Real human social networks (as opposed to the tools that facilitate online communication between people in a social network) have an obvious reverse network effect. If I have too many people in my social network, I cannot pay enough attention to each of them, and without attention, relationships fade.

Back in September 2007, we looked at social motivation in the real world, specifically the two distinct types of motivation. One is, "I want to communicate better with the people I already know and trust". The other is, "I want to increase my visibility so that I can connect with more people."

Both have clear limits. The number of people I can really know and trust is limited, because knowing and trusting take time and attention. Increasing visibility, whether by blogging or tweeting or advertising or PR, is less limited. But when visibility goes beyond a certain number of people, it becomes no more social than broadcast media or spamming. The personal touch is gone. The real community spirit is gone.

As Groucho Marx remarked, "I refuse to join any club that would have me as a member." If it is an exclusive club, the membership has to be limited. If it is not exclusive, is it really "social"?

eBay is the classic example of a network that lost its community spirit after reaching a certain scale, as the comments on this post vehemently demonstrate. This loss opened the market for eBay alternatives, such as Bonanzle. It is unclear whether these alternatives will face the same issues when they get to scale.

Etsy will be an interesting case study. It looks like it may avoid the reverse network effect by being focused entirely on handmade goods. That focus may limit its eventual scale, as not everybody wants to make or buy handmade goods, but it will still be able to build a business more than big enough to satisfy even the most demanding dreams of avarice. That focus on handmade goods will act as its social glue. It will grow as eBay would have had it decided to remain focused on the global garage sale, not getting lured into selling mass consumer goods. I suspect if eBay had done that, its core business today would be smaller but ultimately more profitable and sustainable.

Networks Without Messy Human Interaction Are Immune

eBay the corporation owns two businesses that have almost perfect network effects and do not suffer from any reverse network effects: PayPal and Skype.

PayPal works for consumers because merchants use it, and merchants like it because consumers like it. The fact that everybody likes it won't make me like it any less.

Skype gets more useful with each new user, and each new user promotes Skype, consciously or unconsciously, for his or her own reasons. Even better, the cost of providing the service goes down with each new user, and that is really unusual (a function of Skype's P2P architecture). Google and PayPal also benefit from each new user, but they still have to service that user, and that costs money. In the case of a video service such as YouTube, the servicing cost is significant. So Skype really is in a league of its own when it comes to network effects, and that is why it may become the world's largest telephone company and the biggest economic success story of the Web 2.0 era. (Google Voice, having just thrown its hat in the ring to battle Skype, will be interesting to watch. My bet is on Skype.)

The difference, though, is that we do not look at these services as communities. They are simply enablers of commodity transactions: payments and phone calls.

What About Social Networks?

Does Facebook still feel special now that it has 175 million users and is growing at a rate of 600,000 per day? That is a sincere question for Facebook users. I am one of the few people who do not use Facebook. For whatever reason, I never got into the habit. And I have no compelling reason to start now. This has made me a bear on Facebook for a long time. As a non-user, I miss what makes Facebook special and why it grows so fast.

The network that I use is LinkedIn. I use it to connect to people who my contacts know. As far as I am concerned, it is a utility in the same way that the phone or my email/CRM system is a utility. Do I care that LinkedIn has 7.7 million users now? Does that make it more valuable to me? No. Is Facebook 22 times more valuable to me than LinkedIn because it has 22 times more users? No.

Here is the theory:

In a social network, the value for existing users of a new user joining the network plateaus once users have most of their own contacts in that network.

Of course, the social network grows in value as a business as more users come into it because the network then has more eyeballs to sell to advertisers. But that is different from network effects. As a LinkedIn user, I do not benefit when more strangers join. I already have about 90% of my contacts in there, and the remaining 10% may remain hold-outs; and I don't really care anyway, because I can always reach them outside of LinkedIn. When I meet somebody in business, I look them up on LinkedIn and connect if they are on it (I cannot recall anybody recently who was not on it). I do that to keep my Rolodex updated, which is a very valuable utility for me. But my actions are not growing the network. If I joined a new network, I would spam all my contacts asking them to join, but I have zero motivation to do that.

