Category Archives: business modeling

Is there no limit to loyality point programs?

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As a adjunct to the prior posting about competition for who get’s to run the currency systems; one of my favorite backwaters of that is the loyality points programs. As the cost to track a transaction falls we can expect more and more transactions to have a loyality points involved.

Most people think of IT as a tool for reducing transaction friction; but I’m starting to see it the other way around – as a way to add friction thruout the transactions life cycle. Each bit of friction designed to make money for somebody.

I’m amused to see you can collect points for drinking certain soft drinks; but you have to do the paper work! What’s next loyality points individual sheets paper? Oh dear, I can see that – a number printed in the corner of each sheet of the newspaper. Enter the number on their web site to collect points and win prizes!

Suggestion – let’s rename taxes, call them loyality point!

Pseudo Bank Accounts for the Poor

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I gather that 60 million people are paid with a paper check in the United states and that almost half of those don’t have a bank account. The banking industry calls this market segment the unbanked. If you go into the neighborhoods where those folks live: instead of banks you find check cashing stores. Check cashing stores will cash your pay check and since you don’t have a checking account they will help you pay your bills. Some of them charge a lot for the service. Check cashing operations are more common in poor areas; and they are more common in states with weak consumer protection in the banking industry.

As Clay Christensen points out one way to disrupt an industry, in this case the banking and currency system, is to sneak in below their radar. Serve the people who are currently unserved. If you go after the low margin customers then the existing players won’t bother to compete with you. They don’t want those customers. This is long tail strategy. For the credit card networks I think of this as a loose change strategy.

Christensen’s displace from below strategy for disrupting an industry presumes you can find a way to serve people who couldn’t be served before. Technology provides those; particularly IT. I have a hypothisis that many of these disruptions via IT are similar. You take a previously bundled activity and burst it apart so that you then charge for smaller transactions that were previously charged for in a bundle. The IT enables that. So instead of a monthly phone bill you do pre-paid. So instead of a bank account you sell access to the banking infrastructure with a charge for every little thing.

Here’s the fee schedule for the most reasonably priced stored-value-debit card I could find.

Check “Balance Reimbursement” $9.95
ATM Domestic – Withdrawal $ 1.50
ATM International – Withdrawal $ 3.00
ATM Domestic – Balance Inquiry $ 0.50
ATM International – Balance Inquiry $ 1.00
ATM Domestic – Decline $ 0.75
ATM International – Decline $ 1.00
POS Domestic – Transactions $ 0.50
POS International – Transactions $ 0.75
NET Internet Balance & Inquiry FREE
Load Via Card to Card Transfer $ 2.00
Load Via Direct Deposit FREE
Load Via Bank of America $2.00
Load Via Money Order $2.50
Load Via Retail Location POS $1.00
Fee PIN Creation free
Fee Monthly Maintenance $ 3.95
Fee Paper Statement $10.00
Fee PIN Change $ 0.25
Fee Live Operator Customer Service $ 1.50/call
Fee Automated Customer Service $ 0.50/call
Fee Lost/Stolen Replacement Card $10.00
Fee Emergency Card Replacement $30.00
Fee Dormant Account
(after inactivity of 60 days)		 $5.00 /mo.
Fee Additional Maestro Card $ 9.95
Fee Over-Limit $30.00

The unbanked are the target market for these. Employers are encouraged to hand these out to new employees. That saves money for the employer because he doesn’t cut checks anymore; he just shoots the pay check straight into the card. Notice that instead of the banking term “deposit” they use the word “load.” I bet that’s because they are hoping to avoid some regulations associated with deposit accounts.

These prices are horrible compaired to a real bank account. They are pretty good compared to the check cashing store.

There is a second target market for these; i.e. Guest Workers. Or as we like to optimistically call them in this country immigrants. In that use case the card holder purchases a 2nd card with access to the same account. He then sends this back to his relations in the home country and they can pull money from the account.

There are four drivers for all this. Three mentioned so far – competition with the check cashing industry, lowering costs for employer’s of the unbanked, and better service for the unbanked. The four driver is the police authorities – all currency systems have policing issues – transaction flows that move thru the electronic currency systems are much easier to browse.

End of History, or Becoming a Landlord

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Martin is toying with a very thought provoking glimmer of an idea about the future of Telephones…

… In an oversimplified nutshell, the Western approach puts the individual in the centre of the universe. The Eastern idea is to put the group in the middle. …

That could go in all kinds of directions. For example it is marvelously synergistic with my gleam of an idea that the 80s enthusiasm for personal computing leads to a kind of blindness about what is really going on in the Internet era. For example it echos why Fukuyama wrote Trust, a book on groups, after writing about the End of History.

But here’s one of them.

