First published in 2000, this essay is experiencing a resurgence (meaning I’ve been getting some emails on it recently)

20th century business was about mass; 21st century business will be about micros. Mass markets, mass marketing, and mass production will be replaced for many consumers with micromarkets, microproducts, and microtransactions. Understanding this trend, why it’s happening, and how to take advantage of it, will become a necessary ingredient to business success over the next five to ten years. Some industries like entertainment, publishing, and financial services will be hit first, but eventually nearly every consumer-oriented business will have a clear and unwavering focus on the micros.

Where business in the 20th century took things like rapid ground, sea, and air transportation, assembly lines, labor, market segmentation, and fashion for granted, the business of the 21st century will look to the presence of a ubiquitous network, collaborative and specialized manufacturing, many-to-one and one-to-one creations, and promiscuous provision and payment as standards. The micros will underlie these attentions.

Micromarkets
The development of micromarkets represents the most complex and significant aspect of the transition to the micros. While technology and changing needs create a space for both microproducts and microtransactions, it is the development of micromarkets that enables their growth.

Just as the industrial revolution provided a context and rational for the development and nurturing of mass markets, the decentralized connectivity of the networked world provided the context for the growth of micromarkets. Unlike mass markets which depend not only on mass production, but also on mass fashion and supporting mass financial regimes, micromarkets are characteristically focused, individualized, flexible, highly efficient, and are intended to serve anywhere from very few consumers-even single consumers-to many thousands.

Micromarkets work through three primary agencies: differentiation, connectivity, and economy. Combined, these three agencies structure the micromarket in opposition to its mass market predecessor. As with the other micros, the context of the micromarket-that is, the growth of a ubiquitous and omnipresent network-is an important consideration in understanding its characteristics and its potential impact.

Micromarkets work by exploiting the power of the network to differentiate individual consumers and their wants and needs. This is in opposition to mass markets which necessarily are geared towards large user communities (such as teenagers, or gen x, or baby boomers). Mass markets cannot operate in terms of individual users: neither the material infrastructure or capital expenditure permits it. But, because the network encourages interaction on the level of individuals, aggregated organically, producers of goods and services can realistically reach and interact with individual consumers.

Secondly, micromarkets work by connecting individuals and enabling transactions on any geographic scale. In an economic system structured around the necessities of a mass market, individuals as transacting agents are limited to an immediate geographical area. There is very little economic incentive (or capability) for individuals to attempt to connect and transact on a larger scale. Only the heavily capitalized intermediaries can hope to reach consumers on a wide geographical level. The context within which the micromarket grows enables individuals to circumvent the intermediaries to connect to one another regardless of geographical scale. It is not that the Internet makes it possible for a pork farmer in West Virginia to sell directly to a factory in South Korea, it is that the pork farmer can access micromarkets to sell his product locally, in the next state, or across the world.

Thirdly, micromarkets permit producers significantly enhanced levels of economy through the sale and distribution of highly refined and customized products to a known marketplace. This can not be overemphasized as it is one of the key drivers towards the success of these marketplaces. Mass markets and their supporting infrastructure exist in a state of extreme economic inefficiency, where the costs of selling and distributing a product grows exponentially with the increase in potential consumers of that product. When a consumer base is known, the sales cycle diminishes and the distribution network can be developed and maintained at scale.

Microproducts
Microproducts differ from mass products primarily in their utility, their efficiency, their modularity, their economy, and their production. Mass products are designed and developed to fill a niche in the marketplace. This niche, primarily because of the grossly inadequate technologies of market segmentation, includes consumers united by one thing but not by many others. The problem is that for mass products to be successful they must be many things to many people, which has as its necessary opposite: a product that is not many things to many people.

Microproducts are designed to fulfill certain discrete needs at the time of need, doing away with extras to satisfy consumers other than the consumer who is actually purchasing the product, and ensuring that the product will be consumed at time of purchase. This combination of limited use and just in time fulfillment makes a product more economical for both the producer and the consumer. An example of this sort of microproduct might be an academic journal article, which benefits from its ability to reach a targeted consumer, and can be consumed immediately upon production rather than after a series of uninteresting products (from the consumer’s perspective) have been aggregated for an economically productive sale.

