Stanley Kober writes about emerging alliances that don’t include the United States.

In his classic work, The Prince, Machiavelli wrote “a prince ought to inspire fear in such a way that, if he does not win love, he avoids hatred; because he can endure very well being feared whilst he is not hated.”

An idea we can sum up in this silly B-school style drawing. The line illustrates a cartoon version of what the Bush Iraq strategy has done for America.

Or consider the example of Microsoft. They began weak and accumulated a huge pool of affection. At the same time they became powerful. They abused that power, as amply demonstrated by the anti-trust case. Affection transitioned to annomosity. Meanwhile the bloom of Internet innovation lead to a perception that they were weak, or at least not as powerful as previously thought.

Or consider Google. Their “Don’t be evil” motto could be viewed as a strategic necessity; i.e. stay out of the left side of that graph. They currently sit comfortably in the upper right. Powerful, and therefor feared; but at the same time held in great affection.

When you are both powerful and well liked you need to avoid the trap Microsoft fell into. You need to exercise your power in ways that sustain that affection. The temptation is to exercise your power in offensive manners, achieving a series of short term wins, while doing progressive damange to your good will. One pervasive temptation is to exercise your power in secret assuming that you can have your cake and eat it too. It is always a bit difficult for an institution to distinquish true affection from meer sucking up to because it is powerful. Both of these can make everything looks fine and dandy until the bottom falls out. In the Microsoft case is almost a worse case scenario. It woke up to discover that it’s audience/customers’ affection was more calculating than they realized and at the same time they were revealed be a pretty offensive lot.

Notice how terrorism plays out on this plane. Your typical terrorist act has very little direct impact on the strength of it’s target. Modern open economies are hard to weaken with random acts of violence. Terror can weaken the states they target in two ways though. They increase uncertainty, risk. That lowers investment, which weakens the economy. I suspect that’s their largest effect on the vertical axis. A carefully targeted terrorist act can, of course, do greater harm becasue open market societies tend to condense hubs that make easy targets; once you notice them.

The terrorist, of course, has no affection for his target. The initial effect of the act of terror is to create sympathy for the victums; i.e. it moves the dot to right on that chart. But there is a scenario where the act of terror moves the dot to the left. The terrorist believes that this opponent is evil and that those who hold him in affection are deluded. If only they could see the reality of the situation then their affection would dissapate. So part of the goal of an act of terror is to force the opponent to reveal his true colors.

The extremely strong entity is particularly likely to fall right into this trap. Again consider Microsoft. When the Internet came over the horizon it create, in due course, a sense of panic inside of Microsoft. They responded by exercising a lot more of thier market power. Those of us who had watched that market power distroy other parts of the ecology weren’t suprised when that exercise was quite offensive. But this time around it was publically revealed by the anti-trust case.

Oh this made me snort!

I worked for a company who’s plausable premise was that lots of CFOs are terribly unhappy because nobody in their firms actually computes the NPV (Net Present Value) of the various projects they are considering. The software was an expert system that the CFO could give/demand that everybody use as part of the project approval process. The premise, while plausable, was wrong.

It’s easy to over estimate the demand for good practice. Particularly if your an expert in said practice.

I wish to take issue with this essay disintermediation on Ad Age. It’s really pretty good, but it’s more fun to rant. Here’s a pull quote:

But the truth is, the products that are threatened by disintermediation are not imperiled because of technology; they are imperiled because they are based on models that offer less value to the customer than competing alternatives. In example after example, the middleman isn’t being cut out. He’s simply being replaced by a better one.

This is worth repeating: What we have grown to call disintermediation is, at the end of the day, simply the cold reality of someone doing our job better than we are. If you sense the cold breath of “disintermediation” on your back, more likely than not a bunch of upstarts are delivering your business’ core value proposition for less cost and in a better fashion than you are. And while it seems a bit obvious, it’s nevertheless true: You’ve probably fallen victim to old Railroad disease – you thought you were in the train business, but meanwhile, the other guys have figured out a better approach to moving cargo around the country.

That’s misleading.

Intermediaries are like bridges over a river. They provide the populations on either side of the river a means for getting to each other. The newpaper for example provides a bridge between advertisers on one side and consumers on the other. The marketplace provides a way for buyers and sellers to find each other, transact their business, and clear the resulting books.

The event of disintermediation is always associated with somebody building another bridge. If you own a bridge, lucky you, then new bridges are a threat to your business. Technology both enables new bridges at lower cost, but it also makes it easier for customers to reroute their behavior so they can use the new bridge. To say that the bridge owners are “not imperiled because of technology” is bogus.

A bridge is a huge capital asset that owners typcially spend long time and effort to acquire. For example ClearChannel here in the US spent a lot both thru political manuvering and acquisitions control a large chunck of the nation’s radio stations. They did that because they viewed that channel (bridge) as a powerful intermediary that they could charge a nice toll for folks to travel over.

If you own an a large expensive asset it’s a good idea to keep I eye on how hard it is to build a substitute. What made the asset expensive in the past is often not what makes it hard to reproduce today.

