I was watching this talk with Albert Wenger of Union Square Ventures last night. He was recently in Toronto for a Wattpad board meeting (USV is an investor).

It’s an interesting discussion that touches on education, healthcare, Canada’s tech ecosystem, as well as a bunch of other things. But one point that Albert made that I particularly like is the comparison between industrial and internet scale.

In both cases, it’s all about growth and scale. The bigger a firm can get, the better.

But with industrial production, scale is all about driving down the marginal cost. This is also known as economies of scale. As firms increase in size, efficiencies are found that allow the unit of production to drop in price. This, in turn, creates defensibility, because smaller firms simply can’t compete in the market.

With internet platforms the situation is different. Sure, there are still economies due to scale, but their competitive advantage is often derived from the fact that, on the margin, every new user increases the value for every other user on the network. This is called a network effect.

A perfect example of this is Facebook. People use Facebook because all of their friends are there. And as more and more friends join, it becomes increasingly more valuable. Without friends, a social network has little value. This make starting one fairly difficult. However once started, network effects are incredibly difficult to dismantle. This is their defensibility.

Another network effect example that Albert mentions is search (i.e. Google). This one isn’t so obvious. It may not seem like there are network effects with search, but there are. As a search user, you enter a query and then select from a list of results. In doing so you’re actually helping the search engine figure out what the best and most relevant results are for the keyword(s) you just entered. Again, in the end, everybody benefits.

I found this interesting because, in the case of internet platforms, scale is directly related to value proposition. The bigger something gets, the more useful it becomes. Now, you could maybe argue that the same is true for industrial production, but it’s a bit more tenuous. The direct link is cost.

Earlier this week I talked about the huge importance of cities and how our governance structures are entirely ill-suited to the realities of our new urban focused economy. It was in relation to a talk that Richard Florida gave at the Rotman School.

Well this morning, I stumbled upon an old blog post by Alan Broadbent, who is the author of a book called Urban Nation. In it, he echoes a similar belief: Our governance structures, particularly as they relate to cities, are completely outdated. Toronto would be better off as its own, separate province.

Here’s an excerpt from his blog post:

"In my book Urban Nation (2008), I wrote that Canada’s cities were the orphans of Confederation, creatures of the provinces locked in constitutional arrangements that are almost a century and a half out of date. Our large urban regions are now the economic, social, and cultural engines of the country. They compete with other large urban regions around the world to create prosperity and well-being.

In Canada, these regions create the wealth that gets shared with the rest of the country through our redistribution and transfer arrangements. It is in our cities that the capital pools are assembled to take the oil, gas, and minerals out of the ground, where the factories and laboratories are built, and where much of our modern industries of information and design are based.

But our cities are not in control of their own destiny. Like Blanche Dubois in A Streetcar Named Desire, they are very much reliant on the kindness of strangers. They have few residual powers and limited revenue tools, being overly reliant on property taxes and barred from levying income or sales taxes, the big revenue generators. They are closely controlled by provincial governments and generally ignored by Ottawa. Their role in Confederation is to send money and keep quiet.”

This is a big deal and a big problem. We’re stymying the full economic, social and cultural potential of our cities. We’re underutilizing our greatest assets. It’s time for a new, urban focused, governance structure.

In light of Bill de Blasio being elected yesterday as the new mayor of New York City, I thought I would post this interesting graphic I found on Atlantic Cities:

What it shows is a clear split.

If you live in Manhattan or nearby areas in Brooklyn, Queens and the Bronx, you most likely saw your property values rise from 2008 to 2012. However, if you live on the outskirts of the city, you may have seen your property values fall as much as 20% (the darkest red areas).

This shift back to city centers has been well documented and labeled, by some, as The Great Inversion. But in many ways it’s a symptom of a greater phenomenon at work: rising income inequality.

It’s happening in New York. It’s happening in Toronto. And in many other global cities. New York VC Fred Wilson believes that the solution lies in the three Es: education, empowerment and entrepreneurship. That sounds like a great start to me.