This is great. It shifts the value proposition of the telecom business out of the pairwise and into the group forming; i.e. from Metcalf’s toward Reed’s law.

Groups need rendezvous points. So this also bounces right back on the number one problem the traditional telecom companies have competing with the dumb networks. Dumb network owners loose if they horde the options to search for innovations.

Trying to horde the option to create these rendezvous points frustrates the search to find them. You can’t find the high value rendezvous points without a tremendous amount of experimentation, i.e. a r-Selected strategy. The careful husbanding of options done by the telecom companies is fatal.

When the market signals that you have become a platform vendor it behooves you to listen, and learn learn how to be a platform vendor.

Core Concerns

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Because it is proported to be about emotions I have been looking forward to getting my hands on the new book out of the Harvard Negotiation community Beyond Reason: Using Emotions as you negotiate by Roger Fisher and Daniel Shapiro.  It’s pretty good, which is a relief, since most books about emotions written by rational intellectual people are crap.

It is not without flaws. It is padded out with a review of the ground covered in the other books from their branch of the negotiation community.  I was surprised by a disconnect – emotions are very powerful but the advice the book gives is very temperate.    For example, it is good thing to find common ground with your partner. Discover shared hobbies!  Yes, might oak trees of good relationships from from such tiny seeds, but this kind of advice follows in the tradition found in most geek written books when they touch on emotion:  excessive distancing and reductionism.

Having gotten that out of the way – the structure of the book is just marvelous.  I was particularly delighted that they don’t fall into the tedium of enumerating a hierarchy of emotions.

Here’s the nut.  Humans have some very core concerns: to find a fulfilling role for example.  If these core concerns are not being met then strong negative emotions will follow.  If they are met, strong positive ones will rise.  Skilled negotiators entice the positive emotions out, and avoid baiting the negative ones.  Their reward: productive flexible creative problem solving sessions.

I particularly liked that they complement each core concern with a verb; so here they are:

  • Appreciation – which is expressed.
  • Affiliation – which is built.
  • Autonomy – which is respected.
  • Status – which is acknowledged.
  • Role – which is chosen and fulfilling.

While this book is written with negotiation in mind – i.e. an episodic attempt to engage in collaboration – these issues clearly arise across the spectrum of collaborative effort.  That list is universally actionable!

For example: a manager should keep a score card for every participant v.s. each of the five core concerns.  By participant I mean individuals and groups.  For example each of your suppliers.  Then act on that, encourage action to improve each item.  Do that using those verbs.  If you can’t answer the question “How is X chosing an fulfilling his role?” your not doing your job.  (I might add to that list: “What is the top idea in X’s mind?”)

All this has triggered a number of insights.  For example notice: if you struggle and win a particular role there is the risk that there will be negative emotions created – because winning is not choosing.  Fun, eh?

Notice how role and status are pulled apart here.  I hatz how often they are treated as synonymous. Notice that instead of using the term loyalty they use the terms affiliation and autonomy.  I’ve written before about the dual nature of assuming a role,  e.g. that there is something you do and something others do.  By example, you can’t lead if nobody follows.  By teasing out status from role they address that duality.

I’m pleased that they don’t talk about loyalty.  Loyalty is a outcome, and so it is built indirectly.  But also loyality is a term of hierarchical organizations; where roles are not chosen they are assigned and status is not acknowledged it is merely painted on the door.

Is affiliation just another name for what I call common cause in community dynamics?  A binding force of the collaborative effort, like gravity.  People get very emotional about it!  Which is why they guard the public goods of their communities so emotionally, with scolding, patriotism, loyalty oaths, etc. etc.

Autonomy sounds a lot like freedom, something people get emotional about.    Freedom depends on a rich pool of public goods.  Which are created thru communities of common cause.  Autonomy is to freedom like club good are to public goods.  This is a book about negotiation; as you negotiation your always attempting to frame up a new club.  Even if the  negotiation  is something as trivial as creating a link in the supply chain.

Business jargon likes to talk in terms of power: supplier power, consumer power.  It’s a pain to be a buyer when the supplier has all the power, and via versa.  If you have a single supplier for a key component, for example funding, then that supplier will be powerful.  All five of those aspects illuminate why that’s an emotional situation.  If you have billions of tiny customers then no one of them has much power and the emotions change, they become more alienated.  There is something deep running thru the dynamics of all exchange networks that these five issues can help to inform.

Balloon Fee

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Things have differing kinds of value. My favorite kind of value? The imaginary value of all those things that might happen once you have a thing. The technical term for this is option value; e.g. the sum of all the value you might place upon options to do things the object creates.

So I was pleased to see that the post office has a fee they charge you for stealing their options. Generally the post office charges you by weight, but if you ship a large very light object then they charge you a special fee. The Balloon Fee.