Maybe the railroad guys were blind to how automobiles were going to substitute in the role of cargo handlers, but I doubt it. The railroads substituted for canals. And all three, canals, railroads, and highways arose as substitutes thru the usual combination of government support and technology. This story has been going on for a very long time.

When the new bridge appears it offers some set of features. Those features, compare to those of the older bridge, are better than the existing bridge. Over time customers see that and start to give a portion of their business to the new bridge. So yes the old bridge owner can look at that as “simply the cold reality of someone doing our job better.” That’s true but terribly incomplete.

The new bridge changes the nature of the market. It reframes the measures of quality for the market. This usually causes the market to get larger. It always causes a huge disruption in what the definition of quality is. The old bridge owner hardest puzzle, when the new bridge open up, is shifting from a world in which he knows what quality means into one where it’s up for grabs. The new entrants want to redefine quality, pulling it toward what ever is to ther competitive advantage. These advantages are likely a direct fall out of what every force in the environment enabled them to build their new bridge. Again that’s often technology – though it can just as likely be a shifting regulatory climate, demographics, etc.

While the essay’s blith setting aside of the role of technology is what first pulled my cord, it’s this second more subtle failing that I find more problematic. The essay ends up advising the old bridge owners to return to their roots, to retreat back into their comfort zone, as they look for the key source of qualities to emphasis as they adapt to opening of a bridge next to theirs. This is a bit like advising them to put a new coat of paint on the snack bar next to the toll booth and send the toll collector’s uniforms out to be laundered. It’s what they want to hear, but it’s not what they need to understand.

Old bridge owners rarely become irrelevant, in fact they often continue to grow. After the dust settles the old bridge owners find they are in a market who’s consensus about what attributes define quality has changed. Attributes that define quality are not an absolute. In one time frame quality maybe defined by safety, while in another it maybe defined by price, and then later it maybe defined by convient availabity. If the old bridge owner is to remain on top, in market share terms, then he needs to shift his value proposition toward the newly emerging attributes and depreciate the ones that used to be critical.

When the definition of quality changes the market becomes extremely confusing. It is some comfort for the old bridge owner that the new bridge owner probably doesn’t understand what the new rule are either. The new bridge owner leveraged an oportunity given to him typically by technology, but he doesn’t know what qualities his customers care about – he just has some guesses. But the new bridge owner has something of inestimable value in working out what the answer is, customer contact.

The article that triggered this rant is interesting. It does, to a degree, advise the old bridge owner that he needs understand what the emerging quality vector space is. But it pretends that the answer to that question can be gotten off the shelf. I don’t think that’s true. I think you can’t ask a mess-o-pundits for the answer. First because they aren’t in the trenchs, second because they don’t do a very good job of admitting how everything is in flux, and third because nobody is going to take action of the magnitude that is required in these situations on the advice of outsiders. You have to find a way to get real customer contact and let that drive your adaption.

You gotta go down river. You gotta live in the village emerging around the new bridge. And if at all possible buy one. Not for the usual rolling up market share reasons, but so you can inform your confused self thru direct experiance.

A friend of mine has traveled to South Africa from here in the US. She now has a cellphone and was pleased to report that incomming calls are free!

Here’s a little insta-theory I’ve constructed about that.

If you own a market place you charge the buyers and sellers who come into your market fees for the services provided by your market making activities. There are lots of different kinds of markets. For example eBay where they charge the sellers. Singles bars (aka meat markets) where they tend to forgo charging women the cover charge.

Phone companies provide markets where calls are transacted. Instead of buyers and sellers they have callers and call recipients.

It’s very rare for a market maker to charge both sides of the transaction exactly the same amount to come to the fair. The sellers at the boat show pay a lot more for access. But if it’s a enough good fair the owner can charge the crowd to get into the tent. As long as the market owner can distinquish the buyers from the sellers then he can use that information to price discrimate. Or to put it in more general terms he can charge more to the ones who are most willing to pay.

Lots of things drive willingness to pay, but generally the wealth are more willing to pay than the poor and that’s my theory.

In the US cell phones emerged as a toy for the rich. So when the cell phone first emerged the phone owners, on average, were more willing and able to pay for the calls than the average line line owner. When cell phones showed up most everybody here had a land line. The market owners, i.e. phone companies, naturally setup the pricing to charge the call phone side of the market.

The situation was totally reversed in many other regions. Land lines weren’t common. In fact having a land line was a signal to the market owner that you were better off than the average citizen. Owning a land line was a signal of higher willingness to pay, compared to the average citizen. The cell phone companies sold their product to the unserved market, i.e. a market on average less well off and hence with lower willingness/ablity to pay. So it was natural for them to charge the land line side more than the cell side.

Charging the call initator for the call is a proxy for what they really want to do, which is to charge the well off land line callers more to call over into less well of population of cell phone owners.

It’s an insta-theory. It would be real work, which I’m to lazy todo, to flesh it out completely. For example there is an entire subplot about cross border call termination that should have similar themes.

I find it facinating how a pricing model that emerges early in a market’s life can persist, making it extremely difficult for the market to transition into new forms.