Crowd scale, friction and the nature of the firm

Why a new, digitally enabled, contract-based online business model is disrupting long-established enterprises.
Written by Phil Wainewright, Contributor

My ears prick up whenever I hear people talking about the works of Ronald Coase in the context of cloud-based business models. Coase inspired the title of my forthcoming book on the topic, Frictionless Enterprise, for reasons I first alluded to in this March 2008 blog post:

"According to Coase's theory of The Nature of the Firm, enterprises form to avoid the transaction costs of buying services or other inputs from other organizations. But that was in 1937. Modern communications, in particular the Web, have reduced the friction costs of doing business with outsiders at the same time as increasing competition — to the extent that it's now often cheaper to use an outside provider than an internal resource."

Given my interest in understanding and mapping the emergence of frictionless enterprise, I was intrigued to read the latest blog post by start-up mentor and investor Allen Morgan. In Uber, Airbnb, et al. explained -- The 'Crowd-scaled' Business Model, he writes, "The kernel of the, if not the entire, answer lies in the work of Ronald Coase." Especially when I discovered the article because of a tweet by Rand Schulman, who briefed me for the InsideView story that prompted that March 2008 post. That's serendipity for you.

Morgan's post focusses in on the emerging online brokerages that enable individuals to rent their homes and rooms, vehicles and rides and why that's challenging the business models of long-established traditional corporations like the hotel chains, town car operators and so on. He points out that, while Coase foresaw that modern communications technologies would help traditional enterprises scale better, he didn't realise they would also enable the emergence of (what I would call) new frictionless enterprise models:

"While such technologies allow 'command' structures to scale better, technology also has an interesting, cross-cutting impact, and this is what underlies the growth in 'crowd-scaled' businesses," writes Morgan. "We're seeing the first green shoots of 'firms' that can grow in a capital-efficient manner to a significant scale using 'contract' structures rather than 'command' structures."

So while emerging technologies such as social networks, modern communications, smartphones, mobile apps and increasing user comfort with them (what Morgan calls "the Big 5 Factors") can further enhance the efficiency of industrial-era command-style firms, we may be missing a much more important development, says Morgan. Those same technologies are enabling disruptive innovation pioneered by new breed of information-era contract-based businesses. And while Ronald Coase may not have predicted them, his theory still explains why they'll thrive. It's because in our hyper-connected, digitally embedded, software-driven modern world, the transactional costs of marshalling and pricing resources from an almost limitless sea of autonomous providers have fallen lower than Coase could ever have imagined possible.

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