I think it speaks volumes that the term disintermediated isn’t in the Microsoft Word dictionary on my machine. Presumably they would prefer that move in the game of business not be included in the game set they provide to their customers.

This conspircy runs deeper than I thought. The word is not in the OED. Hm.

In yet another example of how the Internet has deeply eroded the value of the distribution bottlenecks that defines the bedrock of most publishing firm buisness models Freedom to Tinker reports that the editorial board of the Journal of Algorithums has resigned over rapidly escalating pricing.

Eszter Hargittai over at Crooked Timber points out Knuth’s letter which provides a wonderful overview of the dynamics of this transformation from the point of view of one side of the channel. In this example the content producers are a small enough group that they can organize this kind of revolt. In the music industry the revolt is more organic; though Apple’s having fun helping.

One thing that Knuth points out is that as the publishing industry has concentrated they have been furiously raising prices for high end journals. If I was a publisher of a high end journal I’d view my days as numbered. The business model is a deadman walking. So, what to do?

That puzzle reminds my of Axelrod’s book on the prisoner’s delimia. One element of Knuth’s letter I found particularly telling was the nostolgia for a how the authors, publishers, and libraries where once fellow travelers in a grand enterprise. As the industry has consolidated that’s evaporated. Axelrod showed that in a repeated series of games cooperation (with tit-for-tat) is the best strategy. Except.

Except in the last few rounds: as soon as the players know the game is about to wrap up the cooperation breaksdown. This end of game breakdown of cooperation is what I see happening in the high end journal market. The publishers are attempting to capture the maximum revenue their monopoly on the channel can deliver. Every man for himself. This is not dissimalar to my model of why the media companies are suing their customers.

These are last gasp strategies, born of desperation. For the channel operator they are subtle calculations. Doing this accelerates the destruction of the channel, but if the channel’s destruction is assured then it’s just a matter of timing how to get the maximum income out of the game before it’s over. These subtle calculations are made simpler for the “rationally” managed firm; which typically doesn’t understand the value of longterm cooperation. Knuth points out that Springer Verlag charges the most for journals, sometimes managing to charge almost two dollars a page. I’d argue that the indicates they are the most rationally, aka autistically, managed publisher.

It will be interesting to see if the Libraries find a way to join the revolt. Library Napster?

Here’s a cute device.

In my town they have just published the latest tax assessments. This, of course, causes people to start complaining about the accuracy of these assessments.

So today I read of a delightful gimick used by the Dutch in the 18th century. They would charge a small tax on ship cargos to pay for the lighthouses. This was based on the purchase price of the cargo. Which, of course, created an incentive to lie. The trick was that the goverment had the option of purchasing the cargo based on it’s declared value.

Presumably many disputes over valuation and taxes could use a limited amount of a similar mechinism to limit the cheating. It works both ways: you could create a control feedback loop where the town assessor can be ‘put to the test’ by volunteers that; if they believe the understand the market better than he does offer to sell their homes to prove it.

There are two things, at least, that make this somewhat unworkable. First the house market is very thin; so that the instantanous prices that things are clearing at isn’t a good estimate of the median price of the entire set of houses. I don’t see a reasonably way to eliminate that problem. Second the town assessor has much more knowledge of the market than the median home owner – knowledge imbalances like that make for poor market solutions. To some extent assuring that the home owners have to volunteer would limit that problem.

The shipping example presumably works reasonably well because the cargo’s owner is reasonably well informed about the value of his goods. That means that the tax collector and the owner have similar valuation skills.

There is the germ of an idea hidden in there somewhere.

On Paul English‘s recomendation I’m reading Ship of Gold. One bit near the beginning caught my imagination.

Four days after he found the yellow lump in the millrace, and five days before the United States signed the treaty with Mexico, Marshall set out on horseback throught the snow for Sutter’s Fort. There he pulled Sutter aside and bade him retire to a small room and lock the door. Once they were alone, Marshall unrolled a cotton cloth and displayed the lump; he thought it was gold, but he didn’t know. …If this was gold, it appeared to be all over the site.

