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Just Managing: Choose Wisely

For the past year, I've been writing about the resilience of the old rules in this new economy. Sure, the wiring of the world has changed many fundamental things about how people connect to one another, but all along in business, the fundamental truths of management are still the ones that matter most, especially among startups.

Well, I lied.

Not intentionally, of course. I'd just like to acknowledge that insisting that one set of rules, old or new, applies to all businesses is silly. And so I concede that there are a few new rules to the new economy - it's just that one should accept them with a grain of salt the size of a boulder.

The following is a tale of when the new rules matter:

Last week, I met the founders of a nifty Boston-based startup called Dotclick, a company that will live or die by the power of "network effects." The law of network effects holds that the value of a network increases exponentially as it grows, in contrast to the laws of conventional economics, in which a fixed asset generates decreasing returns over time.

In other words, smart businesspeople can create an asset whose returns increase over time. Microsoft realized this with its standard-setting software, which became an ever-higher margin product once it achieved a critical mass of users that granted it a de facto monopoly.

Dotclick presents itself as a marketing services company that taps into computers used by people who access music online.

"Dotclick makes people's music collections - whether downloaded from Napster or purchased from Tower Records - into a key into the world of information about that music," says VP Ollie Jones.

The company has produced a plug-in application that members download from the Web site and then hook up to their media players. The members then construct an online identity, and their entire musical listening experience essentially takes place in real-time, as a collaborative event involving other Dotclick members. As the members listen to music, their experience is tracked by the Dotclick software, which captures how often people listen to a given song and how much they say they like it. Members also can chat with one another about music they're sampling. The software also captures the favorites lists of members, compiling a profile of each person according to their individual listening behavior (as opposed to the Soundscan system, which tracks how many albums are sold on a weekly basis.)

Dotclick then can aggregate behavior and opinions and make individual listening suggestions based on the collective wisdom of its members, much like the recommendations feature on Amazon.com. The company is able to do this because the core of its technology features automated collaborative filtering, which "automates what happens in real life," according to Dotclick founder Pam LaTulippe, who worked with the technology while at Firefly, a much-heralded startup out of MIT's Media Lab. Essentially, Dotclick's application finds patterns in large collections of data, making intuitive leaps based on seeing how, in this case, individual tastes match up with others.

The Dotclick community presents tremendous opportunities, not merely to its members, but also to musicians, who link their Web sites to Dotclick (as a few bands already have), or use the service to form fan clubs or contact members with a preference for their music.

"It's a tool to help you generate hits if you are an artist because it helps you find your fan base," says LaTulippe, pointing out that rather than throwing mass marketing money at mass media, bands can build hits by targeting likely fans and helping spawn great word-of-mouth.

Dotclick owes its success to dynamics best suited to the Web: Fans form groups in a self-organizing, ground-up fashion. The group, and not some authoritative leader, ultimately serves as intermediary. Tastemakers do emerge from the pack, as individuals earn "karma" points when others recognize their opinions. Yet again, these leaders are selected by the group, on the basis of trust rather than power or authority.

How does the law of network effects apply to Dotclick? The company simply needs to hit a critical mass of users, attention and input from artists in order to become the pre-eminent Web destination for music information. Gaining a robust community of users makes success self-generating, as that community then functions as incentive for more users, who will have a better shot at finding individuals with their unique tastes, to join, and serves to attract bands to the service.

It's too soon to say whether Dotclick will hit the tipping point necessary to catalyze user participation, media attention and advertising support into a thriving entity. The company launched the service last month and is ramping up its marketing efforts.

The salient question today is not whether there are two different laws of physics that govern the world of business - I believe there are. The real challenge is figuring out when the new rules apply. It's much the same as the new physics conceived by Niels Bohr, Werner Heisenberg and Albert Einstein. Quantum physics is a brilliant and fundamentally different model of life in the universe, but it applies only to a minuscule subset of situations in the world. The Web corollary is that there are new laws for doing business in the Internet Economy, but one should apply them judiciously.

I'd venture to say that when companies are making new connections and forming new communities, when they are basing their competitive advantage on intellectual property that is both shared and unique, when they are setting new standards (whether technological or human-based, i.e. forming communities), then one can apply new rules. But there will never be a simple litmus test.

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