I’ve been thinking about roles in the economy of ideas. Three roles: those that make ideas, those that consume them, but most importantly the idea middlemen.

I’m reasonably sure it was one of Paul Krugman early books that introduced me to the idea of the Policy Entrepreneur. These folks are middlemen between those who do and those who know; i.e. their suppliers are smart people who think about how we might fix a hard problem, were new oportunities are emerging, etc. etc. Their customers are the people with the resources – policical, social, capital, etc – to act on those oportunities. They are entrepenuers because they are striving to trigger big transformations; what might be called disruptive changes.

Here’s a nice example of how a frustrated policy entrepeur might spin a sentence: “it

I enjoy injecting a bit of Animism in to my design thinking. What if the memory manager has a soul. What if we gave every object it’s own thread? What if we gave each message it’s own object, and it’s own thread? What if we personified the subroutine; what would it say?

So I felt a bond of kinship when I found Mazlow’s hierarchy of needs:.

• Survival – food, air, warmth
• Safety
• Belonging
• Esteem
• Self Actualization

being applied it to a product.

• Survival: Profitable, Market Niche, Utility, Feasible, Competition
• Safety: Durable niche, Development risks, Quality, Patentiblity, Legality
• Belonging: Fits with firm’s facilities, marketing, strategy, distribution; Fits with market timing and complements.
• Esteem: Aesthetics, Pride of Ownership Promotion, Endorcement, Brand, Trademark.
• Self Actualization: Sales, Profit, Market Share, Product Substitution

How’s your product esteem? Is it actualizing it’s protential? Does it feel that it belongs in it’s market?

I don’t get it. This strikes me as one of the more foolish business moves I’ve ever seen. The folks at MovableType are about to release version 3.0. This version is full of features that look to me carefully designed to make the product a lot more sticky; i.e. make it a lot harder to switch to a different blogging too.

You want your product to be sticky because then you can raise prices and if you stumble you’ll have time to fix the problems.

But right now MovableType isn’t particularly sticky. Moving to a new version is a always a pain in the neck. So version upgrades are always a time we people are likely to consider switching to another tool.

So what do these guys do? They raise prices before people transition to the sticky new version. Dumb. First you make it sticky, then you raise prices. Not the other way around! This certainly won’t kill ’em; in fact it might let them cash out sooner rather than later. But it’s going create some real opportunities in the standalone blogging tool market.

$69, yeah right.

Now where is that data export format? Gotta go.

Ed Felton thinks that it’s not obvious if Microsoft did or didn’t make the right decision when it recently announced that unlicenced copies of Window’s won’t get security updates.

I, on the otherhand, think it’s reprehensible. Microsoft made a calculated business architecture choice over the last few decades. A choice that made perfect sense, at the time. They adopted a worse is better approach to products to capture a stronge network effects around their products. This strategy meant that rather than get it right they again and again had to get it to market fast. It meant that again and again if some initiative didn’t get traction they left it half finished and moved on to the next round in the game. This design choice about how to run the business was perfectly rational and it was a wise choice given the pace of technology change.

This worse is better platform stategy turns out to have had a really bad side effect.

Today it’s clear. Microsoft’s platform legacy: they have created the worlds largest supercomputer, one that only evil people can utilize. Microsoft has become the sloppy platform of evil doers.

Who bears the cost of this foul up? Well I have six thousand spams in my email client right now. My firewalls get hit a few times a second with attack attempts. i’m not unusual. Every single person in the net is paying the price of Microsoft’s miscalculation.

So clearly it’s offensive of Microsoft to decide that it won’t try to clean up the mess. Failing to provide updates to unlicensed copies of their software has to negitive externalities. First it punishes the folks that stole a copy of Microsoft software. Secondly it punishes the entire public Internet. The second externality clearly outweights the first. The first only makes sense if you: don’t believe that Microsoft has used differential pricing carefully to achieve stronger network effects; that Microsoft has very high quality models of who has legal licenses; and that vigilante enforcement of property rights is ethical.

But then, I suspect that Microsoft wouldn’t mind in the least: fouling the nest of Open Internet; making it unlivable; and push the majority of users into their proprietary bubble.

Adverse Selection is a term used in the insurance industry for a particular kind of market breakdown. The breakdown proceeds in a cycle where the distribution of customers shifts toward higher and higher risk buyers while the insurance company keeps raising prices to compensate until the only buyers who buy are truely horrible risks.

In all markets buyers and sellers have differing amounts of information about the goods being exchanged. For traditional manufactured goods sellers tend to know a lot about the costs of production while buyers tend to be better informed about the benefits they can capture after purchase. I.e. buyers tend to know more about the future and sellers more about the past.

