Monthly Archives: March 2005

Developer Network Pricing

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One of the mysteries in business modeling is how to do pricing, or any financial modeling, for your developer network offerings.

Developer networks are a marketing channel. Firms create developer networks to encourge 3rd parties to create products that complement their core offering. The presumption of these efforts is that the complementing products will increase the overall value of your offering. Businesses that use this approach refer to their offering as a platform, network, or toolkit. There are probably other names that get used. If you know some please tell me.

The puzzle around the pricing has three parts. First – Pricing provides a feedback, a signal, and if you subsidize the pricing how do you know if your actually generating value? Second – if you subsidize the price the firm automatically treats the developer network as a cost center rather than as a profit center. The standard way to manage a cost center is cost control; and that leads to the brilliant insight that if you shut down the developer network you save money – and that can’t be right.

The third problem is one of time and distance. The model that developer network leads to compliments and that leads to an increase in core offering value is all well and good. It’s not hard to pile on additional bits of optimism. A successful complement will create sales for the core offering. A rapidly evolving innovative new complement will force upgrades for the core offering. The third problem is that these feedback loops are very long and very diffuse. Or in Net Present Value terms they have high hurdle rates and low present value because they are, well, out there. This is a kind of options pricing problem.

So when I look at Microsoft’s recent pricing changes around their developer network I read into some conclusions. First – their management has fallen victim that ever popular fetish – market are the best model of any system – and are forcing the developer network to tie it’s self more tightly to a pricing signal. Second – that they have broken up the company in ways that treat the developer network more as a cost center and less as a marketing channel.

The third thing it appears to say is the most interesting. I believe that Microsoft is one of the few places with a financial model that can solve the options pricing problem. So raising their price maybe a signal that either they lost the model; or that the model is generating a less positive output. Climbing even further out on a limb. I think the model says that fewer developers are taking them up on the the offers implicit in the developer network offering, they are loosing developer mind share.

In summary, I see the raising of prices Microsoft developer network prices, as a the sign of weakness in their developer network business. That is really really bad for for a platform company.

One Sixth

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I’m in this 16+% too.

One-third of the respondents to the ABC News poll reported that a friend or relative had died after life support was stopped. And more than half of these respondents were involved in the decision.

I spent an awful lot of hours making sure the DNR was in still on hand.

I can imagine nothing more horrific than having to play Calvin ball with the religious right during that time.

acquaintance spam

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“Acquaintance Spam” – now that’s a term we need.

Plaxo is a particularly obnoxious with their viral attempts to hide behind my friends in as they strive to get to know me better. Each time I mention it to a Plaxo using acquaintance they explain that there is some button in there and sooner or later they hit by mistake … they are always really sorry about that.

There is a really evil dynamic where in the the product marketing people at these social networking sites create attractive nuisances that draw in the unwary, clueless, overeager or desperate networkers – who then hurt themselves and their ‘friends.’

update: snam Social Networking Spam 🙂

update 2: Stacy Martin replies in the comments below. Man, she’s got my sympathy! “stacy martin plaxo evil” gets 4 hundred plus hits at google!

Network Valuations

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This paper by Odlyzko and Tilly (pdf) is both tantalizing and extremely frustrating. At one level it’s a joke. An amusing joke though. The paper’s title is “A refutation of Metcalfe’s Law and a better estimate for the value of networks and network interconnections.”

The paper is fine; and it certainly needed to be written; but there is a much meaty paper close to this one that I wish somebody would write for us. One with a more careful critique of the three big laws and a more careful enumeration of the tools at hand for doing the valuation of networks.

There are three naive models for network value, each progressively outrageous in their estimates. Sarnoff’s law – that a broadcast station value is proportional to the number of customers it reaches; or O(n). Metcalf’s law that a communication network’s value is proportional to the number of connections it enables; or O(n^2). Reed’s law – that a network’s value is proportional to the number of groups it allows to form; or O(2^n).

All three laws are obviously bogus; though they get progressively more bogus as you go along; but that doesn’t preclude finding interesting valuable businesses using each of these models. Source Forge, Yahoo Groups, and MeetUp are, for example, businesses based on Reed’s law – businesses that strive to generate as many groups as they possibly can. Sarnoff’s law is useless if the broadcast system you form can’t usefully create meaningful audiences for advertisers or in other terms the next N listeners are too poor to buy what your selling.

It’s shooting fish in a barrel to make fun of these laws; but it can be good fun. The paper has fun taking a pot shot at Reed’s law. It points out that a few increments in N and you have a network that’s the scale of the entire economy. It’s amusing. Problem with humor is sometimes it’s true. The economy is a set of groups embedded in a set of networks. That’s what we mean when we talk about supply chains and firms.

That most frustrates me about the paper is that how close it comes to working on a key question. Why don’t networks merge if the laws suggest such merging would generate huge value. I think of this as the tower of Babel question. If we all spoke Chinese, or English, or Spanish, the world would tap into some really vast efficiencies.