As a long-time Facebook user, do you care when more strangers join? Does it make any difference to the value you get from Facebook?

So, it is possible that the network effect has a natural plateau.

A Plateau Is Okay, But a Steep Downward Slope?

Whether that plateau turns into a downward slope depends on the monetization strategy adopted by the "owners" of the social network. And in the social networking business, a downward slope can very quickly become a steep slope or even a cliff. Trust tends to be binary; viral can work both ways; and switching costs are minimal. That is why I put "owners" in quotation marks. You can never really own a social network or community. You can provide services and extract rent for only as long as the community wants those services and is willing to pay the rent.

This is where the incredibly high valuations of businesses such as Facebook and LinkedIn may become problematic. If these businesses get too eager to monetize to justify those valuations, they may create the reverse network effect.

There are only two ways to monetize: ask for revenue from users who regard the service as a utility (like paying for the phone company), or ask for revenue from vendors that want to sell something to the people using the service. Thus far, all the major social networks have taken the latter fork in the road. They don't want to become utilities because that wouldn't justify their lofty valuations. So they have to sell more to those who use the service. At that point, the reverse network effects may kick in.

Craigslist

Craigslist chose a different path by not taking on external investors. It has no valuation to justify. It can leave masses of money on the table without any worries. So Craigslist won't suffer the reverse network effects that come from over-eager monetization. Its model of allowing lots of free listings will sustain high growth and is clearly impacting eBay's business.

Twitter an Interesting Case Study

Once again, Twitter is the interesting one to watch. The ease with which one can add and delete who one follows makes its size self-regulating. As a real-time search tool, its value goes up with each new user. As a communication tool, it goes up as new people join who might be interesting to follow. Its openness may prevent the reverse network effect.

The other reason Twitter is an interesting case study is that it has not yet disclosed its revenue model. If the revenue model it does adopt involves selling to its users, the reverse network effect may kick in. Twitter would become classic MBA case study material, a fact of which management must be well aware!

At a time when marketers are obsessed with getting traction on Facebook and are just beginning to take users outside the US seriously, Etsy's survey of its international members is fascinating - as is the company itself.

Etsy is Hot Stuff

Etsy is an online marketplace where people set up shops to sell physical goods they have made by hand. Knitters, painters, potters and musicians use Etsy like millions of other people use eBay. The Etsy community also meets offline, though, at Etsy-sponsored craft fairs in cities around the globe.

Etsy means business, too. It's raised more than $30 million in venture funding and has the backing of people from places like Facebook and Flickr. Probably the hippest VC fund in tech, Fred Wilson's Union Square Ventures, is an investor - as is early Facebook fund Accel.

This Fall Etsy started looking for a Director of International Marketing and announced major plans to expand its support for international buyers and sellers.

The International Profile

Traffic monitoring services indicate that about half of Etsy's website traffic is coming from outside the US. Where do all these people live? The company's survey of almost 1600 international sellers showed that these members come predominantly from the UK and Europe, with healthy chunks from Canada and Australia. Sixty-seven different countries were represented and 97% of the respondents were women.

French, German and Spanish were the most popular languages spoken after English. Almost everyone said they preferred to be paid for the crafts they sell by PayPal, a great sign that PayPal's international woes may not be as bad as they used to be.

The most interesting parts of this survey may be how respondents learned about Etsy and how they promote their shops beyond the site. Word of mouth was far and away the leading way people discovered the site, something that any other website would be insanely jealous of. Discovery by blog was also bigger than search and advertising.

How did people promote their shops? Their personal blogs are the number one way, they said. Take that "post-blogging" cynics!

That's a snapshot of Etsy's method of international growth. We thought it was remarkable enough that we wanted to share it with readers here.

