Category Archives: business modeling

Reciprocity and Data Licensing

The phrase “reciprocal licensing” got into my head a few months ago. If you go poke around you find that the term is mostly used to describe ways that one organization agrees to honor the licenses granted to professionals by some other organization. Licenses are, of course, set of rights and responsibilities. For example is the state of Massachusetts grants me the right to drive a car on it’s highways most of the rest of the planet will also grant me that right. Lots of professions have associated systems of reciprocal licensing: plumbers, teachers, and lawyers. When you grant respect to a person’s title, for example Vice President of Engineering, outside the context where that title was granted you would seem to be engaged in a form of reciprocity.

Reciprocity isn’t just for roles. The GNU software licenses are a form of reciprocal licensing. In exchange for the right to modify the software you relinquish your option of hoarding those modifications. The peer to peer file sharing, systems are another example, in exchange for drawing down a file from the system you are expected to reciprocate by providing bandwidth for further file sharing. The peer to peer messaging and VOIP systems are two more example. Once you start noticing you’ll see lots of these.

Reciprocity is one way of framing the coordination aspects of collaboration. It’s a way of talking more explicitly about the responsibilities that come with club membership around a club goods. The peer to peer system, the GNU code community, the professional society around plumbers or doctors, even the universe of international drivers all have rules that govern how the goods are maintained in collaboration. You can find other examples around patent pools. Some platform vendors have begun to use these ideas to assure that members of their developer networks add to the platform. For example Microsoft’s consumer electronics platform has rules that clarify the timing of various developer IP rights so innovations can flow back into the common pool around their platform – or so I’ve been told.

Peering agreements are another interesting application of reciprocal licensing used is for. IP packet routing, or phone call routing, or check clearing are all examples. The problem is you want to join a distributed network but your concerned that other members of the network will freeload or cheat in various ways that disadvantage you. You need trust at a distance. By setting up a standard contract that every participant is required to sign you can temper some of the risks.

Data pooling agreements have the same challenges. Consider an example. Imagine you are an insurance company. You have worked hard at great expense to collect data about insurance claims. This data is valuable because in aggregate it drives how you set rates. If you had more data you could set rates even more accurately. That could be very profitable. The insurance industry shares data like this by establishing master database. And, I assume, they use a contract much like a patent pool or a peering agreement to reduce the risk that some companies freeload or engage in any number of other ways of gaining an advantage.

Of course all industries have a power-law distribution of players. One way you can disadvantage the small players is to create barriers to entry that only large players can overcome. One place you can establish these barriers is with the rules around the reciprocity agreements. But, on the other hand, you can use the reciprocity agreement to frustrate that. The GNU license is a fine example of that. There is another example found in the open source VOIP community. They need to exchange call routing data. They have a peering agreement for that which tries to keep large players from locking out tiny guys – like me with my basement phone switch.

For the last year or so I’ve been puzzling about the problem of how to equitably distribute blog pings from blogs to interested parties. The tough nut in the design is that there are some very large gorillas in the blog world and they are all, presumably, tempted to horde their ping data to gain various competitive advantages. And, as usual in these two sided markets where there are lots of providers and lots of consumers there is a two sided network effect that could lead to a single winner who acts as the hub for the exchange. A middleman taking a small cut as he coordinates the interactions. The usual way to temper that risk is to introduce some standards that fragment the market while solving the coordination problem enough. With luck you can even get the standard to do a better job than a single hub would.

All that has brought me around to the question of what the reciprocity rules would be in such a market. What the world needs is creative commons like license for pings. I want to know that when I ping weblogs.com, or ping-o-matic, or technorati, or pubsub.com that they aren’t going to horde the resulting data. I want to know that they have signed onto a peering agreement that assures that my ping joins rest of the ping flux as public data. Some rights and responsibilities are granted when you ping these guys. Their responsibilities need to be made more explicit.

I don’t mind if they want to horde information that they accumulated by spidering, polling, and scraping; though I suspect we will see similar creative commons like licenses appearing on sites. Licenses that make explicit the reciprocal nature of the relationships.