…Sutter concluded that indeed Marshall had found a nugget of gold, but rather than being joyous , he seemed concerned. On fifty thousand acres, he gazed twelve thousand head of cattle, ten thousand head of sheep and two thousand horses mules and kept one thousand pigs. If the lump he now held was gold, he envisioned his ranch hands fleeing into the foothills, leaving the crops in the fields and the stock to fend for itself; he forsaw thousands of crazed miners overrunning his peaceful valley; …

What a beautiful example of how the vested interest reacts when the breakthru arrives, changing everything about the game at
hand. His first reaction is not, “Oh, happy day!” but “Oh hell! This is going to disrupt my business model.” It’s a natural reaction, if your already on top.

In this case his labor supply, among other things, is about to be disrupted. How you gonna keep’m down on the farm after they seen these bright lights?
The Internet bubble did similar things to the labor supply as did cheap the land in colonial America. That destroyed primogenitor.

To the entrepeneur it’s always the land of opportunity. Meanwhile

“The world needs more smart editorial these days. The problem is that that has nothing to do with technology.” – Steve Jobs

Different proffessions have different rules. You can really screw up an organization by forgetting that.

Here is a nice enumeration of the big hits in
managerial enthusiasms over the last century. This list is lifted from
“Facing up to Management Faddism”

They also enumerate a handful of functions that a fad plays for those involved in it. It’s
interesting to contrast this with the list of drivers that give rise to standards, or the
the list of features of a destructive cult.

• Provide Identity to an Organization
• Serve to legitimate a firm, as firms tend to model each other’s behavior.
• Fads give managers, particularly those of short tenure, a tool to demonstrate activity.
• Provide a way for careers to advance and positions institutionalized.
• Create organizational culture (stories, scripts, shared understanding).
• Socialization – the fad’s rituals encourage work related social interaction.
• Legitimize decisions – responsiblity for the tough choices can be shared with the fad.

Interesting to contrast that excellent list with the drivers to standardization, and symptoms of a destructive cult.

I subscribe to the misleadingly named booksfree.com, I enjoy it. They raised my monthly price; so no link for them. I assume they notified me but my spam filters ate the message. I’m sure some vile marketing dudes will start a consultancy to helps firms craft their “service improvement” notices so they are likely to never reach the customers.

Some briliant twit at Belkin decided they could upgrade their home routers to occationally feed you advertisments. Just how vile is that!

I got a reciept at the gas pump yesterday that had two blank lines on it. One said “odometer reading” the other said “gas mileage.” The mind boggles. I assume the idea is that my car and the pump will cooperate and get those two lines filled in. You gotta start somewhere, so first they have changed the pumps and now they are waiting for the cars to get with the program.

One of my gas stations insists on advertising to me as I fill up. Presumably pretty soon they will customize the ad based on my credit card profile.

I enjoy suggesting big marketing ideas to small or non-commercial operators. My barber seemed entirely unenthusiastic about my plan for him to offer a loyality card, do better discrimitory pricing, while cross selling services with the post office. I’m still holding out hope though that the library will adopt my suggestion. My account should show how much money I’ve saved so far compaired to buying those books.

In the 19th and 20th century agricultural productivity exploded and farm jobs evaporated. The labor displaced moved into the cities. There is always more stuff to do, so in time they generally found new work. Often in manufacturing. I read today that worldwide manufacturing jobs are disappearing; down 11% in the US, but more interestingly down 20+% in China. Improving productivity again. One wonders what work people will find to do next. My fear is they will all get to work on clever marketing ideas like the ones above.

Some friends at Pitney Bowes invited me to hear Clayton M. Christensen speak on innovation. He has a new book out and said a lot of fun, provocative, interesting things.

One of his little b-school style charts is reproduced here greatly simplified:

The point of this chart is that over time a firm’s product offerings begin to outstrip the ablity of the customers to absorb all the functionality the product offers. He goes on from there to say all kind of interesting things; for example that the firm is drawn to high margin customers as this happens.