People increasingly look for reasons to avoid traveling, knowing we will get crowds, intrusive security, a bland sameness everywhere, crumbling infrastructure that could be dangerous and to top it all a smidgeon of guilt about our carbon footprint. When travel looks like fun, it is “off the beaten track”, in some place that does not look like everywhere else, a genuinely local place.

Living “off the grid” was once a dream for a few wild hippies, toking in yurts in the Mojave desert. Now we can see three “straws in the wind” that indicate that this is turning mainstream:

1. Silicon Valley A List VCs are financing the solar energy products to enable all of us to cut off our dependency on the electricity grid.

2. The work from home generation increasingly takes a world without commuting to Dilbert cubicles for granted; reducing our dependency on highways and mass transportation. In that more local world, we can get about by foot, bicycle or maybe electric car; we are also more likely to interact with and care about local shopkeepers and other suppliers.

3. Consumers increasingly value local and hand-made as special, for which they are willing to pay a premium; consumers want the opposite of mass-produced. We increasingly distrust the industrial food that comes from the Meatrix and a book about sustainable agriculture hits the bestseller lists. Local food is the new black, “better than organic“.

Taken together, these trends are being referred to as re-localization. An alternative name is Local 2.0. The difference is subtle but real.

Local 2.0 is clearly Web 2.0 type thinking. The big focus is on location based services. The classic use case is a traveler, a stranger in a strange land who has just landed and wants to find something or somebody (who might help them find something). As we all rush around the country/world pitching to clients/investors/partners or hanging out at cool un-conferences, that is an important use case; but it is different from Re-localization.

Re-localization is about locals. It is about people who like being in one place and interacting with neighbors. This does not make it a closed world. Local shopkeepers/restaurants/cafes welcome the stranger/traveler/tourist with their credit card. Realtors, plumbers and all kinds of small businesses welcome the newcomer, who may put down roots here and become a regular customer.

In Web 1.0, these local businesses were viewed as roadkill. Everything would be ordered online and delivered by air and trucks from giant automated warehouses. Oops, lousy economics; plus increasing consumer push-back. So now Web 2.0 start-ups want to “partner” with these local businesses.

“Partner” is a term we fling about carelessly in technology/media circles; it is a thoroughly devalued term. Use it with a local shopkeeper and she will ask you how many dollars you plan to invest with her in this new business that you will jointly own.

What we really mostly mean is “we would like to sell you some advertising”. After delivering your pitch for a paradigm-changing local ad service, you will hear something about Yellow Pages or Classified Ads in the local paper; well, you would hear that if you were actually in conversation. Many will tell you they don’t bother - “the locals already know me”. Others will say they have always used the local paper/directory “because Harry is a great guy, no idea if it works, but don’t plan to change”. So then you switch your pitch to something about visitors and the pitch degenerates into something pretty marginal.

Selling to real small businesses at a local level, means having a little cheat sheet to remind you of three basic facts:

1. People don’t live online. Re-localization is all about human interaction face to face. If you think community = online…ahem, get a life! MeetUp looks like a big winner in this environment. Mobile is a big deal, but you will be hard pressed to offer something more compelling than hitting autodial to tell your friend what cafe you are in.
2. Small business owners are traders. Trade with them. Buy from them or sell something to them that they can sell to their customers. I know that sounds kinda basic. To put it in fancier media/technology language, there is a value chain that leads from CPM to CPC to CPA to transaction fees. Ebay gets that and they are as mainstream as it gets.
3. When the local business wants to look at an online alternative to Yellow Pages/local paper, Craigslist is right there and virtually free and they have crossed the chasm. Count me a skeptic of the local ad market; Craigslist took the air out of that one.

Here is the little secret. Local business people are plenty smart (even if they don’t know what Drupal is) and the Web just made them smarter. They can get together with other small businesses to compete more effectively against the Fortune 500 behemoths who turned America into a shopping mall. They will use the Net to trade with their peers; enable that in some way and you may have a winner.

The Net is also critical to re-localization because it brings the “distant independent digital worker” who relies on broadband and smart tools to communicate with colleagues/partners/clients globally. They bring new revenue into the local economy.

