by Dana Blankenhorn
Volume X, No. XX

This Week's Clue: Barriers to Entry

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This Week's Clue: Barriers to Entry
SSP (Shameless Self Promotion)
Best of the Week
Voic.us
ZDNet Open Source
Clued-in, Clueless
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For the Week of May 15, 2006

The most remarkable achievement of the Internet Age has been to set the economic concept of barriers to entry on its head.

In the Industrial Age, mass consumption and mass production naturally created high and rising barriers to entry for any market.

Once an industry got going, it became increasingly difficult for new entrants. Once the barriers were established, consolidation led to just a few companies dominating a market. This required a larger government, in order to restrict the ability of these players to dictate market conditions. (They just restricted it, they didn't stop it.)

This has been going on for over a century now, so many economists believe it is the only way in which businesses or industries may develop.

But it's not. Even while these industrial markets were developing, service industries were being created with relatively low, and falling barriers to entry. Advertising firms, law firms, architectural firms, and other professionals found they could compete effectively, and grow into giants, on the strength of a talented core, often consisting of just one person.

This is still true, and as I note it's not remarked upon. While some law firms have become established institutions, outliving their founders, these are exceptions. While there are some huge advertising and architecture firms, these do not keep talent from competing, and beating them. And the exceptional firms must be continually nurtered through the recruitment of new name talent, or the firms quickly begin to fade.

During the rise of the PC and packaged software industries, this industrial model seemed to hold. There were dozens of PC makers in the 1970s, and a variety of operating systems. Now there are just a handful, and two (three if you count desktop Linux, which few people do) desktop operating systems. Every major software niche seemed to consolidate in the same way. There was a new niche created, an explosion of innovation, then growing consolidation leading to one or maybe two companies finishing with all the chips. Microsoft. Oracle. McAfee-Symantec.

Open source software has stood this on its head. You can see this in the quick rise of JBoss .

A year ago, JBoss founder Marc Fleury told me his wife gave him an ultimatum five years before. If he couldn't find a way to make a living from open source in six months, he'd go and get a job. So he created a course, on Java middleware, taught it a few times, and got a grubstake. Then he found some really top-notch programmers, and began offering Java middleware support based on the work of these stars.

What he basically grew was a law firm in corporate clothing. He sold that firm to RedHat recently for a reported $350 million, plus possible performance bonuses.

What did Red Hat really buy? Some service contracts, some employment contracts, goodwill, and (frankly) very little else. Should one of these "stars" decide to go out on his own, upon the expiration of a contract, RedHat could not really prevent it, any more than a law firm can stop a partner from taking his reputation out the door with him.

When someone leaves Microsoft or Oracle they lose access to the code they were working on. If a star leaves JBoss, this does not happen. Thus, not only did JBoss take advantage of falling barriers to entry in open source, but the next JBoss is able to do the same thing.

Open networks share many of these characteristics. It is still possible to start an Internet business, on a shoestring, and make a lot of money (or whatever else you want to make) in a very short period of time.

Rather than look at an obvious example like MySpace or BlogAds, let's look at Glenn Greenwald. A few years ago Greenwald was just another mild-mannered New York lawyer. Then he started to write about politics, and now he's a star. Greenwald is directly impacting what Democrats think and say concerning political issues, nationwide, simply through careful reporting on subjects of interest to him.

Greenwald's barrier to entry was nil. His is a Blogspot blog.

I personally resisted this changing reality for a very long time. I was taught that a journalist is someone who works for someone who buys ink by the barrel - that's an industrial mindset. A journalist is someone who works for someone. So for most of the last 30 years I've looked for people to work for. I have let them call the shots, I have let them choose my beats and stories, and I have trusted them implicitly to have my best interests at heart.

Sometimes I have been disappointed, most recently by Corante. I joined that company because I felt they would build my traffic, my name, my reputation, and eventually my bank account. By aggreating the work of a lot of tech bloggers under one label, they felt they could make money, and pay me.

They couldn't. One reason is the low barrier to entry we have in blogging. Another was the high cost of building a brand name in blogging, and attaching that to anything real.