The paper frustrates me because it argues that networks fail to merge because the end state value is too small, I just don’t think that’s right. Networks don’t merge because the transitions costs to get there are what frustrate the transition. Vested insterests. Sure the laws are over the top, but in the long run highly interconnected societies do generate truly mind boggling amounts of value.

Our lack of good tools for estimating the value created by network merging undermines our ability to form larger groups. So the paper frustrates me not because it’s wrong to make fun of the existing laws but because it’s “better estimate” appears to be almost as light weight an attempt as the models they hope to displace..

Long Tail – Wrong Drawing

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It’s very odd to be in front of a fad. I’ve spent a lot of time over the last five years looking at the power-law distributions in networks trying to understand the nature of these things. What’s up with elites, the middle class, the poor – or as we have come to call them the long-tail.

One level it’s very exhilarating to have a huge population of people become interested in a topic that fascinates you. But it also involves an odd kind of whiplash. One day your slowly climbing a long tedious learning curve. Off in the distance a few other people are climbing similar hills; you feel a kind of kinship with them. But it’s a big territory and pretty much you all don’t know squat. When the fad breaks a huge crowd rushes into the territory.

This might be great. Many hands make for light work and all that. But the noise level rises and it becomes harder to find the thoughtful ideas. It’s kind of weird how the hordes rush about in this or that region of the landscape; leaving fast territories just as untouched as they were before they all rushed in.

One is torn. Should you continue as before; climbing what ever hills in the problem space that catch your fancy or should you turn and dive into the crowd – where your role would more educational rather than investigative.

For example consider this first image which is becoming the canonical visualization for the long tail. The idea is that the color regions, the bits under the curve, are the value generated by the what ever process is giving rise to this distribution. The red bits are the elite’s generate value; the yellow bits are the value generated by the long tail. The fad is about realizing that the yellow part can be bigger than the red part; in some cases a lot bigger.


Ok now, look at the real curve. The red line is the whole curve. All the value is in the invisible space between that curve and the x and y axis. The elite value generation is along the y axis while the the poor/long-tail is the value generated along the x axis. That chart is clickable, and here’s another for less political data.

I have a lot of sympathy for the role of the middlemen in the marketplace of ideas. I don’t really see how you can get ideas to move into large populations without their slipping thru the hands of such middlemen. What I don’t get is how bizarre that process really is. Not just that large regions get ignored but even the core of the ideas undergo this severe mutation as they get communicated. Those two drawings are really really different. One is correct, the other isn’t – or a least it is quite a stretch to make it correct.

I can’t claim to being immune to using the exact same rhetorical cartoon. I did it here. If you don’t lie in like this your readers get deeply confused. But, I suspect if you use that cartoon you get get deeply misled as well.

E-Rate

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E-rate (or education rate) is a program funded in part by one of those numerous little charges the phone company piles onto your bill under the heading of various taxes and fees. It’s a variation on the old universal service fee that to shift money down the power-law curve an assure that the poor and rural get phones.

FCC established the E-rate program using an organizational structure unusual to the government without conducting a comprehensive assessment to determine which federal requirements, policies, and practices apply to it. The E-rate program is administered by a private, not-for-profit corporation with no contract or memorandum of understanding with FCC, and program Since 1998, the Federal Communications Commission’s (FCC) E-rate program has committed more than $13 billion to help schools and libraries acquire Internet and telecommunications services.

13 Billion, hm. There are around 225 Million people in the US; so that’s $57.77 each. These days the program spends about 2.24 Billion a year, or about ten bucks per person per year.

The program has some serious oversight problems. The GAO has been poking the FCC, which administers the program, in the ribs about these for years. Last year it finally got some traction; at which point the entire program came to a halt. Apparently the program was running outside the usual rules for managing federal funds. It had money invested in unusual ways. It lacked required reserves. To get the program running again the Congress passed a special temporary exception to the rules in December 2004. Of course like all programs where Billions of dollars are going by you can also find some outrageous examples of fraud. The level here is probably worse do to the sloppy oversight structure the FCC setup for the program.

Recently the GAO releasted report (pdf) that summarizes this mess.

What to do? Some folks would like to kill the entire program. They stand on the GAO report and promise everybody ten bucks a year.

The program was set up in 98 as a way, in part, to get Internet into the schools and libraries. If you’ve participated in one of the volunteer events where you pull wires in a old school building it is likely that part of the equipment and the discounted service were paid for by this program. The funds are distributed in a very progressive manner. Rural and poor school districts get much deeper discounts.

The GAO report is very depressing. The laundry list of foul ups in the FCC’s setup for this thing is just plain ugly. They didn’t set goals. They didn’t measure efficiency. They didn’t manage the funds in compliance with the rules. They didn’t require appropriate record retention by the schools and libraries. They didn’t look for gold plating. They didn’t attempt to estimate the rate of bogus payments. All of this the GAO pointed out back in 2000.

