The Kindness of Strangers

This article is the first of two Perspectives on theimplications of Web 2.0.

In some American cities, Craigslist, a largelyfree Internet listing service, has displacedmore than 50 percent of the classified advertis-ing revenues of the local newspaper. Since theaverage metropolitan daily would lose moneywithout classifieds, Craig Newmark and histwo dozen employees are well on their way toupending an industry.

Elsewhere on the Internet’s new frontier,dubbed Web 2.0, Wikipedia gets 1,000 pageviews per second while traditional encyclope-dia companies struggle. And then there’sNapster. For companies in the cross hairs, Web2.0 competitors can be lethal. But why wouldanybody e lse care? I t i s not as i f CraigNewmark, J immy Wales ( the founder ofWikipedia), or Shawn Fanning (Napster’s cre-ator) got rich in the process.

These glitzy exemplars of the new “new econ-omy” are interesting less for what they aredriving than for what is driving them. Theyare bright paper boats floating on much deep-er currents. It is the deeper currents that havewider application.

Web 2.0 is often described as an exciting set ofnew technologies: RSS, AJAX, SOAP, and soforth. These are cool: they change the Netfrom a noun (static Web pages) into a verb(services delivered over the network, throughthe browser). But the deeper technological cur-rent is simply the uninterrupted progression ofMoore’s Law and its correlates for storage andbandwidth. As computing and storage andtransmission become arbitrarily cheap, it does

not matter where the data are kept or where thecode is executed. Client and server becomeinterchangeable peers. The network becomesthe platform—an infinitely large platform thatnobody really owns.

Implicit in these abstract statements are thetwo basic (and quite distinct) phenomena thatcharacterize Web 2.0: the empowerment of theperiphery and loose modularity.

The Empowerment of the Periphery:Threadless

Threadless (www.threadless.com) serves acommunity of some 370,000 T-shirt enthusi-asts. Visitors can browse a gallery of 94,000 T-shirt concepts—all designed by the communitymembers themselves. They post about 800new designs each week, critique one another’swork, upload photos of T-shirt sightings, andmaintain personal Web pages to advertise theirtaste—and themselves. Submissions are pre-sented for evaluation on a scale from 0 to 5;the site receives about 750,000 evaluations aweek. On the bas is of that feedback,Threadless puts about four designs into pro-duction each week, paying the winning design-ers $1,000 and putting their names on thelabels. When scoring a design, members indi-cate whether they would buy the T-shirt if itwere manufactured. (See Exhibit 1, page 2.)Threadless uses those responses to set produc-tion volumes. No Threadless T-shirt has everflopped.

It is an elegant business model: Threadless hasits customers creating the designs, selectingthe product line, fixing production volumes,and doing the marketing, promotion, and sell-ing. Manufacturing, of course, is outsourced.All Threadless has to do is maintain the Website. Zero market risk and negative workingcapital. According to estimates by Frank Piller

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of MIT, Threadless sells about 60,000 items amonth at $20 each. With a 35 percent grossmargin, the company earns about $5 million ayear before sales, general, and administrativeexpenses. Threadless has 20 employees. With$250,000 in gross margin per employee, what’snot to love?

User-generated content is the essence of Web2.0 . Blogs , eBay, Wikipedia , MySpace ,Facebook, YouTube for videos, Flickr for pho-tographs, del . ic io.us for bookmarks, TheCambrian House for software: they all exploita simple peer-to-peer technology platform tonurture peer - to -peer human networks .“Communities” are born, often of staggeringsize. Thirty-five million people writing blogs.More than a million Wikipedia articles. Sixty-seven million members on MySpace.

Size matters. It makes possible a diversityunlikely in geographically defined communi-ties: critical masses of people with even the

most obscure enthusiasms can find one anoth-er. The community—by adding descriptivemetadata (“tagging”), by voting, and by shar-ing mutual feedback—builds social capital inthe form of personal reputations and collectivetrust. Metadata describing the community’sown behavior become the means of its ownorganization, and the sheer volume of poten-tial applause serves as a motivation to con-tribute.

Size permits semiprofessional and professionalparticipation: small shops on eBay, rock bandson MySpace, and art students and graphicdesigners honing their skills or promotingtheir portfolios on Threadless. Instead of big,corporate, economically motivated producersselling to individual passive consumers, we seethe growth and empowerment of active user-producers spanning a continuum of skills,sca les , and mot ivat ions . The dis t inct ionbetween producer and consumer—the startingpoint of a lmost a l l market ing—is blurredbeyond recognition.

