In this video, we'll look at blockchain's potential to change the boundaries of the firm. The first era of the Internet brought us several different organizational forms. There was the networked enterprise, the flat organization, the open innovation movement and business ecosystems. I've had my share of writing about these over the years. But the big hierarchies of the early 20th century corporation remain pretty much intact. Even the big.coms and so called Internet companies adopted a top-down structure with decision-makers of Jeff Bezos, Sundar Pichai, and Mark Zuckerberg. Incumbent firms have shown little desire to use blockchain to distribute power to increase transparency or to be more inclusive. Respecting customer privacy and anonymity, is not really a priority to say the least. In fact, companies making money off other people's data and operating largely behind closed doors, have had data breach after data breach but they haven't really suffered much. They should be wary, we think. Blockchain has a potential to do to these companies what the Internet did to the Industrial Age companies. So, let's start with a little economics. Hang in there. This is going to be good. Nobel Prize winning economist Ronald Coase 80 years ago identified three types of what he called transaction costs in the economy. First, was the cost of search. Finding all the right people and information and resources outside of a company to create something. Second, was the cost of coordination, getting all those people to work together efficiently. Third, was contracting costs. Keeping trade secrets, negotiating the cost of labor and materials, and policing and enforcing those agreements. Coase argued that a firm would expand until the costs of performing a transaction inside the firm exceeded the cost of performing it outside the firm. The Internet did have an impact on business initially. It dropped transaction costs somewhat in an open market. It dropped search costs through browsers and the worldwide web. It dropped coordination costs through email, social media, cloud computing. It lowered the barriers to entering some markets. Lots of companies benefitted from outsourcing customer service and accounting, as these costs in an open market became lower than doing things inside the boundaries of a firm. Marketers engage customers direct with product planners, crowdsourced innovations manufacturers tapped into vast supply networks. But the Internet of information has really had limited impact on corporate architecture overall. Think about it. Capitalism's still runs on the classic industrial age hierarchy. Most functions that companies do are within their boundaries. Managers still view the hierarchy with a clear corporate boundary as a better model for organizing assets, talent, and capital, and intangible assets like intellectual property. The old corporate model concentrates power at the top of the hierarchy, and in many cases it can stifle innovation. At least compared to new models. Corporate boards still pay executives far beyond any reasonable measure of the value that they create. This is widely understood, but it's one of those sayings like Mark Twain said about the weather everybody's talking about it, nobody is doing anything about it. The industrial complex still generates wealth. But, increasingly not prosperity. That's a big problem. There's strong evidence of an increase of oligopolies in some industries even monopolies. Another Nobel laureate Oliver Williamson predicted these outcomes. He pointed out the bad effects of industry consolidation on productivity. It leads to weaker incentives and stronger controls. Not everybody agrees with what I just said. Peter Thiel, co-founder of PayPal praise monopolies in his book Zero to One. Thiel said, "Competition is for losers. Creative monopolies aren't just good for the rest of society; they're powerful engines for making it better". But Thiel gave no real evidence to prove monopolies are good for consumers or society as a whole. Companies strive to rule their industry or market. But most democratic capitalist countries have laws to protect fair competition. Firms with no real competition can grow inefficient, raising prices in and outside the firm. Monopolies may help with innovation in the short term, but overall, they harm society in the long term. Look at the technology industry is a case in point. Companies may get monopoly power through cool products and services that customers love. But their honeymoon typically ends, their creation remains popular. But over time innovation declines or even stops. Harvard University Law professor Yochai Benkler said to us, "The Web didn't come from monopolies; it came from the edge. Google didn't come from Microsoft. Twitter didn't come from AT&T, or even from Facebook." Why? Because they lack what he calls the internal culture of pure and open exploration required for innovation. Bureaucracy keeps executives at the top from seeing the signs of change at their companies edge. That's where accompanies bump up against one another. That's where innovation occurs and ignoring it is bad for business. So, there's real value in the next era of the Internet and real incentives to join in. These platforms based on blockchain hold promise for protecting user identity, respecting user rights, ensuring network security, and dropping these transaction costs. Even the unbanked can take part. Unlike traditional firms, blockchain platforms don't need a brand to convey the trustworthiness of their transactions, they can share their power by giving away their source code for free. Using consensus mechanisms to make decisions and conducting their businesses more openly. Earlier, we covered how blockchain technology can cut out the middleman or cause them to change. Well, it can do a lot more than that. It can turn vertically integrated hierarchies into networks. It can lower barriers to opportunity.