Transactions are more likely to take place in the presense of these information asymmetries. If the buyer and seller have different models of worth then after the transaction has closed both parties can be happy with the outcome. If they have identical models then the best they can do is close the transaction with both parties meerly satisfied that they didn’t get taken. To an optimist this means that markets make everybody happier; to a pessimist it means that any transaction leaves money on the table.

The adverse selection senario given above is interesting because both buyer and seller are attempting to predict the future. A successful insurance company manages, thru the magic of statistics, to gain an upper hand in the information in balance.

One of the definitions linked to above gives this very concise definition of adverse selection: “A situation in which market participation is a negative signal.” Anytime a buyer or seller enter a market and begin to participate they reveal some information about the hand they have been dealt. When a market begins to fall apart via the process of adverse selection the market becomes structurally flawed so that only customers who are truely lousy risks will still enter the market. Once this happens then entering the market tends to signal that your a lousy customer.

Market structure creates selections pressures on both the buyers and the sellers. A market maker strives to maintain markets were these selection presures don’t drive the market in any of many the wrong directions. So while a “adverse selection” is a term used in the insurance industry it certainly would seem to be equally applicable to any number of other markets and in all cases it would seem to apply to both buyers and sellers. If the market is poorly structured then as tranactions clear the buyers and the sellers are both happy; but as the future unfolds one or both of them become unhappy.

Let me take another try at this problem of why firms might need to commoditize their own markets.

It appears to me that the high value is found in solving hard problems. The way we solve problems is that we bring together a collection of component bits that were not previously integrated. As we do this we complain: the design should be more elegant, the parts more modular, guiding principles of the design less random, the coordination problems less tedious. These complaints are the symptoms of the hard high value problem.

As times passes the solution to the hard problem becomes better understood. Any numbers of processes drive this transition. Design knowledge emerges and becomes widely known. Workable modularity is distilled out of tangled spaghetti like systems. The existence of exchange/interaction bottlenecks encourages standards to emerge. Rituals that lower coordination costs become better known.

This shift in a given problem domain from hard or tangled problem solving toward easier more modular problem solving causes two complementary shifts. The modularity enables a substantial increase in the size of the market along with an associated increase in total value generated. At the same time it knocks down the garden walls around the firms that built highly integrated solutions. It wreaks havoc on their discriminatory pricing.

All this is consistent with the insight that discriminatory pricing is likely when a firm

I wonder how many major businesses had their roots in a story like this one that Stuart Robinson writes about in Hypocrisy of Hollywood passes on by Larry Lessing:

A little history, courtesy of Larry Lessig’s new book ‘Free Culture’, goes a long way:

The Hollywood film industry was built by fleeing pirates. Creators and directors migrated from the East Coast to California in the early 20th century in part to escape controls that film patents granted the inventor Thomas Edison. These controls were exercised through the Motion Pictures Patents Company, a monopoly “trust” based on Edison’s creative property and formed to vigorously protect his patent rights.

California was remote enough from Edison’s reach that filmmakers like Fox and Paramount could move there and, without fear of the law, pirate his inventions. Hollywood grew quickly, and enforcement of federal law eventually spread west. But because patents granted their holders a truly “limited” monopoly of just 17 years (at that time), the patents had expired by the time enough federal marshals appeared. A new industry had been founded, in part from the piracy of Edison’s creative property.

There are other examples of legal loophole as enabling innovation.  The cryptography package used by the Open Source community was written in Australia; which had a different configuration of laws then those found in the US.  A friend tells me how Belgium is a hot spot for music based on sampling because their copyright laws are somehow different for that kind of “fair use.”  Of course there is there is Las Vega for gambling. And, I believe, the John Hancock insurance company, which first sold insurance to shipping firms, was founded by folks who’s fortune was made by piracy. That last one has a nice symmetry with the Hollywood story.

The term resource endowment labels the theory that certain venues succeed in a given industry because they have unique endowments. These give credibility to founding myths, like New York is there because of it’s great harbor.  For example dentist chairs are made in LA because of a resource endowment in working aluminum. A skill it accumulated from it’s role in the aircraft manufacturing business.

In the examples above endowment is some species of unlawfulness. Will San Francisco be able to use gay weddings as the spring board to taking a dominate position in the whole wedding industry?  Time will tell, but I certainly believe that Apple has carefully played the drm free mp3 card to disrupt the music industry in a mimic of this pattern.

It’s a pretty noxious combination when the the dumb network and the stupid terminal come together! But then I guess we knew that shortly after all those MSDOS boxes appeared on the Internet and all those AOL users poured into Netnews. But this example; the phone network and dumb phones is a praticularly amusing combination. It is pretty difficult to install a spam filter into your phone because the phone companies keep limited the phones they will support to protect their priorietary network gardens. But then they don’t want to expend the cost to weed the garden…