Loose Modularity: Trulia

Trulia (www.trulia.com) is a real estate searchengine. It is paid by real estate brokers for theleads it generates. On the home page, youchoose a geographic location and specify thetype of home you are seeking. Trulia then dis-plays a wonderfully interactive and easy tonavigate list of homes that satisfy those crite-ria. (See Exhibit 2, page 3.) Click on a proper-ty on the adjacent map and get more informa-tion; click on an item on the list and see fulldetails and a map of comparable l ist ings.Thanks to AJAX (asynchronous JavaScriptand XML), Trulia feels like an applicationrather than a Web page—a “verb” rather thana “noun.”

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A T T H R E A D L E S S , T H E C U S T O M E R N O T O N L Y I S R I G H T B U T A L S O D O E S M O S T O F T H E W O R K

From Threadless.com. Used with permission.

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The listings are sourced from participatinglocal real-estate offices, and the map comesfrom Google Maps—all at no cost to Trulia. AnAPI (application programming interface) pub-lished by Trulia allows brokers to submit theirlistings as data feeds; Trulia in turn relies on aGoogle API to generate the custom map.Joining these feeds is easy: people with moder-ate programming skills could build a simpleversion of Trulia in a few days.

Trulia is a “mash-up”: a new service createdfrom the easy combination of other people’sdata. There are currently about 280 APIs pub-l ished by more than 100 Web companies(including Amazon, eBay, and Google). Thatuniverse defines, in principle, 60,000 servicesthat could be “mashed up” through their pair-wise combination. Already more than 1,000actually exist. API publishers don’t know whatapplications will emerge; they don’t need to.

Most do not even know or care how their APIis currently being used. But at very low cost,APIs place in the hands of entrepreneurs themeans to create value through the near-infinitepower of recombination—and thereby reducethe cost of innovation by orders of magnitude.

Most publishers of APIs make them availablefor free, in the belief that they will gain morefrom a vibrant application ecosystem thanthey will forgo in cash flow; in the belief thatindirect ly monetiz ing something that hasbecome really big has a far higher expectedvalue than charging ex ante for something thatnobody knows how to use; and in the beliefthat “some rights reserved” can be more prof-itable than “all rights reserved,” because a taxon experimentation costs more than it yields.

Mash-ups tap into the well-known power ofmodular i ty to accommodate complexi ty,adaptability, and variety. But this is not themodularity of enterprise software or of anautomobi le . In the wonderful phrase ofHarvard’s David Weinberger, i t is “smallpieces loosely joined”—building blocks thatyou can mix, match, and combine with almostchildlike ease.

One has to ask: Are these principles widelyapplicable? How much of the tight couplingthat corporations typically prefer is the legacyof obsolete technologies and a reflex for con-trol? How much net value is lost by taxinginnovation to satisfy some financial calculus?Craigslist is 99 percent free, yet the companythrives. And if that still seems a little toocrunchy-granola, what percentage of Googlesearches are uncompensated? Probably aboutthe same. Maybe, just maybe, Google—theparadigmatic Web 2.0 company—understandssomething that the textbooks of finance andcontrol have missed. And maybe the power of

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Copyright © 2005–2006 Trulia, Inc. Used with permission.

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these remarkably thin business models can infact depend, like Blanche DuBois, on “thekindness of strangers.”

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Web 2.0 i sn ’ t jus t for geeks and goths .Companies—whether in the cross hairs or onthe sidelines—must address some hard ques-tions. How can we catalyze, build, and influ-ence communities? How can we create theopen standards that allow those communitiesto innovate as we cannot? How must we rede-fine the boundaries of our business? How canwe earn a return, directly or indirectly? Canwe stomach the leakage of brand control, ofintellectual property, of predictable cash flow?And if we cannot or will not, how will we dealwith a competitor that has no such inhibi-t ions? Or with customers, suppliers, andemployees who simply demand a Web 2.0experience? And even if we can cope with allthat now, how will we cope in five years’ time,

when the principles are the same but the chal-lenge, thanks to Moore’s Law, is ten timesstronger?

Philip Evans

Philip Evans is a senior vice president and director in theBoston office of The Boston Consulting Group.

You may contact the author by e-mail at:

evans.philip@bcg.com

The author wishes to thank Karim R. Lakhani, formerly of BCG and now an

assistant professor at the Harvard Business School, for generously sharing his deep

knowledge of technology and collaborative networks.

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© The Boston Consulting Group, Inc. 2006. All rights reserved. 10/06

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