Wikinomics: How Mass Collaboration Changes Everything, by Don Tapscott and Anthony D. Williams (Portfolio Hardcover, December, 2006)

At first glance, the operating plan for Wikipedia sounds crazy: set up a website that anyone can edit, cross your fingers, and hope that thousands of people will converge on the site and create the world’s most comprehensive encyclopedia—for free. Even at the height of dot-com euphoria, no one would have believed that would work. Yet today, Wikipedia has become so prominent that when one of the site’s administrators was caught faking credentials, the scandal got extensive coverage in the New York Times.

And Wikipedia is no anomaly. The economic principles behind Wikipedia also drive open source software like Linux and Firefox; the world of blogging; and dozens of “Web 2.0” businesses like Flickr, Digg, and Craig’s List. Business leaders can no longer afford to ignore this phenomenon, which Dan Tapscott and Anthony Williams dub “mass collaboration” and academics term “peer production.” In Wikinomics, they offer a breezy, comprehensive primer on the ways that mass collaboration is transforming the business world. They describe companies that have turned mass collaboration into a business opportunity, and they warn of danger for companies that fail to adapt to the changing business environment.

Peer production seems to challenge some of the most basic principles of economics, especially the rule against free lunches. Yet it quite plainly does work, as executives at Microsoft, Oracle, and the Encyclopedia Britannica know only too well. It works best when the task to be completed can be readily broken down into a large number of bite-sized pieces. If the pieces are small enough—and on Wikipedia, a contribution can be as small as correcting a typo—thousands of people may be willing to participate purely for the incidental benefits of doing so: meeting new friends, developing useful skills, or the satisfaction of contributing to a worthy cause. Once a project reaches a critical mass, it begins to snowball, as more and more contributors discover the project and join in.

Peer production succeeds largely because it eliminates the frictions that accompany commercial activities.

Companies that successfully hitch their wagons to a peer-produced star can reap large benefits. But to successfully incorporate peer production into a company’s business plan requires unconventional thinking. A good example is IBM, one of the first companies to jump on the Linux bandwagon. They’ve poured hundreds of millions of dollars into improving the free operating system over the last decade, but they’ve acquired no proprietary rights in the process. Tapscott and Williams report that “IBM not only accepted open source software products and processes but also its philosophy, which is to spur quality and fast growth rather than just profits based on proprietary ownership of intellectual property.”

Why would a company spend hundreds of millions of dollars on software that’s given away for free? The strategy benefits IBM in two principal ways. First, contributing to Linux is the best way for their programmers to become experts on the system, which in turn makes them better at offering support services. Second, their contributions have created considerable goodwill in the broader Linux developer community. IBM has used that goodwill to enlist the community’s help in meeting IBM’s own software development goals. This informal open-ended collaboration has served both IBM and the broader Linux community, creating value that couldn’t be captured by proprietary business deals grounded in exclusive contracts, patents, and copyrights. As unnerving as that strategy might seem to the typical MBA, it paid off handsomely for IBM, which has been able to dramatically cut its software development costs while focusing on their core competence of selling support services.

Indeed, if Wikinomics has one weakness, it’s that the authors fail to fully appreciate the extent to which market mechanisms lose their salience in the context of peer production. For example, they urge Yahoo! to set up a profit-sharing scheme within its Flickr photo-sharing site and its del.icio.us social bookmarking site, in which the creators of the most popular content would get paid for their contributions. This seems entirely unnecessary. The sites must already be offering users sufficient incentives to participate, or they never would have signed up in the first place.

Moreover, introducing payments could create new problems. Paying a handful of the most popular contributors could create feelings of envy and resentment among the vast majority of users who would continue to be unpaid. The lure of cash payments might also induce some users to attempt to game the system. Paying contributors would be highly inefficient, as there would be substantial overhead in locating, authenticating, and mailing (fairly small) checks to thousands of people. The money would be far better spent hiring more programmers to further improve the site, making it more valuable for all users.

Peer production seems to challenge some of the most basic principles of economics, especially the rule against free lunches.

This points to a more general principle: peer production succeeds largely because it eliminates the frictions that accompany commercial activities. Proprietary software companies face a variety of costs, including finding and hiring programmers, finding and hiring sales and support personnel, supervising and evaluating employees, negotiating contracts with other software companies, filing patent applications, renting office space, and so forth. Peer production eliminates most of these costs, as contributors self-select the parts of a project that interest them most (which will, more often than not, be the parts to which they’ll have the most to contribute) and contribute their changes directly to the project, without the substantial overhead that would be required to keep track of who contributed what and how much each contributor was owed. Introducing financial payments into the equation can often undermine the very efficiencies that make the system work in the first place.

But these nitpicks do little to mar an excellent layman’s introduction to mass collaboration. The authors provide a wealth of examples and a great deal of insight into why mass collaboration works and how a company can best take advantage of it. Their obligatory “four principles of mass collaboration”—openness, peering, sharing, and acting globally—are good advice for any company, even one not willing to jump headlong into an open source project. Customers, employees, suppliers, and shareholders all want to work with firms that are transparent, responsive, and nimble. Wikinomics will help managers incorporate these traits of the open source world into almost any business.

Managers who fail to heed these lessons are likely to have a rough time in the next few years, especially if they run companies that sell information products. Wikipedia is steadily driving the Encyclopedia Brittanica into bankruptcy. Craig’s List is devastating newspapers’ classified revenues. And proprietary software firms are feeling their profit margins squeezed by open source products. Things will only get worse for information companies that fail to incorporate peer production into their business plans. They will find it more and more difficult to compete with projects that are run by loosely-knit teams of volunteers and give their products away for free. Wikinomics is an excellent roadmap for executives who want their company to be the next IBM, rather than the next Encyclopedia Britannica.

Timothy B. Lee is a policy analyst at the Show-Me Institute, and a regular contributor to the Technology Liberation Front.