Moore’s Thumb

I was trying to recall where I picked up this rule of thumb: the cost of disk space grows at +60% a year; or by a factor of a 100/decade.

I was then wondering if their is a name for this analogous to Moore’s law or Guilder’s law.

Imagine my embarrassment the rate for bytes/$ of disks is identical to Moore’s law – I didn’t know that!

  • Guilder’s Law: +3 times every 1 year
  • Disk space: +100 times every 10 years
  • Moore’s Law: +4 times every 3 years, which is +100 every decade

This paper (pdf) is still a very thought provoking read. It has some very interesting things to say about how disk data is getting colder, an how the throat between the processor and the disk needs to take bigger bites and relatively more slowly.

For example it got me wondering if I really ought to go ahead and setup a proxy server in my basement that caches of everything we visit forever. Why not?

Culture, Network Effects, oh and Apple

Where ever you get a strong network effect you get a complementary culture. The network effect draws into it’s thrall a large set of players; it attracts them, it locks them in. So a group is formed. The common cause of that group is leveraging the network effect. The common rituals of group is it’s culture. Much of the culture’s rituals emerge early and evolve in a very path dependent way. Group members, embedded inside the culture, can’t see that. It becomes difficult to tease apart what elements of the culture are necessary to maintain the network effect from those elements that are historical and act only to create those weaker, but still useful, benefits that arise from having everybody playing by similar rules.

Sometime, even often, the culture around a network falls into particular rituals that over time become dysfunctional. Which is to say they are more costly than some alternative. Switching to that alternative is amazingly difficult to orchestrate. For example consider a region that all speaks the same language. Then, just to get a concrete example, imagine that the culture of the region is very hierarchical. Then, again just to be concrete, assume that the rate of innovation is substantially higher in non-hierarchical cultures.

I got to thinking about his because Apple has decided to switch processors. The power-PC culture is very different from the x86 culture. Some of the rituals you find in each culture are cool. Some are bogus. The x86 DRM, for example, is very bogus. It looks like the Apple culture is now stuck with that.

What causes a citizen of one culture to abandon his loyalties and shift to another? It’s never the case that the citizen switching loyalty knows what the new culture has to offer him. He can only read the brochure. You have to live inside a culture for quite a while to be able to know it. For example people often move to France or Japan having tasted a sample of the culture, stay for a while and then come home again. Because of my general interest in the middleman I’m very interested in people with this kind of dual loyalities. Since a very key group of people at Apple were at Next, which was x86 based, we can assume that they have mixed loyalties.

There are standard scenarios for why a shift of loyalty happens. Some of them are pull in nature. The exotic, the taste of exciting opportunities, enthusiasm for to this or that element of the new culture. Many of them are push. The old culture is in decay, the opportunities are drying up. the cultural experience has grown stale. In extreme cases the citizen if forced – war, plague, famine, economic displacement.

What is the story for the Apple processor switch? Did the DRM issue force them? Has Intel become the land of opportunity? Are the Next guys sick of the culture shock and want to go home? Is the network effect around the PowerPC drying up? I tend to lend toward thinking the reason Apple switched is that the network effect around Intel is just too strong – that it’s the land of opportunity and Apple had to immigrate.

Apple has a super-power which other vendors lack. They control their hardware and their volumes are smaller. That means they can be first to market with the coolest shit. They can be the first to move to flat screens. They can be the first to move to wireless. They can be the first to move to firewire. They can be the first to move to GUI. It’s a standard pattern for Apple. For example they bought up all the production volume of those cute tiny disk drives and created the iPod. This super-power is why Apple can lead the industry, as an innovator.

Part of the super-power is control over their hardware. That makes it easier for them to coordinate their steps as they chase after Moore’s law and his friends. When Microsoft wants to take a step forward they have to orchestrate the high school band of PC vendors while sharing the conductor’s podium with Intel.

