Network theory and the adoption of biometrics . . .
(Be forewarned on this post: I'm going to get in pretty deep here and it's not clear I can swim my way out of it.)
We are all eagerly awaiting IDX to ramp up its IT sales, and noticing that prices are dropping and the Internet is expanding, and we are waiting on the runway. What is the holdup? When do we take off? Do we take off?
Sales will happen when the potential customer base recognizes more value in the biometric security product than it costs to install it. That's a truism. But will it happen gradually or explosively? Sooner or later?
Let's take a quick look at how a network itself gains value. When the telephone was first invented, the first user had no one to call . . . so the phone itself really had no economic value, although it was a technological marvel. As phones were added to the network, the value of having a phone in your house started increasing in a linear fashion, according to the number of people you could telephone. The intrinsic value of the network itself grew factorially, by the number of possible connections among all the people with telephones. (That is, with ten users there are 10+9+8+7+6+5+4+3+2+1, or 55, possible two-way connections. To oversimplify (since more than two-way connections are possible) the value of the system increases from 1 to 55, while the value to a given user has increased only from 1 to 10. Eventually, as the phone system became universal, both the value of a phone to an individual user, and the value of the system itself, grew to a immense propertions -- although the system value (as a factorial rather than a linear function) became almost infinitely greater than the value to an individual.
Obviously, this is the economic model for networks in the process of becoming universal. The system value equates to the social value of the network, and we can see with the Internet that the factorially increasing social value is beginning to drive the general economy, even though individuals, while realizing greatly increasing value, do not organize around the system to quite that degree (I suspect the social value increase will have indirect effects on individuals, such as receiving benefits from higher productivity and lower inflation, etc.).
I haven't studied the percentage of actual Internet participants versus potential participants, but with wireless companies expecting a billion users, etc., it may be fair to guess, within an order of magnitude, that perhaps 10% of the population that will be connected to the Internet is now connected. In some years -- maybe 10, maybe 20 -- we'll reach the Internet's potential. Meanwhile, the social value of the Internet will continue to well outstrip the value to given individuals.
The 10% figure is also convenient, because I can borrow the figures laid out above: If the number of users will increase by ten over the next years, the value to individual users for one-on-one connections will increase from here linearly -- tenfold -- while the system value (the value to society) will increase factorially -- fifty-five fold. (This implies to me that the investment of social resources on the Net, such as databases, will go up more like 55x than 10x, in line with its increasing system value.)
What does that mean for Identix and the biometric security industry? Is the industry connected to the social value of the system or the value to the individuals in the system? Is the need for security going to increase factorially or just linearly? If security needs track the linear function, we can expect a slower, more gradual adoption of higher security measures such as biometrics. This is clearly unfavorable for biometrics and IDX (the current leader), in particular. A slower, gradual takeoff gives IDX competitors more opportunity to overtake us, puts financial and psychological strains on the corporation, and reduces and delays returns on the stock, assuming IDX maintains market share. A quicker, more explosive takeoff favors biometrics and IDX in particular for converse reasons.
I see the Internet security market proceeding along two independent tracks. Corporations and, even more so, individuals, are going to be gradual and linear adopters of the technology. System administrators -- such as major credit card companies, the government, and perhaps some day as yet unknown Internet database controllers (perhaps Novell or Microsoft) will be explosive adopters. The owners of systems receive the benefits of the whole network value, and they run the factorially increasing risks of poor network security. For them, the benefits of adopting biometric security will more quickly outpace the costs.
The question is, Where are we on the network value curve? I suspect we are at least a year or two away, based on what has happened to date. The trick for IDX will be to strengthen its AFIS market position to prepare for a potential long run, rather than a sprint. However, when the time comes for adoption into the Internet, it will seem to happen overnight -- not unlike what is happening with Verisign, which is addressing a more immediate network need for data security 'in flight.'
Any economists on this thread? And Happy Thanksgiving, everyone. |