The biggest sale in blog history - Jason Calacanis selling his Weblogs Inc. to AOL for $25 million, was not really the sale of content or readers or anything that scaled. It was, frankly, a hiring, of Calacanis, and an evaluation of the traffic his staff was bringing in at the time.

If this were an industry like any other, the Weblogsinc sale would mean barriers to entry in this busness were going up. They're not. While it may take more time than before to build an audience, it can still be done from your dining room, for virtually no cash outlay, and the value of that audience is going up. So is the fact that it's all about your personal brand.

Journalism, in other words, is becoming more like the law than like the car business.

This should be the solution to the "last mile" problem. Local access, run by local people, connecting to a variety of backbone providers. New, smaller companies can take advantage of Moore's Law and add capacity cheaply. They will also compete avidly, delivering more bits for less to consumers - which is the idea.

Government and economists need to recognize these changes, and get with the program. Their role should be to maintain barriers to entry that are as low as possible, so that entrepreneurism will be encouraged and economic growth maximized. We're all creatives now. It's hard to get one's arms around, both the concept and the required policy changes.

The education should start now.

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Shameless Self-Promotion

I have made a big decision. I have moved my main blog, formerly called Mooreslore, to danablankenhorn.com under the name Dana Blankenhorn. (Hey, that's MY name.) The blog is written in Typepad and is also available at 200billionscandal.typepad.com

I'm continuing to produce a special blog on Open Sourcefor ZDNet. I am pleased to say it has grown into a real money-maker. I work as a freelance writer in Atlanta, and am on the development team for Voic.Us, which aims to become a political "super-site" and offer mobile marketing services. Please visit that blog as well.

You are encouraged to forward this newsletter widely. And if you have trouble subscribing let me know. Remember: it's journalism that keeps the Clues coming...

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Best of the Week

Why a Political Fight for Open Source?

It's the business model, stupid.

Net Neutrality Becomes Partisan

This is something I predicted a while ago, but it does not necessarily please me.

How Low Can Bush Go?

A lot lower.

Net Neutrality Fight Is Not About Spin

Once the Bells stop being common carriers they lose the benefits of that status, like preferred access to utility poles and streets.

Why Politicians Don't "Get" Blogging

They don't understand the open source process.

Chewing on Astroturf

In their struggle to be seen as "fair," Washington reporters swallow the lies and spin of their sources, acting more as stenographers than as journalists.

The Biggest Rip-Off You've Probably Never Heard About

Its name is letterboxing. And the fact it's not being done more is the rip-off.

Lessons from a Fall: SGI

Proprietary advantages are temporary.

Ready for Multiple Internets

Assuming network neutrality fails in the Congress, with Verizon and AT&T favoring specific Web sites (like Yahoo's) over others, some of their chief rivals are ready

Elements of Open Source Politics

How in the world are you going to build a political philosophy on that? In fact, you build one the way Marx did, by looking at how the economy works, and what is needed for it to work more fairly.

What Open Source Journalism Really Says

Biases must be applied, bullshit must be called, and readers' biases, not just writers', need to go under the microscope.

We're All Publishers

Personally I've worked that way for over a decade now. It's not an easy road, because it means you have to take full responsibility for your work as a business, and as a trademark. This has been very hard for me to get my own arms around, since I was taught the maxim "journalists work for someone."

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Voic.Us

Georgia Economy Hit Again (and Again)

Immigration Math

The Lesson of Kos

Party Polls Support Cox Candidacy

Georgia GOP Riding Chip Rogers Back to Washington

Will the Teachers Follow Their Leaders?

ZDNet Open Source

Open Logic Building Freelance Bug Fixing Market

Libraries Pull Down the Tower of Knowledge

Free vs. Open

Must Open Source Businesses Scale?

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Clued-in, Clueless

Clued-in is a political party taking advantage of opportunity. Numbers don't mean anything if they can't translate into votes.

Clueless is Patrick Hynes. Making broadband an inevitable choice between only cable and telephony is idiocy.


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