What do you think? Do you like your local bookshop or are you Amazon only? If you ran a local small business, what Net based service would you find most useful?

Image by StuffEyeSee

We wish everyone put this much care into promo videos - then our jobs watching promo videos would be even more fun. And the serious business of promoting important web startups would overcome one of its most challenging obstacles - getting people to listen to and understand your explanation of some crazy new idea. So check out the Sayvee video we like best below, stop by their site for more and sign up there for notification when the new service is available.

These guys are going to have a hard time challenging incumbents like Dawanda and ShopWindoz, much less the awesome powers of Etsy. Maybe their whole site will be as cool as their videos though!

But what about now? This is the time to be audacious. The world has changed, totally and irrevocably. Change is the entrepreneur's friend.

I call these Micro Trends. They are not the big obvious trends that everybody is riding - such as mobile, online advertising, search, social networking, globalization etc. If you spotted those 10 years ago, great. Now it is too late. Think surfing. If you see the wave building early on, you get a chance to ride it. If you catch it too late, you get crushed.

How Does The Last Few Weeks Change This List?

For some time I have had a list of Micro Trends on my personal blog. It seems a good time to revisit them to see what might change based on the global credit crisis.

1. Transparency. This wave has been building for a while, but it just got a big boost by recent events. Transparency in financial markets obviously. Then there is Obama's Google for Government initiative. Some of the smartest recent startups we have seen use a mix of technology, insight and hard work to expose the inner working of industries to eliminate information asymmetry and get lower prices for buyers. You can bet that there will be more.

2. Relocalization. We have already written about this here. Tough times will accentuate this trend. The solutions are not obvious (so Momentum VC won't touch them), they could be game changing.

3. Reduced power of gatekeepers. This relates to Transparency. Reduced information asymmetry reduces the power of gatekepeepers/intermediaries/tollbooths. The Financial Services industry is the mother of all gatekeepers. The Economist states that in the early 1980s, the financial services industry accounted for 10% of GDP, but last year it rose to 40%. One change arising from the recent turmoil we can be totally confident about is that the current financial services intermediaries are weakened and new models will arise. Who will do a craigslist on the financial services industry (or at least segments of that vast industry)?

4. Micro-trend Slopes replace Chasms. Alex Iskold started an interesting conversation about whether the Internet has made the Chasm adoption model less relevant. Biking up and down slopes may be the better analogy today. Catch a new trend and you can cruise down a slope, picking up speed effortlessly. As trend-spotting me-too ventures join the race (the Internet spreads ideas instantaneously) the slope flattens out and curves uphill. In good times, a bit of pushing gets you over the top and catching another micro trend slope on the way down. If your up slope coincides with a cyclical down turn (and we are certainly in a big cyclical downturn today), you will get a flat tire and have to carry your bike up the hill and mend it at the top. Don't worry, the other racers will have given up at that point. Starting in a cyclical downturn, make sure you are on a down slope!

5. Changing balance of power between big and small businesses. Yes we have been "banging on" about this for a long time. For the most long-winded description (sorry), read this. This could be the biggest micro trend, even a Tsunami that few people have spotted. Which the current crisis just accentuated. Which the incoming President might actually do something positive about for a change.

6. Self-organizing networks beat command and control structures. This is the story of Enterprise 2.0 - aka, social media meets the enterprise.

7. The end of mass markets. This relates to most of the other trends. Small, niche, specialist will beat mass produced. This is why Etsy may be a big winner from this Web 2.0 cycle. There are probably other opportunities around this trend.

8. Ad $$$ will flow to measurable ROI models. OK, that falls into the no-duh category! But surely Google Adwords is not the only winner in this category? There must be a better ad targeting model out there somewhere? Not better search, you can just use Yahoo Boss for search - that game was totally over well before the credit crisis. But better ad targeting that does not infringe privacy is a big winner.