The hulla-hoop community is outraged!

Newton’s immovable installed base

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Here’s a fine example of the tensions between an irresistible force v.s. an immovable object.

At some point in my childhood my father, presumably in an attempt to keep me from wasting a summer in idle pleasures, got me an unpaid job working with a locksmith. I really enjoyed it, though I never did get the hang of picking locks. One thing I loved about the job was all the paraphernalia. One of the principle artifacts in every lock smiths tool kit is a box of pins. These pins are tiny bits of brass all of various lengths. They were color coded so you could put them back in the case.

These pins are packed into the lock so that when the right key is slide in they align just right and the lock will turn. Sweet little springs push the pins back into place when the key is removed. Each spring sits in a hole and the hole has two pins whose length sum up to fill its column just right. A lock with a master key will have three pins in one or more of the columns.

Locks of varing sophistication modify this design by having the columns oriented in various patterns. The typical lock just has the pin-columns in a straight line. If you look at your key ring you’ll probably find at least one key who’s bumpy bits are set up in some tricky way. Complex topology makes it harder to pick the lock; or at least that was the idea.

The design patterns for key-and-pin locks form a the plaform for a huge installed base of locks and keys. So it’s a great standards story and like all standards used for security things get messy when a security flaw is revealed. The usual exemplar of that is Microsoft Windows, which was never really designed to be secure and now sustains the vast cyber-crime industry (said to be larger than the drug trade).

You can’t ‘just fix’ a system like this because the installed base is very slow to move. As Bill Gates is rumored to have said back in the 1990s, “My biggest competitors is old versions of Windows operating system.” Users don’t upgrade quickly.

Over the last year or two knowledge of a huge security flaw in the key-and-pin lock design pattern has been revealed. There is a fun video (with subtitles) from a Dutch TV show you can watch (WMV) and a paper about it (pdf).

It’s easy to understand though. The common name for the technique is bump key. You make a key that bumps the pins. Well, actually, it taps the pins sharply. The sharp tap is then transmitted thru the stack of pins until it reaches the top most pin. That pin then floats up and way from the rest of the stack. At the moment the gap appears you turn the lock. All you need is a good bump key, a sharp tap, and to time the turn to the right moment.

You have seen this dynamics in one of those executive desk top toys (these are known as Newton’s cradle) where a group of balls hang in a line and you drop one ball one end and ball on the other end floats up.

Designing around this problem is, I presume not too hard. For example, since only the top most pin will float up when tapped you need to assure it’s movement won’t open the lock. That’s not too hard since you can arrange to have the top pin above point where the lock turns. In some cases you might even be able to repin an existing lock to prevent the problem. In other cases you probably have to redesign the locks.

There are techniques for moving a large installed base. Firms, like Microsoft, that depend on upgrade revenue are very practiced at these. Moving an installed base can be very profitable. Rekeying the entire planet, changing every lock in every door, replacing the keys on everybody’s key ring – wow! The lock industry ought to be very excited about this. I bet there is quite a backlog of key-and-pin patents piling up at the patent office right now.

Of course, the profits to be made from migrating the installed base are not the first thing most people think of when they hear this story. But then, most people don’t tend to think of Microsoft’s security problems as an upgrade driver either.

How big?

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This morning a oil terminal outside of London blew up. The paper says the terminal handles “2.37 million metric tonnes of petrol and other oil products a year”.

How much is that? It’s about 19 million bbl/year (if I assume 8 barrels/ton (see here). or 51 thousand bbl/day. For comparison the Gulf of Mexico has about 500,000 barrels a day shutin right now. So it’s about a tenth the impact of that. That sounds big.

Let’s try another approach. The bottom of this page it says that on average a thousand people consume 31 barrels of oil/day, but scanning the table suggests that Britain probably consumes something more like 35 or 40. So, using the 31 bbl/day, that terminal handled the oil for 1.4 million people. London’s population is 7.4 million, England and Wales is 54 million.

I gather that this terminal had a pipeline to Heathrow airport, but I haven’t found how much fuel the airport consumes per day.

delicious + yahoo

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Among Yahoo’s properties the one that most impresses me is Yahoo groups. In part because of my long standing fascination with things that enable the generation of vast numbers of small groups. Businesses, assuming there are any of this kind, have the possibility of tapping into Reed’s law. Which in turn makes the more vital that even the ones tapping into network effects.

You can see similar patterns of vigor group forming in Flickr.

Delicious on the other had is been, inspite of years of mumbling, entirely about one group – the global tagging group. Of course groups have such a compelling need to from that if you look you can find groups forming at delicious. Many people who use it talk about being aware of one or more groups there that they are affiliated with. But that’s happening inspite of the software – much like prisoners tapping messages out to each other thru the walls.