Meanwhile I suspect there is whole tangled story to be told in the managerial structure of this thing. The 2.24 Billion is spent by a nonprofit (the USAC or Universal Services Administration Company) a subsidiary of the National Carriers Exchange Association (another nonprofit) thru a for profit organization called the National Carriers Exchange Association Services Incorporated. It looks like the FCC just handed the money over to the telecom industry and and said, you guys take care of this.

My default managerial reaction in a situation like this is to decide first I like the goals of the program. I do, Next question, can it be fixed? It can. It’s clear from the GAO report that just following the rules would fix much of the problem. Finally there is always a hostage problem. The beneficiaries of the program are held hostage by program managers. Punishing the incompetent program managers without doing harm to beneficiaries is difficult. But yeah, management isn’t easy.

The good news is that it appears that the GAO is doing it’s job. Let’s hope the FCC can be convinced to do theirs.

Income Redistribution

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Steve Jobs makes an argument I’d not seen before about the structure of the music industry. He argues that the industry’s architecture shifts money down the power-law curve. In effect a few a-list performers make most of the money but the industry has happened on a way to see that the money flows down into the b-list. It does this by signing up lots of b-list acts early in their carriers and then funding that expense from the few that make it into the a-list.

Here’s what he says:

After talking to a lot of people, this is my conclusion: A young artist gets signed, and he or she gets a big advance — a million dollars, or more. And the theory is that the record company will earn back that advance when the artist is successful.

Except that even though they’re really good at picking, only one or two out of the ten that they pick is successful. And so most of the artists never earn back that advance — so the record companies are out that money. Well, who pays for the ones that are the losers?

The winners pay. The winners pay for the losers, and the winners are not seeing rewards commensurate with their success. And they get upset.

From a God like point of view this might be very healthy for the industry. An architecture that starves out all your b-list performers isn’t likely to generate a deep pool of talent that occasionally bubbles up an a-list winner. It’s an entirely reasonable deal that’s offered to the b-list players; we make you reasonably wealthy but in the unlikely scenario that you make it into the a-list your going to help fund all your b-list peers.

Notice that Jobs doesn’t say the industry is screwing the performers. He only says that the ones that make it into the a-list often feel that maybe they shouldn’t have taken the deal. He doesn’t say that the industry is stealing the cash the a-list is making; only that they are shifting it down to the b-list.

Wealth redistribution is one of the standard ways that you can temper the power-law curve. There are good reasons to want that. Starving the pool of talent isn’t a very good long term plan. The architecture Job’s outlines is good for the performers; lowering their life time risk and raising their chances of working in the profession of their choice and it’s good for the industry because it creates a more reliable pool of talent to draw upon.

This is the same framework you find inside companies with their ornate job classifications. In any give time frame some high achievers subsidize the salaries of the low achievers in that time frame. Since high achieving is such a crap shoot of variables the structure tends to compensate for the randomness. It spreads risk for both the employer and for the employees.

This is the same framework that union contracts strive to achieve. A degree of tempering the risk in the out years by spreading the wealth across the union members and turning down the capacious nature of the market.

There is a lot of enthusiasm these days for shifting risk out of social structures and onto individuals. There are reasons not to do that. Reasons that everybody involved might well sign onto. I see lots of benefit in societies with a less severe wealth distribution. I find it sobering how fast we are tearing down these structures.

Jobs’ model implies that the a-list performers are bitter about the deal they made. In the context of the music industry they have limited legal options for renegotiating that deal. What’s a pain in the neck about modern politics is that the a-list can renegotiating the terms of the social contract buying enough senators. In the short term this makes the a-list richer, in the long term it starves out the long tail. That’s not good.

Connectors

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The computer in my lap has 12 connectors on it and supports two wireless protocols. In other news General Motors is considering the possibility of putting an audio input on the radio of some future model. They released a photo! How can that possibly be news worthy?

When you make something – a computer, a car, a website, a communication’s network, intellectual property rights scheme – one of your design choices is leaving some open connectors. Leaving open some options for other the customers to fool around with. What guides a designer, a business architect, in making those choices? Why do car makers tend to horde these options while PC makers tend to bleed open interfaces?

One driver for hoarding is value pricing; a few options (leather seats) are valued very highly by a small number of customers. If you left your car open to customization then 3rd parties could undercut you and selling the high margin options. For the car maker the after market is a competitor; and unlike the software business they lack network effects to lock-in their customers.

One driver for open designs is innovation; a highly open architecture allows the vendor to sample the long tail of creatives. Innovations the pop out of that space will often change the game. If you get in early and their network effects you get to grab elite positions on the power-law distributions that emerge. That leaves your competitors bewildered. The car market has a reasonably vibrant after market. Where in the software world we call them hackers in the car world they call them tuners. They do innovate, and the majors do capture those innovations. But it’s not at the scale you see in the PC world.

Presumably the idea that GM would provide an audio connector is news because people have so totally accepted that car makers horde most of the options. In that world, even this tiny bit of giving away is news worthy. Those who want access to the machine’s data bus will have to wait.

Makes me wonder if there is a disruptive move in the car business. Somebody gives up the hoarding and builds a business around empowering the after market. Something an emerging nation’s car maker might do.