Collective intelligence as commodity

The most important metric to track with respect to services on the Internet is collective intelligence.

At Hambrecht & Quist's Technology Conference last month, a number of investors were in sustained disbelief that Internet stocks are continuing to appreciate in value. Investors could not understand what defensible position these companies had gained. In one of the breakout sessions, an investor asked an executive who works for an extremely successful Internet retailer a question that plagued many at this conference with respect to Net-based companies: If a large company with deep pockets decides tomorrow that it wishes to build a similar service, and this company is ready to invest five times as much as you in infrastructure and ten times as much in marketing, what happens to your barriers to entry? What will you do at that point?

The question, while pointing up a very realistic possibility, overlooks a very important fact. I would argue that the single greatest barrier to entry on the Internet today is not brand, content, technology or exclusive distribution partners. It is collective intelligence.

Running an electronic business in a networked world is a very different challenge from running a brick-and-mortar operation. Mistakes do not have to be replicated or avoided, they can be deleted. A large company would not be able to copy an online commerce service, and it's not because of proprietary content or proprietary technology or even proprietary data.

It's because of the collective intelligence the online service has gained since the day it was launched.

Amazon.com, America Online, DoubleClick, and VeriSign share one fundamental characteristic: they all have fairly long-standing networks. These networks are made up of users who access and utilize the service being offered on a regular and individual basis--regular in the sense that they use the network in a repetitive manner, and individual in the sense that every user in the network can be identified, to a certain degree of accuracy, based on his or her demographics.

In other words, all of these companies aggregate audiences that use their services on a frequent enough basis, and for a wide enough range of specific functions, that certain lessons can be deduced. The network provides the collective intelligence necessary to maintain a market advantage. For example, the fact that a service like Amazon.com works is a direct result of the collective intelligence the company has gained from its network. The online book retailer does not have to wait for thousands of consumers to complain about being unhappy or confused before it can begin taking steps toward change. All it needs is one person or one observation, and it can dramatically improve its service--immediately. This efficiency of scale can be understood as collective intelligence.

For arguments sake, let's imagine a similar scenario in the physical world. In order to improve the brick-and-mortar approach to selling books, book retailers have to instruct every last employee before corporate changes are implemented. Rather than simply changing a few lines of code, as their online counterparts would, physical booksellers must amend the codes and regulations of their bookstores, and then retrain every affected employee before tangible change can take place. Thus, in the physical world, there can be no assurances, and no effective means of monitoring whether change has been successfully implemented, without assigning some individuals to play the role of inspectors. In other words, there is no collective intelligence, and, as a result, there are no efficiencies of scale.

Given that the Internet is the network of all networks, collective intelligence will become one of the most significant barriers to entry for new companies hitting the online commerce scene. Why wouldn't the value of the collective be measured in the same way that we evaluate the pipeline for enterprise software companies, or page views for media services?

The faster the network or collective grows, the faster it will experience mistakes from which it can learn. I suspect that, before the turn of the century, collective intelligence will become a crucial business model metric.

Danny Rimer writes regularly about the Internet in Marketwise.