As the barriers to competition evaporate, the world is becoming Bitcoin’s oyster.

Guess who it is you’re fighting now? Everybody.

In his old book, The Road Ahead, Bill Gates wrote of “friction-free capitalism,” a type of marketplace that he argued will be ushered in by the spread of a technology like Bitcoin. This is like heralding the Net as a harbinger of instantaneous transaction while dispensing with hard cash and the credit card. Forget the Banks — we already inhabit what has become a remarkably low-friction internet economy. That’s why today’s marketplace feels so competitive. And it’s why some businesses are prospering beyond all expectation while others are wondering who changed the rules of the game.

Economic friction is everything that keeps markets from working according to the textbook model of perfect competition: Distance. Cost. Restrictive regulations. Imperfect information. In high-friction markets, customers don’t have many suppliers to choose among, or are restricted to suppliers hampered by regulation. Owning a factory — or a store with a good location — counts for a lot. It’s hard for new competitors to get into the game. The marketplace moves slowly and predictably. Low-friction markets, as are found on the internet, are just the reverse. New competitors crop up all over, and customers are quick to respond. The marketplace is anything but predictable. Bitcoin exacerbates these effects exponentially, because it removes barriers to securely collecting money from customers.

The single most significant change in the economy over the past 36 years has been a wholesale reduction in friction, affecting nearly every industry. Some of the factors are obvious: increased air travel, overnight delivery, credit cards, cellphones, the internet. They put faraway companies on a competitive par with local ones; they enable Lands’ End, Amazon and a hundred other mail-order houses, for example, to match the convenience and price of a neighbourhood store. Other factors are less visible but no less important: Deregulation opened up many industries; local truckers, for instance, may face competitors from half a world away. The growth of high-risk, high-return capital markets has transformed other fields. Today a local Bitcoin entrepreneur must worry about the entrepreneur in Kiev showing up two clicks away in her browser.

Sure, the Internet will grease the market’s machinery still further. But friction is declining every day anyway. Banks face new competition not just from the occasional startup fiat money site (like Linden Dollars) but from distant competitors using Bitcoin technology. Entrepreneurs in Kansas or New York, according to the Wall Street Journal, must now compete with entrepreneurs from Bangalore and China, whose Bitcoin services are only a click away.

There’s little need to elaborate on the threat posed by a low-friction economy; it means more competition, often from unexpected parts. The opportunity is pretty plain as well. In principle, at least, the world is any small company’s oyster. Bitcoin services selling in Dallas can be offered in Dakar or Bangladesh with zero extra time and expense. The thing is, the rules of a low-friction marketplace are different. And if you’re not playing by the right rules, you’re out of the game before it starts.

Rule Number One is merely a caution: Don’t expand blindly. The fact that you can open up a plethora of locations or launch a public relations operation or even integrate into the mainstream banking system doesn’t mean that you should. After all, everybody else can do the same, or something new and disruptive that will outmanoeuvre you. You may be able to peddle your products or services in Minneapolis or Brooklyn, but nobody has to buy them. Having 100,000 outlets is meaningless when it comes to being outflanked by a more nimble competitor.

Rule Number Two: Offer a distinctive something to your customer. This seemingly trite piece of advice is more revolutionary than it sounds. Your job is to take care of the customer — to deliver good value. All the business gurus harp on that one theme, albeit in many variations: Quality. Service. A fair price. In a low-friction marketplace, however — particularly if you’re expanding — the old nostrums are nowhere near sufficient. You have to have something that sets you apart from all the other suppliers offering quality, simplicity, service and a fair price. What should the something be? In the internet age, the company that provides the best privacy and usability wins, especially with Bitcoin.

There’s a hidden secret of the low-friction marketplace, which I’ll call Rule Number Three: What you sell doesn’t need to be a unique product or service. It can simply be the ability to do something better than anybody else. If that puzzles you, think of Google. None of Google’s strategies — search, webmail, storage — is exactly a secret. Indeed, most of the big search engines have at one point or another tried to be Google, only to discover they can’t. They just don’t know how to do what Google does and still make money at it.

You can be a lot smaller than Google and still do things that leave most competitors baffled. New, agile Bitcoin Businesses, will learn how to guarantee, for example, the delivery of Bitcoin in 30 minutes, without fuss or privacy issues. You think people wouldn’t welcome that capability? There will be many market players entering the Bitcoin space who will offer friction free services that will be a no brainer when you compare them to the stifling complexity and Orwellian surveillance state features of other services.

We get dazzled these days by glossy visions of information superhighways and electronic bazaars fuelled by Bitcoin. No doubt we’ll all have to deal with the commerce of Bitcoin sooner or later. Meanwhile, the friction-free economy is already here. The entrepreneurs who recognise what it means are the entrepreneurs who are going to prosper.

http://www.inc.com/magazine/19960601/1690.html

This entry was posted on Saturday, August 25th, 2012 at 1:50 pm and is filed under Bitcoin, Economics, Libertarianism, Substitution.