Part of the super-power is small installed base. They can move before the producers one back from them in the supply chain is capable of producing sufficient volume to supply the entire PC installed base. This is key to why Apple has repeatedly thru out it’s history generated really cool products and then not been able to meet the demand. It’s not Apple that couldn’t meet the demand, it’s some cool component that enabled their cool product that couldn’t meet the demand.

Maybe Apple’s move is a sign that they are relinquishing this second part of their super-power. Maybe they really want to grow out of their small market share, giving up the advantages it gives them.

On the other hand maybe Apple want’s to play the same game they have always played. Maybe there is something really cool in the component stream from Intel. Something that will let them create a really cool product out in front of the rest of the industry. I hope this is why. In which case I wonder what cool product this will let them announce for the Christmas season.

Rifles and Shotguns

Jargon makes you special. Biologists call it R-selected v.s. K-selected, and I see that investors call them shotgun and rifle strategies (“happiness is a warm gun”), and I’ve called it weeds and tubers. I’m surprised though that I’d not made the connection before that these are like two sides of the power-law curve. One edge spending it’s energies on a quantity of connections and the other in the quality of the connection.

Are there really investment houses that are run on an R-selected model. Scattering as numerous investment seeds as the Norway maple in my back yard? Of course an investment house is different from a maple tree. The investor hopes to capture a disproportional share of the value created by it’s offspring. The a maple tree is only striving to reproduce it’s self in the next generation.

It’s obvious there are businesses who’s customer relationships are analogous to a R-selected strategy. It’s a subset of those companies with millions of customers. Not of all of these are actually structured to execute on an R-selected strategy. It’s one thing to have a million relationships, to scatter a million seeds, to draw a huge sample. It’s another thing to be setup to capture value from the few that grow large.

A bank might manage this. If they can avoid losing customers that grow large.

Developer network based platform companies manage this. Scattering a lot of low cost options into their developer community and then capturing value by selling the platform to the resulting success stories. Works if the developer splices the platform deep into his DNA, locking him in.

Nokia 770

It must be a pain being Nokia, because you only have a handful of very very powerful customers. For example if the 3 or 5 largest phone companies don’t buy your phone then you don’t sell any. Which means you just build exactly what they tell you to build.

Meanwhile your technologist are telling you that Open Source, open platforms, and the end to end principle are not just cool, but so powerful that any business that tries to control the edge is toast.

What to do? Handspring tried a few different things. In the end they caved and now thier products are carefully obedient to the demands of the phone companies.

The Nokia 770 looks like an attempt an answer, an attempt to route around the damage.

It makes me wonder if bluetooth is the hole in the armor of the cell phone companies.

Fundable

Why don’t neighborhoods have a collectively owned tool shed? My neighbors and I own the most amazing amount of idle captital equipment! We each have our own hedge trimmers, snow blowers, lawn mowers, etc. etc. It is mind boggling! I’ve been puzzling about this question for years and years, because this question is a good small proxy for many big questions.

A varient of the tool shed question is snow removal. Why don’t neighbors band together to hire somebody to plow their sidewalks and driveways. There is an interesting liturature on that question. It is a really hard problem. Consider this simpler one. Say three families are interested in planting a tree. Take as a given that the cost for the tree is $200. With the help of powerful mind reading techniques we know exactly what each family is willing to donate for this project. The numbers are: $100, $75, and $50. So in theory there is enough money ($225) to plant the tree. In practice the tree is very unlikely to get planted. The project falls apart as issues of equity, fairness, debt, etc. enter into the negotiation.

One way to solve this problem is to insert a middleman. He can then obscures who paid what. Community activists often fill that role. They keep the secret. If that information got out the whole project would fall apart. If you want to kill a community activity just force the contribution levels of the various participants out into the open!

The tool shed question is more complex than the tree planting project. The tree is a one shot event, while the tool shed has all kinds of policing, maintainance, liablity, etc. etc. aspects that add complexity. Worse they add uncertainty and we all know that’s deadly to action. One reason I find Circle Lending an interesting business is how they reduce the uncertainty by doing the loan servicing if one or more people agree to lend money to an activity.