So, of course, I find it interesting that the delicious blog mentions social when talking about their acquisition.

These business models that tap into network effects and their friends are subtle. I like the phrase “monitize lightly” here. But what it implies takes a bunch of work to think thru.

I have a friend with a topic specific blog. Their site is very very highly ranked in Yahoo search, but hardly visible in Googles. I’m reasonably confident I know why. Their site’s if often referenced in yahoo groups associated with that topic. Interesting complementary effect there.

While that speaks to the question of how one might monitize some of the value in socialization hubs it also speaks to another hard question that floats around in these network businesses. Which complements must the hub own. For example I think it’s absolutely necessary for a operating system hub/monopoly like Microsoft to own those complements which are used by more than 80-90% of their users, if those complements have strong enough network effects that they tend to condense into practically one vendor. They need to own the word processor because if they don’t the word processor vendor becomes so powerful a complement that it can force them to negotiate by threatening to enable users to switch to competing operating systems.

The delicious acquisition just reminds me that we don’t know which complements the search engine hubs are going to have to own.

Moneyball -> Football?

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Moneyball, a book that appears to be about baseball, can be read as a book about how disruption can sweep thru an established industry. In that case the story is about using statistics to pick good players and plays while backing off traditional metrics of what makes for a good player.

It’s neat to see that the author, Michael Lewis, looks like he found another story to tell. This time about football.

Here some pull quotes from his article in the New York Times.

Possibly most interesting is how unlike the coach in Moneyball this coach has no serious credentials with the games classic hierarchy.

“How does a coach who never played a down of football have the best offense in the game?”

This coach’s core mood is totally different than the tightly intensity of the one in Moneyball.

The Texas Tech offense is not just an offense; it’s a mood: optimism. It is designed to maximize the possibility of something good happening rather than to minimize the possibility of something bad happening. But then something bad happened. (“It always does,” Leach says.

Unlike the coach in Moneyball this one is obviously a hedgehog.

Each off-season, Leach picks something he is curious about and learns as much as he can about it: Geronimo, Daniel Boone, whales, chimpanzees, grizzly bears, Jackson Pollock.
…
“To Mike, everything he does makes sense,” Wylie says. “It just takes a while to see how it all fits together. But if you were a fly on his shoulder for six months, you’d laugh your eyeballs out.”

But of course somethings never change, the establishment is closing ranks and fearing displacement.

“…Dismissive is the word. They dismiss him out of hand. And you know why? Because he’s not doing things because that’s the way they’ve always been done. It’s like he’s been given this chessboard, and all the pieces but none of the rules, and he’s trying to figure out where all the chess pieces should go. From scratch!”

But then, that’s just a required part of the David innovator v.s. Goliath story.

That was quick

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Ian Holsman writes:

Google has just released a free service to do web site analytics which is/was their ‘urchin’ product. sorry all you startup’s who were in that space?.. maybe next time ;(

It wasn’t too long ago that developers and VC rushed into the Internet to escape this pattern on the desktop, where Microsoft methodically vacuums up any idea likely to have wide applicability – turning them into features of one of their hubs.

It’s very common for hubs to absorb adjacent universal functions. Three forces, at least, drive that: appetite for features, keeping your complements commoditized, and scale efficiencies. In the Microsoft story one of them is/was the need to find new features that can drive upgrades. Another, also seen in the Microsoft story, is the strategic necessity of keeping competing hubs from emerging in their market – for example if they hadn’t taken the word processing network away from competitors then they would have been forced to negotiate with a powerful partner rather than lead of weak developers (“chasing tail lights”). Finally there are pure production and demand side scale advantages.

Of course in some cases the story doesn’t demand a complex model like that. Adding analytics to your ad network is just a feature, like adding footnoting to your word processor.

I liked a line I read recently about how so many ventures in there days are “built to flip,” but that the speaker’s firm was being “built to last.” When strong hubs emerge in a market, like Google, Yahoo, Amazon, eBay, etc. flipping becomes a valid move in the game. There was a time when one of the more dominate models for a venture was to flip it into Microsoft, and while that’s still a common model it’s not as rampant on the land as it used to be. In those days the Microsoft developer network could be productively viewed as an extension of their acquisitions or R&D strategy.

When this happens in a market it has two consequences. The ventures become much more winner take all games; since there is rarely more than one place to flip a particular effort into. That kind of risk drives developers to look for other markets to play in. The customer also changes; if you know that your firm’s future is very likely to lead to flipping into Yahoo, or Microsoft, then they become the customer and the day to day customers are no longer job 1. That creates lousy dynamics for seeking really useful innovations – you’re now innovating for the hub, not for the user.