Category Archives: business modeling

Caesar’s Render

ceaserJohn Siracusa has posted a quite thought provoking piece about the power games unfolding between Google, Apple, Facebook and others.  Let’s say you wanted to own a cirtical open source project, i.e. own a key standard.  How might you go about that.  He makes a case, that has some merit(sic), that contribution rates can be used by a firm to buy control of an open source project.  If so, then it’s only a matter of money and time.

It’s a good essay and worth reading.  In my limited experience firms are rarely this strategic; but in retrospect they can stumble into outcomes like these – moving fast, hill climbing, and a bit of impatient greed can goes a long way.  But, yeah – who knows … he might be right.

Little Pirates

This chart is a nice simple illustration as to why an investment advisor might be drawn into pitching a higher risk portfolio.  All you need to do is offer him a bonus if the portfolio performs particularly well.  This creates an incentive for him to offer you investments drawn from the blue portfolio v.s. the green portfolio.

This chart is lifted from this provocative paper: “Low Risk Stocks Outperform within All Observable Markets.”  It’s role in the paper is to argue that this incentive, the tendency of advisors to prefer the blue to the green portfolios, leads to high prices for the blue stocks.  Thus they become overvalued and lousy investments.

What I find interesting about that is how complementary it is to my theory of Capitalism as the direct decedent of Piracy.  E.g. here we have agency effects creating an incentive for the investment advisor to put his client into more volatile (riskier?) investments, but thru the wonders of agency (aka limited liability) he bears on downside for that.

ht: Bob Wyman.

Forgetting to succeed

I learn from a book that bacteria are unlike life as we know it.  The evolutionary mechanisms are different.  Food scarcity is the primary pressure on them.  When food is scarce reproducing fast is beneficial.  The book mentions two ways the accelerate their reproduction. Both address the same problem copying the genetic material takes time.  First off they shed genes.  For example they will very quickly shed the genes for antibiotic resistance when the antibiotic is absent.  Secondly; recalling that bacteria are a-sexual.  That allows mom a head start.  She can make the copy that will be used by her grand daughters.

The shedding genes appears, at first glance, to be very short sighted.  My house is full of stuff I’m not going to need tomorrow; but yeah I retain to insure against the possibility I’ll need it next week.  The bacteria have stumbled on solution to this problem, they steal genes from each other.  In fact they do it a lot, the percentages are huge.  I think this is amazingly cool.  The community can, and will, shed the gene for antibiotic resistance quickly; but if only a handful of the community retain it then the community can survive the reintroduction.  I do that too.  I discard stuff in my house because I know I can recover it from the city around me.

Much fun can be had with this.  For example here is a fun essay on the evolutionary history of the directories in my Unix PATH.  At each point in time it seemed like a good idea, solved a problem; but now we carry the complexity around.  The essay is written by somebody who is under very different evolutionary pressures; so he’s trying to shed those genes.

I’m reminded of how the 1984 macintosh shed the genes for memory management, because it wanted to reproduce more quickly than the Lisa.  Getting that gene back wasn’t easy, but the design pattern certainly didn’t get lost.

The dialectic between reproducing fast and remembering and copying all the important design patterns is a key challenge in any new product.  It is the curse of experience that you have a deeper catalog of design patterns you feel you must decide if you will or won’t pack them into today’s new product.  I’m always a bit bemused by how casually presumptive some people are about the absolute necessity of packing in this or that thing.  For example: first customer contact v.s. QA?  For example: delivery or modularity?  For example: features or cross platform.

The answer tends to fall out of the R-selected v.s. K-selected nature of your business ecology.  It’s part of what makes small businesses radically different from big ones.  Which reminds me of who eats the bacteria.

So in this amusing game of analogy what plays the role of antibiotic.  QA is a kind of antibiotic, but I think a better example would be the skills that organizations need to have to defend themselves from the dark arts – i.e. the agents that immunize the organization against the numerous bad ideas found in the business cults.

And then finally, let’s says something about how the bacteria draw upon their community much as I draw upon the city around me.  In a business context I think that explains a lot about the survival value that comes from situating your small business inside a geographic region  or virtual community from which you can draw in the craft knowledge you’ll probably shed in exchange for fast growth out of the box.

Why Google’s Troubles Run Deep

This may be the only thing ( I’ve ever read that made me actually want to work at Google.  First off, ignore the stupid framing and scroll down to the actual content.
Let me pick some quotes.

Writing about Amazon: “Organizing into services taught teams not to trust each other in most of the same ways they’re not supposed to trust external developers”

Or writing about a fundamental truth: “Accessibility has an evil twin who, jilted by the unbalanced affection displayed by their parents in their youth, has grown into an equally powerful Arch-Nemesis (yes, there’s more than one nemesis to accessibility) named Security. And boy howdy are the two ever at odds.”