9. Bubbles will form and pop faster. Bubbles are like booze. With a horrible hangover we say "never again". But guess what.... They don't reappear in the same place until a generation that was bruised has moved on. So the big bubble may be a thing of the past. But we will get lots of small ones. That is kind of like moderate drinking, actually quite good for us. My motto is "moderation in all things, including moderation".

10. The end of 11 point lists. I used to do 10 point lists until a commenter showed me this wonderful Spinal Tap video. Seriously, 10 point lists indicated limits and space on the Internet is unlimited. But then I noticed many people doing 11 point lists. In the spirit of back to basics discipline, 10 point lists will make a comeback.

Image credit: Thomas Hawk

See also: What's Next After Web 2.0

One thing many sellers are doing, is sticking with eBay. Rather than change horses mid-stream, some sellers are transitioning their auction businesses to the fixed-price model that is now favored by the ecommerce giant. Others are listing their wares at eBay's cross-town (on the web, anyway) rival Amazon.

Online Craft Fairs

New York based Etsy is part of a new breed of online marketplace startups targeted specifically at the needs of independent artists and crafts makers. With more and more people pledging to buy handmade goods, marketplaces like Etsy are taking center stage and becoming important hubs for small merchants. We've even wondered if Etsy might be the next eBay. Be sure to check our lists of Etsy alternatives here and here, as well.

If you enjoy this post, please digg it by clicking here

Classifieds

Craigslist has been accused by some of single handedly sinking the entire newspaper business by doing for classifieds what eBay did for auctions in the 90s -- putting them online and making them dead simple and accessible. Craigslist started as a local events email list for San Francisco in 1995 and has grown to an online classifieds powerhouse serving more than 500 cities in over 50 countries across the world. 40 million people visit Craigslist each month, generating more than 10 billion page views, according to the company. It's no wonder that an ad on Craigslist is an extremely effective way to generate sales, especially in large local markets.

Online Informercial

If you're like me -- and that would be a bummer for you -- you're often awake at 4am. If you happen to flick on the TV, you'll quickly notice that in the wee hours of morning, the airwaves are dominated by a certain variety of program: infomercials. Most of the time, it's hard to wonder how anyone could be suckered into ordering stuff peddled by late night hucksters. But infomercials have inundated the television airwaves since the 1970s, so they must work. Could they also work on the Internet? One company thinks so. Talk Market lets anyone host their own video sales channel on the web. Amazon thinks enough of the idea to have invested in it.

Social Networks

Yes, it doesn't seem that any of the big social networks have yet figured out how to monetize all that traffic. Facebook gave up on Beacon, and MySpace isn't living up to Google's expectations, but that doesn't mean you can't try to sell to your friends, family, and fans via social networks. Buy.com thinks they have the best way, with their Garage Sale application for Facebook. The best part of this option, though, may be the irony of their intro video which calls eBay a "thing of the past" -- apparently Buy.com's top brass didn't get the memo... they closed a huge product listing deal with eBay last month.

Your Own Storefront

Sellers with an adventurous spirit may opt to set up their own storefront. There are a number of free or open source projects, such as osCommerce, that can be used to power an online shop. There are also all inclusive small business hosting solutions, such as Yahoo! Merchant Solutions, that can get sellers up and running with their own stores with a lot less headache. We like Shopify, an all in one hosted ecommerce suite that has become one of the showcase apps for Ruby on Rails (don't worry -- we've never heard of anyone having trouble scaling their store on the service).

How else do you sell online? Let us know in the comments.

Living “off the grid” was once a dream for a few wild hippies, toking in yurts in the Mojave desert. Now we can see three “straws in the wind” that indicate that this is turning mainstream:

1. Silicon Valley A List VCs are financing the solar energy products to enable all of us to cut off our dependency on the electricity grid.

2. The work from home generation increasingly takes a world without commuting to Dilbert cubicles for granted; reducing our dependency on highways and mass transportation. In that more local world, we can get about by foot, bicycle or maybe electric car; we are also more likely to interact with and care about local shopkeepers and other suppliers.

