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Chris Anderson posts on Wired today championing an idea that MIT Professor Tom Malone taught in the late 80s: the Internet will decentralize and externalize industries. He goes on to say that the financial crisis is the catalyst for this change and large companies will be fewer than before, dominated instead by much smaller companies.

Anderson’s interpretation is wrong but Malone’s idea is right.

Media industries have been decentralized and externalized – journalism, music, movie and video production. Technology industries as well – casual gaming, phone applications.But this decentralization doesn’t obviate the necessity of the large corporation.

Advantage of being big

Large corporations have resources to bring to bear a on a problem that small companies could never overcome. For example, the ability to spend huge amounts of capital at a loss to finance the production of a new business or business unit. Rolling out a cable or satellite network, deploying a new video game console, developing oil or natural gas fields.

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Additionally, large companies provide value in aggregation of services. One stop shopping for advertising? Go to Google, instead of dealing with many other vendors.

The third and last advantage of my list (although there are more), is trust. Large companies fail less quickly than big ones – in normal economic times. It’s just easier to rationalize large capital expenditure when your supplier has billions in revenue and has been around for 40 years.

Technology is reducing the costs to start a company. Today more than ever, small companies will play the role they always have: driving innovation and disruption of industries. There will be more of them and more often than before, they will interact and belong in the ecosystems with the large companies. But they will never replace large companies. However, the best ones will become large companies.

The internet enables ecosystems

Users can have conversations with big brands on Twitter.  Developers build on top of large open platforms like Facebook, Evernote, WordPress to bring additional functionality that appeals to smaller audiences whose needs would never be met by a larger corporation because the ROI is too small to serve them.

This is what Malone meant when he said “the Internet will decentralize and externalize industries”. And he was right.

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