In a famous essay in 2011 Netscape founder and venture capitalist Marc Andreessen notoriously wrote about “Why Software is Eating the World.” He was right. Companies he identified including Amazon, Netflix, Spotify and others did just that – they used software to eat their industries. Today, newer companies are repeating the feat, including Airbnb, Stripe, Uber and others. All are digging in.
It is said that today, all companies are software companies. Or they had better be. Many have adopted software to maintain or extend their competitive dominance, even in industries as arcane as pizza to name just one, where Domino’s has achieved a dominant position thanks to its software focus.
A recent article co-written by hedge fund CEO Steven Cohen and venture capitalist Matthew Granade, both of Point72 Ventures, and writing in August in The Wall Street Journal’s Opinion section, begs the question: What’s next? Their answer? Models.
This new paradigm is defined as a shift from a world often dominated by software to one driven by ‘models,’ which power the key decisions in business processes, creating revenue streams and improved cost efficiencies. It requires a mechanism (usually software-based) to collect data, processes to create the models from the data, the models themselves, and finally a mechanism to deliver or act upon the suggestions from those models. To be specific, quoting the authors on the latest paradigm shift:
“These companies structure their business processes to put continuously learning models, built on ‘closed loop’ data, at the center of what they do. When built right, they create a reinforcing cycle: Their products get better, allowing them to collect more data, which allows them to build better models, making their products better, and onward. These are model-driven businesses… being created across a range of industries.”
While there is plenty of hype about big data and AI, the models, they state, “are the source of the real power behind these tools.” They go on to say… “A model is a decision framework in which the logic is derived by algorithm from data, rather than explicitly programmed by a developer or implicitly conveyed via a person’s intuition.”
Get it? It’s the data-driven model’s ability to learn from itself and its own mistakes – at a rate much faster than mere humans can do – that sets it apart as an increasingly rapid prototyping tool for building the better business. Humans, it seems, need not apply.
A Chinese company called Tencent provides a brilliant example. They have customer data across social media, payments, gaming, messaging, media and music, and information on hundreds of millions of people, all of which they put into the hands of thousands of data scientists in order to make their products better.
That unique data helps Tencent to power a model factory “that constantly improves user experience and increases profitability – attracting more users, further improving the models and profitability.” That’s a model driven business.
Closer to home, Amazon used software to separate itself from physical competitors but it was their models that helped them pull away from other e-commerce companies, Cohen and Granade point out. By 2013, over a third of Amazon’s online revenue came from its recommendations, the result of model-driven data usage, “and its models have never stopped improving,” as Bezos & Co. continue to find myriad ways to use machine-learning models.
The authors go on to extol the model-based leveraging changes now taking place across the business spectrum. Key industries include agriculture, services and logistics. The implications are vast, and Cohen and Granade sum it up by describing five key implications for the future of business … and we’ll cover those five in our concluding post. Stay tuned…