3. Consumers increasingly value local and hand-made as special, for which they are willing to pay a premium; consumers want the opposite of mass-produced. We increasingly distrust the industrial food that comes from the Meatrix and a book about sustainable agriculture hits the bestseller lists. Local food is the new black, “better than organic“.

Taken together, these trends are being referred to as re-localization. An alternative name is Local 2.0. The difference is subtle but real.

Local 2.0 is clearly Web 2.0 type thinking. The big focus is on location based services. The classic use case is a traveler, a stranger in a strange land who has just landed and wants to find something or somebody (who might help them find something). As we all rush around the country/world pitching to clients/investors/partners or hanging out at cool un-conferences, that is an important use case; but it is different from Re-localization.

Re-localization is about locals. It is about people who like being in one place and interacting with neighbors. This does not make it a closed world. Local shopkeepers/restaurants/cafes welcome the stranger/traveler/tourist with their credit card. Realtors, plumbers and all kinds of small businesses welcome the newcomer, who may put down roots here and become a regular customer.

In Web 1.0, these local businesses were viewed as roadkill. Everything would be ordered online and delivered by air and trucks from giant automated warehouses. Oops, lousy economics; plus increasing consumer push-back. So now Web 2.0 start-ups want to “partner” with these local businesses.

“Partner” is a term we fling about carelessly in technology/media circles; it is a thoroughly devalued term. Use it with a local shopkeeper and she will ask you how many dollars you plan to invest with her in this new business that you will jointly own.

What we really mostly mean is “we would like to sell you some advertising”. After delivering your pitch for a paradigm-changing local ad service, you will hear something about Yellow Pages or Classified Ads in the local paper; well you would hear that if you were actually in conversation. Many will tell you they don’t bother - “the locals already know me”. Others will say they have always used the local paper/directory “because Harry is a great guy, no idea if it works, but don’t plan to change”. So then you switch your pitch to something about visitors and the pitch degenerates into something pretty marginal.

Selling to real small businesses at a local level, means having a little cheat sheet to remind you of three basic facts:

1. People don’t live online. Re-localization is all about human interaction face to face. If you think community = online…ahem, get a life! MeetUp looks like a big winner in this environment. Mobile is a big deal, but you will be hard pressed to offer something more compelling than hitting autodial to tell your friend what cafe you are in.
2. Small business owners are traders. Trade with them. Buy from them or sell something to them that they can sell to their customers. I know that sounds kinda basic. To put it in more fancy media/technology language, there is a value chain that leads from CPM to CPC to CPA to transaction fees. Ebay gets that and they are as mainstream as it gets.
3. When the local business wants to look at an online alternative to Yellow Pages/local paper, Craigslist is right there and virtually free and they have crossed the chasm. Count me a sceptic on the local ad market; Craigslist took the air out of that one.

Here is the little secret. Local business people are plenty smart (even if they don’t know what Drupal is) and the Web just made them smarter. They can get together with other small businesses to compete more effectively against the Fortune 500 behemoths who turned America into a shopping mall. They will use the Net to trade with their peers; enable that in some way and you may have a winner.

The Net is also critical to re-localization because it brings the “distant independent digital worker” who relies on broadband and smart tools to communicate with colleagues/partners/clients globally. They bring new revenue into the local economy.

What do you think? Do you like your local bookshop or are you Amazon only? If you ran a local small business, what Net based service would you find most useful?

Image by StuffEyeSee

Then Umair Haque, a well respected blogger and strategist - albeit one who is known for being a bit “out there” - asked Is Etsy the next Google? Maybe Umair was just saying that this is big. One of his commenters pointed out: “not Google, but maybe the next eBay”.

The bloom has gone off the eBay rose recently, so it is interesting to think about what went wrong at what was almost the perfect start-up success. Many people critiqued eBay for buying Skype at too high a valuation, but that seems like a tactical error only. The big issue is that they lost sight of what made eBay special when they started selling mass-produced stuff. There is something about being a public company, with investor pressure for endless hyper growth well beyond the natural growth constraints of the market, that seems to drive this kind of brand-destroying diversification.