So. Take notice of Fundable.org today. They provide a place you can go if you want to raise a lump of cash, via contributions or donations. If they could keep the secret then they could be used to solve the tree purchase example.

Group purchasing is very common in the online car tuning communities. One guy offers to collect the funds from a group for a make a bulk purchase of something. Often this is an accessory that, for example, you can only buy in Japan were the car was made. He then orders, splits out the parts, and ships them off to the group members. This is exactly like community activists acting as middleman. The guys that organize these things keep secret the varations of the various participants. I notice a lot folks who do this use paypal to collect the funds. So does fundable.org.

Complexity and Condensation

The web spread out so fast because HTML was so lame even a monkey could understand it. That simplicity created a low barrier to entry. Monkey see, monkey do learning was the key. A million monkeys at a million keyboards and a few years later … boom!

Even before the war buffs could turn around in their lawn chairs the long running standards war over document formats was transformed. It took Microsoft years to displace Word Perfect from the rich farm lands. It’s took Adobe years carve out an encampment on the high ground above Microsoft Word. Suddenly HTML was in control of the seas.

Bill Gates onces said of Netscape that they owned all the river front property. But, the HTTP and HTML were the water and owning those was harder. Not that they both didn’t try to own them.

Spreading fast creates very fragmented markets. The entire middleware industry is a side effect of this. Building a custom niche oriented authoring tool, say a bridge from your real time control system into the web, was the work of a weekend. Happy monkey.

Diffuse big markets call out to be condensed. They call out to capitalists to be owned. They call out to engineers to be made safe and efficent. They call out to the monkeys to come join in the fun, and those monkeys start demanding regulations, police, schools, etc.

One road to condensation is to roll up the big monkey firms, the ones that have found important bits of real estate in the new jungle. This is, for example, what Adobe is doing in buying Macromedia. Adobe likes the high ground, the sophisticated elegant page layouts and such, and Macromedia is it’s closest competitor for that ground. Flash is more widely deployed than the Adobe reader; end of story. Buying up the big monkeys isn’t an effective tactic if the new ones appear faster than you can buy them.

Another way to condense a difuse market is to raise barriers to entry. But, how do you raise the barriers to entry around HTTP and HTML? Easy. Make them more complex.

For HTTP the answer is SOAP, WS, et. al. You create a specification that is sufficently complex it scares off little monkeys. Frustrate their desire to whip off an implementation over a week end. It’s not clear this tactic is working; the value add of these stacks just isn’t as overwhelming at it needs to be.

For HTML the answer is DHMTL, XML, Javascript etc. This tactic is working out pretty well.

The idea is to make raise the barriers so the monkeys will wander off and find something else to play with. View source used to be a lot more fun for a lot more monkeys than it is today.

This is a story about standards. Simple low barrier to entry standards can spread like wild fire over an ecology. After the burn there begins a progression toward increasing complexity. Some players in the forest society will work to increase the complexity. Their motives vary. Some do it to for fun or to address real needs. Sometimes, particularly inside proffesional standards bodies, the complexity rises because the process tends to compromise to the sum of all features.

For some players the rising complexity is a conscious attempt to prepare the forest for something more suitable for their big agriculture of monoculture crops.

Lending Intermediaries

Here’s a domain where it looks like Moore’s law and his friends could be very disruptive; particularly if you mix in some statistics, some small groups, and a means for individuals and groups to accumulate reputation.

Changing how intermediation works in the lending business. Some examples.

  • Circle Lending — Loan servicing Brokering the loans is done privately, presumably via the parties existing social network; e.g. between family, friends. coworkers. The value proposition here is how it temper the risk that the tedium of servicing the load will affect their original relationship.
  • Zopa — Broker and service arbitrary loans. Risk managed via pooling funds, pooling loans, credit ratings, and optional insurance. The value proposition here is a smaller cut for the middleman (compared to a bank say).
  • SBA MicroloansMicroloans, or Micro Finance — in this case local groups intermediate to lower and pool risk while wealthy lenders provide funds.
  • Prosper – affinity groups, capital pooling, greater gap between the borrower and lender, and better risk diversification.

Other examples?