The Algorithm Economy Will Start a Huge Wave of Innovation

January 20, 2016

Contributor: Rob van der Meulen

Algorithm marketplaces set to proliferate in the next five years.

Several analytical vendors have recently opened algorithm marketplaces that enable algorithms or code snippets to be bought and sold. These marketplaces will see substantial growth. In fact, by 2020, Gartner predicts that the three leading marketplaces will offer more functions than all other analytical vendors combined - transforming the analytics and broader software market in the process.

Algorithms are the DNA of software. They codify the macrosteps of how computers already run large parts of the world. Gartner believes that the predominance of algorithms will only increase in the digital age, especially with the growth of the Internet of Things.

“Algorithm marketplaces are similar to the mobile app stores that created the ‘app economy’. The essence of the app economy is to allow all kinds of individuals to distribute and sell software globally without the need to pitch their idea to investors or set up their own sales, marketing and distribution channels,” explained Alexander Linden, research director at Gartner.

An algorithm marketplace takes the app economy one step further. It allows algorithms and other software components to be brokered. These algorithms are not stand-alone apps, but are meant to be used as building blocks within tailored solutions.

Mr. Linden said the impact on the analytics and software market will be revolutionary for these reasons:

  1. More software and more granular software will be commercialized - The current software ecosystem allows only whole products to be commercialized — not functions or features. This conventional wisdom ends with algorithm marketplaces, as software distribution costs become marginal which is increasing the use cases for third-party software in an organization.
  2. More cutting-edge software can now be commercialized - While the number of existing algorithms is significant, very few engineers or scientists commercialize their algorithms, mostly due to the limited prospects of real success. With marketplaces dramatically reducing the barriers to entry, end users will benefit from more advanced software functionality.
  3. Marketplaces will create a spiral of reuse - Another profound aspect of a marketplace is its ability to allow algorithms to be reused. Whole teams of developers have direct monetary incentives to create quasi-standards such that the involved outputs of algorithms are better compatible with the inputs of others.
  4. Easier quality assessment - Advanced end-users who are building cutting-edge solutions face a complex algorithm selection process. Many algorithms are unproven and of variable quality, especially in the open-source domain. Marketplaces' usage statistics, feedback and collaboration mechanisms can create higher levels of testing and easier quality assessment for end users.

It’s clear that the traditional software market is on the brink of a major overhaul. With marketplaces set to proliferate in the next five years, analytics and IT leaders must act now to proof their own analytics architecture. The potential rewards are huge. Start considering algorithm markets as a novel way to obtain specialized solutions to difficult business problems. Start comparing your existing algorithms against the state-of-the-art ones found in marketplaces.  

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