking specialization gains.

But unlike in the real world, 2.0 technologies offer the potential to let virtual communities of connected prosumers self-organize and almost vaporize coordination costs altogether. This unlocks hyperspecialization gains: gains that aren�t possible for real-world firms to realize.

These specialization gains are accelerated by a supply-side network effect. Because communities have permeable boundaries � anyone can join them � your joining the network of prosumers increases my value to it, because it is nonlinearly more likely that together, we can complete an activity whose output is valuable. These supply-side network effects are a powerful component of value creation which firms cannot realize, because their structures are hierarchical and their boundaries are closed.

2.0 technologies allow production to be atomized - to be subdivided into arbitrarily fine microchunks of value activities. Prosumers can self-select and manage their own interactions with these microchunks, rather than incurring the real-world coordination costs of managers, meetings, and red tape.

Because these microchunks of prosumer-contributed information can then be recombined and reused, the community realizes a second network effect: the total value of the network of microchunks is greater than the additive value of each individual microchunks.

All this implies that peer production is an extremely powerful and hyperefficient way to organize the production of goods and service that meet certain criteria. Recently, investment in peer production models has hit an inflection point: Kleiner Perkins� recent investment in Zazzle is a bet on peer production, as are the new breed of social search startups, such as JetEye, Squidoo, and del.icio.us, as are vertical communities, such as Last.fm, Flickr, and Basenotes.

Bubblegeneration is recognized as one of the preeminent advisors on peer production strategies, economics, and business models � Bubblegen�s peer production competence is detailed in this presentation.

To get started with peer production, ask yourself:

Is information relatively cheap or expensive in my value chain?

If it�s cheap, is your value chain dominated by layer specializers with strong core competences?

If it�s expensive, what is the fundamentally scarce resource in your value chain?

How can you leverage 2.0 technologies to allow consumers access to transform this information or other scarce resource into outputs?

Is it possible to let prosumers atomize this scarce resource or information into arbitrarily fine microchunks?

Will your model realize supply-side network effects? Will marginal productivity increase in network size?

How will you capture a share of the value your network of prosumers will create? Is your business model aligned with the community�s value drivers?

-- umair // 11:24 PM // 7 comments

Comments:

I work at Zazzle and I found your post very thought provoking in how it articulated the concepts around user-generated content and the breakdown of coordination costs to effectively zero. Your ticket into this world is your broadband pipe and you are empowered to select your degree of involvement based on your own preferences and interests. There is a fundamental transition taking place to balance the ownership of content creation and digestion ... with users having more control. It's a great time to be active on the web as new value is created not just monetarily but also in terms of content and knowledge.
-JoshR, Product Manager

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Joshua Reeves // 8:32 AM

The creator of the Sim's next endeavour - new, useful example to illistrate the power of peer production.

http://business2.blogs.com/business2blog/2006/02/the_next_sims.html

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khailee // 8:56 AM

Umair, very thought provoking assessment and analysis. As you suggest, this has very broad implications. One area that a revolution is beginning is around open source software development. We're also working to integrate some of these concepts into our core business, software investment banking. http://architectpartners.typepad.com for our blog.

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Eric Risley // 2:36 PM

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Eric Risley // 2:37 PM

I found the analysis extremely thought provoking. The one question I still have is whether peer production falls short in providing the ability to hit deadlines. If the argument is that firms are inefficient because of bereaucracy, how does peer production react to enable a task to be completed within a specific time line. In addition to coordination, firms provide deadlines and dates. I am therefore still somewhat sceptical but love to hear any feedback from folks.

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Zorba // 7:43 PM

Fantastic analysis. As a fledgling economist, I find your interpretation very interesting. It almost strikes me as a marriage of communalism and market economics, which borders on an oxymoron. Nevertheless, I am also an intern for a startup company that is going to be filling some of the networking/collaborative needs that you outlined in your presentation. It was a great read for us.

http://www.jdavidmacor.com

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J David // 8:06 PM

I thought this was a great analysis of peer production. I'd be curious to learn your thoughts on the new concept of peer production in rich media, similar to what Kaltura launched a few weeks ago. It basically takes peer production to the next level and allows users to collaborate with rich media. www.kaltura.com

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Lisa // 12:46 PM