Ian Davis, the CTO of Talis is speaking about connected platforms. He starts with a lesson in economics.

In the pre-industrial era, most goods were produced by individuals or small groups working together. consequently, most trading was local. Trading to a large market required a very large company capable of vertically integrating all its functions. The East India company is an example: ships, docks, towns, armies, and even currencies were all done by that one company.

Transactional costs for a given market size were usually much larger than the associated value in the pre-industrial era. Transaction costs fell with the industrial revolution as infrastructures like railroads, telegraphs, and canals were built. Large markets opened up and allowed greater specialization. Adam Smith observed that the division of labor is a function of the zie of the market.

The industrial revolution caused the cost of transactions to drop below the value associated with a given market size and allowed the development of the horizontally integrated firm. Large horizontally integrated firms like Li and Fung employ relatively few employees for their revenue. Li and Fung has $7.5m in revenue per employee (and 8000 employees). The average reveue per employee is in the hundreds of thousands of dollars. Google in $1.2m.

The Internet's huge connectivity and ubiquity has put more people in economic contact with one another than ever before. The Web's been around 15 years. Think about the companies that couldn't have existed 15 years ago. This isn't just the big ones like Google and Yahoo! but thousands of small businesses.

Could computing holds the promise of allowing businesses to scale costs with revenue. That is, you don't need large capital investments to prepare for future capacity needs.

Similarly, social networks are enabling businesses to reach millions with almost zero friction. The fixed costs of provisioning users from a social network are small. The semantic web will radically change the economics of sharing and combining information.

The combination of these trends means that increasingly large markets are available to businesses with much less cost. The implication is that companies will become smaller and more specialized, focusing on creative talent, not heavy engineering. I'm not sure I agree with these trends doing away with the need for engineering. Architecture and engineering will become increasingly important, it seems.

The bottom line: companies can become loosely coupled, small, efficient, very creative, and highly networked.

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