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“The recovery in profitability has been amazing following the reorganisation, leaving Barings to conclude that it was not actually terribly difficult to make money in the securities business.”
- —Peter Baring, Chairman of Barings Bank, September 1993.
Replying to Peter Norris’ remark: “We’ve tried everyone. It’s hopeless.” “I therefore have to inform you that Barings is insolvent and will go into immediate liquidation.”
- —Also Peter Baring, Chairman of Barings Bank, February 1995.
Much of modern commerce is predicated on the benefit of scale. Never before has scale been quite to easily available: the intersection of the networked economy and the information revolution — which I read as the final liberation of data from substrate — has delivered the possibility scale effects into the hands of every netizen.
No longer is capital a prerequisite. No longer is is reputation a prerequisite. No longer is is is membership of the the guild a prerequisite. For the first time in history, the entry barriers are down in many industries.
This is the story of the internet titans: everyone built a a monopoly where none existed before. In businesses where there is a a natural Monopoly effect, the the infinite scale presented by the network represents, to one lucky winner, riches untold.
For natural monopolies confer a licence to extract rent. Amazon has a natural Monopoly. So does Google. So does eBay. And Facebook. And Microsoft. Their value derives, in large part, from from their monopoly. Monopoly + network + substrate elimination = licence to print money. All you need to do is keep your network up, and defend your monopoly. The profit takes care of itself.
It is not the technology that is valuable, but your monopoly.
For businesses that don’t have a monopoly — and if they are around at all, that means their market is one where the monopoly effect is limited — scale is a different proposition. It is a threat. It's benefit accrues to the consumer. You have to keep up with it, or you die. Your margin moves in lockstep not with your running costs, but those of the most efficient competitor on the network.