The city is dead; long live the city
Pundits have asked whether the city will survive COVID-19 – whether we will want to move to the countryside from cities and interact via Zoom/Slack/Teams etc. or whether we will continue to live and work cheek by jowl in urban conurbations.
However, the theoretical physicist Geoffrey West, has led the way in mapping out a new ‘science of cities’ in which cities do not die but actually become more productive and efficient as they grow.[i]
We can draw parallels between the open-ended exponential growth in cities, and the increasing success of digital marketplaces like Uber, Amazon and Airbnb. Both are driven by powerful network effects.
Fundamental power laws
When a city doubles in size its socioeconomic activity grows by about 115%. If one city is twice the size of another city, then its wealth, hospital patients, crime, schools, patents etc. all increase by approximately the same degree – by about 15% above mere doubling. And there are similar savings in its physical infrastructure. The bigger the city, the more the average individual owns, produces and consumes.
This is because of their huge economies of scale and powerful network effects. As cities grow, there are more social interactions, driving more economic activity and wealth while also decreasing infrastructure needs.
These fundamental power laws pervade many aspects of urban activity and they speed up our pace of life. Astonishingly, we even see this in walking speeds in towns and cities which increase with population size.
These fundamental power laws pervade many aspects of urban activity and they speed up our pace of life.
Animals and companies: growth, age and death
Although cities scale up on super linear basis, on the other hand animals (and in fact companies too) scale up sub-linearly. We take it as a given that animals grow for a period before growth becomes stable, tapers off and ultimately ends in death. This process follows similar fundamental scaling laws to the way cities grow – but in a linear, rather than super-linear way.
Put simply, when you compare the metabolic rates and life spans of animals, these are all faster and shorter in smaller species compared to larger species. This reflects the economies of scale that come with increased size.
The reason why there are no smaller mammals than shrews and no bigger ones than blue whales (and why shrews’ lives are so much shorter than whales’ lives) is embedded in the underlying scaling laws. For example, the geometry of animals’ arteries imposes physical limits on maximum and minimum animal size. Godzilla could never exist because its heart simply couldn’t pump enough blood around its body to supply its organs with the required oxygen.
…when comparing companies of different sizes, income and assets consistently scale up with employee numbers by a factor of 90%.
Interestingly, companies appear to share similar properties, benefiting from economies of scale as they mature but with growth eventually tapering off and resulting in a wind down. For example, when comparing companies of different sizes, income and assets consistently scale up with employee numbers by a factor of 90% – if company A has twice the employees of company B then it is likely to have roughly 1.9x the assets and income of company B. And just as sub-linear scaling results in the eventual death of animals, so it also appears to be the case for companies. For example, of the 29,000 companies trading on US markets from 1950 to 2009, 50% companies ceased to exist after 10.5 years, and 80% had “died” by 2009.
Network effects and digital marketplaces
Cities on the other hand do not experience this tapering off but benefit from open-ended exponential growth, even after suffering great damage, such as Hiroshima in World War II or London in the Great Fire of 1666. Cities are the engines that drive human social networks and connectivity through positive feedback loops and many-to-many interactions. This in turn produces ideas, innovation and exponential growth.
All very interesting; but how is that relevant to digital marketplaces? The point is that businesses can find ways to benefit from powerful network effects by joining a digital marketplace.
Businesses can find ways to benefit from powerful network effects by joining a digital marketplace.
Digital marketplaces like Airbnb and Uber display two-sided network effects: increased activity by one set of users adds value to another set of users, and vice versa. An increase in Airbnb guests attracts more hosts, driving a wider selection of rentals and more reviews. This helps guests to make their choice. And the more guests the better for the hosts.
In the asset management space, AMX can help provide similar network effects. AMXConnect is our online portal where investors, managers, and other market participants are connected in the investment ecosystem. Within AMXConnect, our Store is a digital marketplace where buyers of financial services can find information on, and buy, investment-related services, often at a discount to the headline fee rate. The initial suppliers cover segments such as investment and portfolio analytics, capital raising, financial consulting, fund distribution, recruitment, fund oversight, regulatory and ESG reporting, and stewardship services.
For service providers, the Store is an effective way to boost your marketing initiatives, connecting directly with some of the world’s largest and most significant investors, asset managers and other buy- and sell-side market participants. Service provider relationship models can scale from simple advertising and information display to a fully integrated offering with in-ecosystem purchasing.
Just as network effects have propelled our cities’ super linear growth, so digital marketplaces can also bring more connections and efficiencies to their users in a virtuous cycle of benefits.
[i] Scale: The Universal Laws of Life and Death in Organisms, Cities and Companies by Geoffrey West, 2017