But this got me to thinking about a syndrome I’ve watched unfold at more than one company.

Consider the gap between those two lines. On the left, when the company is young, the company is faced with strong demand from it’s users for improvements. The customers are highly aware that they could absorb more functionality if only the vendor would provide it. The vendor is embaressed by the short commings of the product and strives to fill that gap.

On the right the mature firm has succeeded in fufilling a huge range of demands that customers have. Now the customers are embaressed! They are fully aware that they aren’t utilizing the entire power of the product.

This is all bad, bad, bad!

• bad: Your customers are embaressed, so they fall silent.
• bad: So the institutions in your company that design products are running on vapors!
• bad: As they chasing demand your drawn to serve higher and higher end customers
• bad: Higher end, higher margin customer demand longer sales cycles – your value creation shifts into sales rather than product.
• bad: You move up market. You abandon the low end customers. That creates oportunities for competitors.

All in all it reminds me of a classic behaviorist training schedule where you
start by providing clear signals for the desired behavior and then you shift to a more intermitent reward schedule so the behavior becomes more deeply engrained. Thus in this scenario the entire marketing, engineering, design culture of firms is trained at first respond to the strong customer demand for new features. Over time that strong reward loop grows weaker, but the trained behavior just become more deeply engrained as the reward appear fewer and farther apart.

The bizare result is that you think you’ve evolved into an extremely customer oriented firm. You have a very sophisticated sales team. You have a very muscular product design function. So it must be true. But meanwhile you have embaressed your installed base so they can’t even open their mouths to complain. If they could they’d say: “I don’t need all this cruft. I was sufficently satisfied by the previous release. I don’t want to learn how to use all these new features! I’ve got better things to do with my time. Leave me alone! Why aren’t your prices falling, haven’t you learned anything!”

Curiously the only way you can get a good signal out of your users it to
fail to fill all their needs as was the case in the early days. It’s good for the vendor to be embaressed. It’s bad for the buyer to be.

One thing I puzzle about is why some things are done inside of a firm while others are done outside. Data storage or product shipping are two examples but there are hundreds. I found this an amusing way to look at the problem: Brad DeLong quotes the abstract of a paper by Olivier Blanchard and Michael Kremer that attempts to puzzle out why output declined so far in Eastern Europe after the collapse of the Soviet Union.

Under central planning, many firms relied on a single supplier for critical inputs. Transition has led to decentralized bargaining between suppliers and buyers. Under incomplete contracts or asymmetric information, bargaining may inefficiently break down, and if chains of production link many specialized producers, output will decline sharply. Mechanisms that mitigate these problems in the West, such as reputation, can only play a limited role in transition. The empirical evidence suggests that output has fallen farthest for the goods with the most complex production process, and that disorganization has been more important in the former Soviet Union than in Central Europe.

To me the point is that when you have a single supplier it creates habits that are fundimentally at odds with the habits demanded when you have multiple
suppliers. To put it another way that managing in the face of diversity is a entirely different from managing in a strong heirarchy.

Thus while it seems like a fine idea in the abstract to outsource this or that function it is usually very difficult in practice because the entire day to day relationship between the function and the firm has to be transformed. It’s a demands a culture change and that in turn makes it a social reengineering problem.

Another place I see this: Microsoft, Oracle, IBM, Sibel, etc. Many firms have a single supplier relationship with for their platform, IT, CIO, etc. needs. In the abstract it may seem like a fine idea to shift to a more open market relationship for these functions pulling it off demands a very complex shift in culture.

All this is a huge part of what slows the adoption of open source solutions. In contexts where open source creates the platform of standards for an industry the vendors tend to be numerous. The buying firms then have to have an entirely different culture for managing the set of vendors from one time period to the next. More information has to be managed; information that sums up into the answer to the key question “Can I trust this vendor?”

When you settle into a single vendor, or in-house or out, there is a tendency to become lazy aobut these issues. “Incomplete contracts” and a “breakdown of bargining” indeed. The challenge of maintaining trust displaced and the habits of authority, strong loyality, and maybe an occational game of golf take their place.