But then getting to Google’s deepest fundamental tragic flaw: “one last thing that Google doesn’t do well is Platforms” … “product is useless without a platform”  …  “.Google+ team took a look at the aftermarket and said: “Gosh, it looks like we need some … Let’s go contract someone to, um, write some… for us.”  … “Any teams that have successfully internalized the notion that they should be externally programmable platforms from the ground up are underdogs” … “The problem is that we’re a Product Company…”

ok, nevermind.  But,  I think it’s shockingly exactly right and in the long run it’s not a bad reason to short Google.

If I’ve peak’d your interest read the whole thing (see now)

I suspect this says something about  Hal Varian’s status in the senior leadership.  I presume he understands this.  But maybe not how fundamental it is.

Nice Lion

I haven’t played with Mac OS X Lion yet, only read, John Siracusa’s lovely long review.  John suggested a while  ago that Apple had learned somethings from the iPhone/iPod/iPad, and that these things were likely to fundamentally change the way the Mac worked.  At the time my reaction was; “but of course,”  and I wondered: how aggressively can they manage to drive toward these goals.

Lion answers that question.  Fast and hard seems to be the answer.  I impressed!  And, good for them!

This will be very disconcerting for long time Mac users, a real culture shock.  They will complain, a lot.

Stewards of high tech platforms have to manage a balancing act.  If they don’t force the migration of their users into the future the platform dies.  Doing this runs counter to the cliche that you should listen to your users.  In this case your users don’t know diddly.

Usually when this happens the platform steward is chasing a future innovated by some upstart.  As Google is now doing with Facebook and Twitter.  As the voice telco industry has long been doing with the internet.  And in such cases the existing culture around the existing product is a nearly immovable object.  For Apple the upstart is in house.  I bet that’s an interesting story.  I wonder if you stand outside the Apple campus you can hear the shouting matches.

What’s unique about the Apple situation is that I suspect their primary source of new Mac OS X customers are users who already used the IPhone.  The discomfort those users feel when they encounter the Mac must be huge.  Sum that up and I bet is is much larger than the discomfort the Mac installed base is going to feel as Apple forces them into the new user experience.

But enough about the b-school view of what Apple is doing.  A few comments about the actual changes.

The mouse is pretty much dead, long live touch.  I can’t wait to experience how they designed all that.

Respect for screen real estate is back in a big way.  I’m delighted.  I’m very intrigued by what they did with scrolling, scroll bars, and window resizing.  It looks awesome.  Full screen apps are a no brainer.  If they werent’ so damn modal I’d have expected them much sooner.  It’s interesting to think about what it is that enables them to finally arrive now.

Applications now just are.  They don’t run, they are.  User experience guys have known for decades that this was the right model, so it’s nice to see that we are finally doing it.  The design looks sufficently elegant and complex.  Particularly the codependency on changes in how documents are managed.

I can wait to try this.  Really.  I think this maybe the first Mac OS release since the beginning that has called out to my fancy like this.

The Pitch

I assume they have all read the same book, because they use the same outline, start-up CEOs I mean.  It has two parts.  The opening, and the gonna have a revolution bit.

First the prolog:

  • Open with how grateful you are for the ideas and help the host (and/or the most powerful people in room) provided in starting your firm.  But, don’t explain why.  Leave that a mystery to hook your audience.  Set the hook “i’ll get back to that.”  Note how this reframes the usual thanks to the host for inviting you.  Note you don’t need to know these people, but you should have done your homework and be familiar with their ideas, papers, books, failures and achievements – certainly there is something in there you can use.
  • Introduce your founding myth.  The characters in the founding myth should be drawn from a sacred category, e.g. mom, family, your tribe, citizens, the profession of your audience.  Populism can work.  Customers is kind of a weak form populism.  Nine times out of ten these stories seem to involve a mention of family.  The pain the product resolves is introduced here, as felt by this representative of sacred/worthy group.  This works for a few reasons.  First off banishment from home is the usual kick off of any fairy tale: so this make your audience comfortable.  Secondly it draws our their empathy, everybody cares about mom.  It also makes you out to be a caring person so the audience begins to identify with you.
  • Introduce the broad themes of value generation.  It’s good if at this point you can begin to introduce yourself as the agent of resolving the problem previously introduced.  Your frustration at being unable to aid those in need.  This is becomes the quest in the classic story template.
  • Start to tempt the audience.  Letting them glimpse the solution.  Letting them glimpse an artifact or a prototype at this point can be good, but don’t show it to them!  This creates an appetite; which if can heighten by delay.  This might be a mistake if overplayed, I’ve noticed audiences that stop listening as they attempt to catch a glimpse of the hidden product.
  • Finally notch up the frustration at lack of resolution both for you as hero, and for your homie.