Selling off inventory from big companies (eBay’s diversification) may be a great business, but it was not what made eBay magical. Garage sales, antique shops, auctions….these all have a bit of magic and romance. It is about finding something unique and special.

Handmade goods have the same appeal.

Etsy Connections

The reason it is so hard for most technologists to see the power of services such as eBay and Etsy when they first come out is that we tend to look at the world through the prism of big companies and consumers. What is so powerful about eBay is that around 750,000 people see eBay as their primary source of income and double that‚ 1.5 million‚ see it as a significant contribution. Etsy can have the same income-generation impact for lots of people globally. Where do all these millions of people fit in the big company/consumer model?

According to a 2005 survey, close to sixty percent of Americans reported that they dreamed of starting their own business.

Etsy is part of a much broader economic shift. So is the Blog Networks challenge to MSM and the smaller rounds of financing for start-ups in the programmable web.

We may be witnessing the historical high water mark of giant companies in developed economies. In 1955, Fortune 500 companies generated 1/3 of GDP in America. In 2000 that had risen to 2/3. If you prefer %, from 33% to 66%. Hidden in those numbers are the countless family farms that could not withstand the onslaught of Agribusiness and the Mom & Pop shops that closed when Wall Mart came to town.

Imagine a world where the Fortune 500 share of GDP went back to 1/3 and small businesses got back the 1/3 they lost in the last 50 years.

This may be about to happen for 3 big reasons:

1. The Internet reduces transaction friction, making it easier for small businesses to do business with each other, with consumers and with big companies.
2. Big companies are no longer seen as a reliable source of employment; decades of outsourcing and layoffs at the first whiff of a problem, all cloaked in inhuman corporate speak, have had their effect. This changes the risk/reward decision for talent. The best and brightest will more likely go the self-employed route, start a business or work for a small business where at least you have coffee with the owner and he or she looks you in the eye when (s)he has to fire you. Fortune follows talent.
3. Consumers are looking for that extra special something, the customized motorbike and the grass fed local beef and the hand-made jewelry. We want what your average person does not have, the opposite of mass produced products. This growing consumer demand arise from decades of mass affluence and the fact that the Internet makes these types of products visible.

The Rise of Mass Customization

Maybe we are finally going to see the long-anticipated wave of mass customization.

The trouble is, customization costs a lot of money. Ask a Savile Row tailor. Consumers want that special something at a price that is a bit closer to the mass produced stuff.

Who is going to meet that demand for mass customization? The mega farming corp in Iowa that is used to distributing huge volumes via Cargil, onto to General Mills and finally to Wall Mart? Or thousands of artisanal specialty food producers? The supplier who contracts with factories in China to produce huge quantities of toys based on what consumers bought last year and who will lose his price break if he changes the volume? Or the thousands of small producers locally who will custom-produce on demand, meeting the actual demand today?

I would always bet on the latter. This is a distributed version of the Dell model applied to lots of industries. This is distributed mass customization.

The reason that mass customization has taken longer than predicted is that we have been looking in the wrong place. Re-tooling large companies to do mass customization is too hard, the micro-niches are too small and there is just too much fear of cannibalization and resistance to change.

This is the coming wave of small business that can easily trade globally - with each other to offer new products and with consumers to meet specialized demand.

What has been missing is order aggregation. There are plenty of long-tail customers who reject the mass-produced plastic toy made in China but who want the pink version of the Rambo soldier made out of recyclable wood (OK, I made that one up!). But you won’t find enough of these customers by setting up shop on your average high street.

Aggregating the long tail is clearly something that the Internet does well.

Conclusion

Etsy is a good example of an emergent business network that creates trust within a specific market. That trust enlarges the market by enabling transactions to happen. Then more suppliers come into the network to meet growing demand and the range and quality of products improve; and so the consumer demand improves and so on….

Just don’t try shoving mass-produced junk through these networks. It won’t work. These networks have a very good junk filter!