Electricity is another sort of microproduct. While certainly not customizable in its base form, the amount provided to a household and actually used is highly customizable, and with development of fuel cells and power chips, consumers may actually be in a position to sell electricity back to the public grid, or appliance makers may actually be able to develop business models based on consumption of electricity (therefore use) rather than an outright sale of an appliance. A person who wants a large screen TV but really only uses it for DVD movies, could rent the hardware for a small kilobyte fee.

The most obvious microproducts, however, are intellectual property. Music, video, novels, research, educational lessons, games, etc. We’ve already seen the trauma that the development of these microproducts are causing. Some industries, particularly gaming, are quickly incorporating the inherent potential to be exploited from microproducts. Other industries are fighting such a transformation tooth and nail. These products can be purchased as needed, provide exactly what the consumer is looking for, can be aggregated to create new products that again match desired specifications, are hugely economical in the sense that their distribution and sales processes and often cycles are enormously efficient.

In the realm of intellectual property anything that can be digitized can be developed into a microproduct and profitably sold. Of course, it can more easily be pirated, but with the development of business models that are responsive to the contexts of the micros, piracy can become part of the profitable equation.

Microtransactions
Microproducts, purchased in the context of micromarkets, are best paid for with microtransactions. Microtransactions are small-scale payments that are efficiently fungible (with or without the existing credit infrastructure), are compoundable, and can scale as the need arises. What this means practically is that there is very little in the digital world than can not be purchased with microtransactions. What it does do is force recognition that economic models built on mass transactions (needing to compensate for the manufacturing, sales, and distribution costs for products that didn’t truly fit the consumer) can be much better handled in the micro economy.

Microtransactions have tried to make their appearance before and have worked less well than their proponents might have hoped. But, there hasn’t really been a sustainable business model that made consistent use of microtransactions as a way of exchanging value for goods and services people wanted. That is changing now, particularly with the growth of peered computing and digital-only production. In tandem with this growing market desire for products and services, the technologies underlying cost-effective microtransactions are already being pioneered by content and services companies in the wireless application marketplaces, as well as a couple of still-stealth companies all of whom are hoping to revolutionize the ways in which we pay for digital goods (e.g. Hettinga’s IBUC).

Microtransactions are dependent on a financial system that can handle them. As the credit companies have made clear, there is little incentive in clearing low value transactions since the cost of that clearance can easily outstrip the value of the transaction itself. This is particularly true in the areas where microtransactions may be the most relevant, that is, in the $0.1 to $0.0001 range. The most obvious model for adoption is that of cash-faceless value token passed between consumers and providers, and of course if you can do away with the whole process of clearance entirely, costs go way down. While this presents a number of both technological and regulatory issues, it is a necessary step to meet the market demand and associated business models driven from the sale of microproducts in micromarkets. If a consumer wishes to purchase a subscription to listen to a song, at $0.1 per kb or per incident, only microtransactions are going to allow that.

How might microtransactions work in real life? For instance, as a consumer of music, John may wish to purchase an MP3 collection that has just the songs he wants, with the transitions he wants, stored online, and available anywhere. His may pay for each time he listens, for a particular amount of time, or for a particular song. Or equally possible, a house with solar power or its own power source, might sell its surplus energy back to the public grid at a constant rate of $0.001 per 1/100 kw. The constraints and economics that underlie mass transactions don’t need to apply. The result is massive opportunity.

What does the resulting economy look like? How does an economy driven from the perspective of the micros operate? The short answer to both these questions is: not much different from what we’ve got now, and completely different. The big difference is the context within which this economy is expected to operate, the sameness is that the fundamentals of supply and demand, capital and labor will all hold, but their appearance and modes of operation will be vastly different.

The technology to support the transition to the micros is not all in place yet. But the trends in economy and market, as well as technology, are pushing inexorably towards a commercial environment that is focused on the individual consumer, who will buy just what he or she needs, and will only pay for just what is need or wanted.

It is not just an issue of technology; some of the fundamental axioms of business will need to be reevaluated. It’s not that everything is different, and we are in the midst of a new economy, it’s just that we are well on our way. Companies that expect to last for a hundred more years will need to start moving now. Industries that are on the cutting edge of this change-media, energy, publishing, financial services, education-should already be working to develop new models and actively shaping these developments. The micros are not optional, and can not be legislated into submission or ignored. The good news is they are derivatives of our history and our economy, and as such can be identified, channeled, and ultimately exploited.

Tags: microeconomics