That end’s the prolog.  Now this is a VC funded start-up; so we need a industry game changing story.  That prolog doesn’t provide that.  In a story telling frame you now want to introduce the evil king (current industry structure) and how your firms innovative addition is going be the revolution.  At this point we are shifting out of the fairy tale frame and into revolutionary group forming.  You want to create in the audience a desire to join the revolution.

  • Tell story of current industry structure.  This structure must frustrate, bewilder, and/or anger you – our hero.  Done right you will not need to say it, but your audience will see how the glimpses of a solution you gave before foreshadow the resolution of these issues.  At this point you must have quantitative data; at least charts.  Trend lines, preferably  exponential, illustrating how it is only going to get worse.  A bit of casual social science about why it’s in the culture of the evil kings is good at this point.
  • This, or just after the next step, is a good point to resolve the quesiton of what you learned from your those powerful people in the room, it shouldn’t be the whole answer – it should be an addition to the core.
  • Now you can finally reveal the solution, but though not the demo or the prototype.  You can and probably should be rational, and quantitative.
  • Now double the bet.  Make it clear that the pain your addressing is felt so widely that there is broad demand for a new paradigm.  Clarify why your solution enables it.

That fits most of the stories I’ve heard.  Occasionally  there is another element.  Notice how that story is buyer facing; but it is good if you have additional bit that talks about how you have unique supply side advantages.  The lamest form of this is a single patent or research result.  In the story telling metaphor this is part where our hero picks up his band of uniquely talented buddies – the brother who can swallow the sea, the cat that talks, the cloak of  invisibility.  Weaving these into the story is tricky.  Too much too early and the audience figures out what your doing too soon – which leads to their minds wandering and then they make up objections.  But it’s cool if you can get them into the story early and the mystery of how your going to use that cofounder, or that unusual technology can suddenly become clear as you reveal your answer.  The other reason to get your supply side advantages into the narrative is so you can have charts that show how this revolution is inevitable and timely.

Timely is good because it answers the objection – why hasn’t anybody done this before?  Inevitable is good because it creates urgency to move now; before the revolution/wave – and it’s wealth generating power – breaks.

That framing is another standard framework.  You want to get a population (this industry) to move you build them a golden bridge (your solution) and set fire to their village.  You need to make clear that the problem your solving scales up to being so serious and widespread that the industry is soon going to be on fire.

I was surprised at first that nobody every goes back and explains how their Mom has now been made happy.  But that’s actually obvious, this is a start-up and the story’s not over yet.

How to Eliminating the Boys

Some time ago I was greatly amused by this fine example the  pervasive power of the patriarchy.  Not that it’s surprising; the patriarchy rules!  In that example we discovered that the forces which be have conspired to plant only male trees.  Male trees are good for the economy.  They increase in sales … of allergy meds.

But, there are always contrarians.  So some wags have suggested that we should plant only female trees.  The cover story for why we plant all these allergy generators is that the female trees produce fruit and seeds; better known as litter.  The wags suggest this problem can be resolved if we don’t plant any males.

Of course that doesn’t work since we already have a large installed base of male trees, desperately seeking females.

It occurs to me that a city could pass a regulation to force the planting of female trees, and if they limited those to a species of tree who’s males are not currently infesting the city … well this might work.  Obviously it’s time to short the drug companies.

(Hat tip)

Insurance Deductables

My father was wrong.  I learned at my father’s knee that it is wise to self insure for the little things and buy insurance for the big things.  Thus it is clever and thrifty to buy insurance policies with large  deductibles.    It is a little odd to notice that poor people should buy more comprehensive, and hence expensive insurance.  Large economic actors can afford to self insure more than smaller ones; so for example a Billionaire may minimal car insurance – since if he can casually afford to replace the car – but he will carry a substantial personal liability policy since replace his wealth would be harder.  Firms often self insure and some even gin up their own employee health insurance systems.

This advice turns out to be wrong, for most of us.  There are three reasons.  The simple reason: people buy high  deductible  policies not because they can afford to cover the cost of small loses, but because they don’t have a clue what they are buying.  Secondly the marketing of these things is entirely a pure confusopoly; buyers haven’t got a chance.  But the third reasons is interesting.

Insurance has plenty of adverse selection and agency problems.  Nominally a benefit of self insuring is that your less like to engage in some risky behaviors since you will personally bear the cost.  On the other had you remove any incentive for the insurance company to bring it’s scale advantages to into the equation; e.g. the insurance company is likely to work for systemic improvements that reduce risk.

So there is an  argument  to be made that my father’s advice might be wrong.  I noticed this because I have a few medical bills on next to me.  My health insurance includes a  deductible.  What I notice about these bills is that I am not getting the prices the insurance company negotiated with the providers.  I am paying full price!  Note that agency is not all bad; since agency creates a locus for skill.  In this case I have lost access to both of these.  Having taken the choice to self insure for the amount of the  deductible  I now have the option to simulate the skills of the insurance company – i.e. I can call these providers and attempt to  negotiate  a discount … or not.

So this is another interesting story about middlemen.  There are three actors in this story; the service providers, the insurance company, and the service consumers.  I’m am  fascinated  to notice a new move in the game that can takes place during the negotiation between the insurance company and the providers.  In exchange for a reduction in prices the insurance company assures the providers that it will sell more high  deductible  policies.  That’s great for the providers since they can then charge those consumers the list price.  To  fulfill  the promises made during this negotiation the middleman may have to set goals to assure he sells enough of the high  deductible  policies.

That shapes the market in very perverse ways.  The small jobs become the high profit work.  My father’s advise become obsolete.  How weird is it that purchasing high  deductible  policies is a form of free riding – since as long as the insurance company price control feedback is working effectively you get the prices and quality provided by that loop without paying for it.

This is all  marvelously and distressingly perverse.  Since poor and innocent people tend to mistakenly purchase high  deductible  policies (do to regulatory failure enabling market failure) this process shifts costs onto poor people.  I also think this explains why the last car I bought had a bumper design that was prone to failure who’s repair was just bellow the typical  deductible.  The dealers presumably like that.  The usual feedback loop thru the insurance company that would fix it wasn’t just broken – somebody removed it.

Cost Benefit Analysis

Plucked from this poignant post about externalities (which reminds me of my realization that limited liability corporations evolved from pirates)  is this bit from a Rolling Stone article.  It’s a nice clean example of cost benefit analysis in the “real world.”

BP has also cut corners at the expense of its own workers. In 2005, 15 workers were killed and 170 injured after a tower filled with gasoline exploded at a BP refinery in Texas. Investigators found that the company had flouted its own safety procedures and illegally shut off a warning system before the blast. An internal cost-benefit analysis conducted by BP – explicitly based on the children’s tale  The Three Little Pigs – revealed that the oil giant had considered making buildings at the refinery blast-resistant to protect its workers (the pigs) from an explosion (the wolf). BP knew lives were on the line: “If the wolf blows down the house, the piggy is gobbled.” But the company determined it would be cheaper to simply pay off the families of dead pigs.

Billions of years ago, in a course on Biotechnology, I got a A+ for writing a long paper outlining a cost benefit analysis for some research on kidney machines.  I’d written the entire paper in a similar sardonic tongue in cheek tone and I was shocked that the instructor seemed to be oblivious to that.  It was, I thought at the time, the most interesting lesson I took from the course.

I must look for a chance to use the The Three Little Pigs as design framework!

Problem: Immovable installed base -> Solution: closed system?

The ongoing puzzle, debate even, about the choice points between a closed and open system appears to have picked up a new aspect.  At least I had not noted this one before.  What differentiates a closed model from an open one is the extent that the business hordes the options created by it’s product offerings.  For the firm the open v.s. closed debate comes down to questions about short and long term advantages for the firm and it’s managers.  A closed approach hold out the hope of better price  discrimination.  While an open approach offers a change at wider adoption, more innovation, stronger network effects, and better protection against competitors.

So, the new  argument  I’d not previously seen goes as follows.  It is on the closed side.  A firm can adopt a closed architecture to deal with the rapid technology change.  Closed addresses the immovable installed base problem.  By making closing things down the firm captures the  ability  to migrate the installed base more quickly.  Or, so this story goes.

When dealing with the risk of technology driven displacement a large installed base is both a blessing and a curse.  It’s a curse, of course, because it is slow to move.  But it is a blessing since there is safety in numbers, e.g. an assurance that when technology changes you’ll not be left out in the cold.  The suppliers and users will have plenty of common cause to help solve to manage the switching costs.  In a closed system the vendor coordinates that.  You could argue that in a closed system the coordination problem is easier to solve.  I suspect that’s not so clear in practice.  The installed base ties it’s fate to the competence of the vendor.  The vendor is a single point of failure.

Open makes firms nervous.  Management is all about juggling risks.  Closed offers the impression your in control.  This impression is often wrong.  Closed systems lead to the systemic blindness; provincialism.  And yet I find the  argument  that a closed system is better able to handle rapid technology change sounding pretty good.  Possibly that’s because it’s about supply side risks.  I wonder why I think the closed system blindness issue is less serious on the supply side v.s. the demand side.

Having engaged with this debate for twenty years, and now finding it kind of dull, it’s a delight to see a new aspect to it.