There are plenty of buisness models that depend on an intermediary, a middleman, to solve some problem that the parties on either side have trouble solving on their own. Real Estate agents are a classic example they help buyers and sellers find each other. Before wealth and modern life started making it safe to teardown the walls between tribes, family, religious groups the marriage broker did something similar.

Publishers are a prime example of this. The problem they solve is distribution, authors need a distribution channel to reach their customers. The whole channel: finding worthy content, editting, production, warehousing, shipping, limited shelf space, etc. etc. were all problems that the publisher solved. Portions of this channel had strong network effects so that a publish with a bigger share of the distribution channel, for example, was a much better publisher for an author than one with a minor share – that positive feedback made publishers get bigger.

Technology has resolved most of the core problems that publishers solve. In the web there is no shelfspace limit, there is no bottleneck due to warehouse, or shipping, there are better solutions to the search problem than single editors.

So publishing is in a death spiral, displaced by the total and now complete undermining of the business model that life to the publishing industry. A third of how this will play out is clear. These guys are toast. It’s unclear what will takes it’s place, something new, maybe free content – this we don’t know. The other thing we don’t know is what the industry will do during it’s desperate dealth throws.

Displacement make peopl desperate. Desperate people are very unpredictable. For example I wouldn’t be the least surprised if some huge pools of knowledge owned and stored by one or more of these dinasors is casually distroyed. In a way similar to how the Library at Alexandria were lost with the Roman’s displaced them.

It is totally clear that we will have an extended period during which content that flows thru the new dis-intermediated distribution channel will have a huge competitive advantage over content that flows thru the obsolete bottleneck of
the publishers. A period during which most of the content of the 20th century is orders of magnitude harder to get to than what, for lack of a better term, we might call “open content.” I bracket it as the 20th century because that was the era of copyright. A period during which copyright was a useful – for all parties – complement to the publishing business model.

Meanwhile the industry, in it’s misery, has lashed out at it’s customers. They are trying to get the law, i.e. intelectual property rights, to fill in for all the numerous other structural reasons that their businesses used to make sense. This is at best a transient. The law exists to serve business models and make them run more smoothly and effectively for all parties in the economy. It does not exist to create business models – while it does occationally do that it’s always a fundimentally unstable arrangement. Sooner or later the parties in the economy will notice that this doesn’t serve their interestes and then they will use the feedback loop of governance to fix the problem.

For course you can’t predict how long that will take.

Meanwhile it seems that in the 12 weeks since the industry decided to lash out at it’s customer CD sales have dropped 54%.

Displacement:

“…journal Science, researchers say they have found spotted knapweed’s deadly secret: a potent and previously unknown poison that it releases through its roots into the soil to kill off neighboring plants”

“… within 10 seconds of contact the neighboring plants’ roots begin producing chemicals that set off a cascade of events that will ultimately kill their own cells.”

A few days later the plant is dead, and then the field.

“One plant arrives in a field where there are a lot of native plants,” Dr. Vivanco said. “The next year you see not one, but actually a patch of spotted knapweed where the natives were. And if there are still native plants near it, they don’t look so healthy.”

A few years later the entire eco-system is destroyed.

“…Montana … vast monoculture of spotted knapweed, Dr. Vivanco said, as have millions of acres in that particularly hard-hit state.”

“…elk herds have altered migration pathways to avoid vast inedible swaths of it.”

Allelopathy isn’t unknown as a business method. For example here’s a tiny firm pumping a powerful toxin into the soil provided by Internet browsers – soil that in turn supports the entire Web eco-system. Then, of course, there is a long tradition of powerful firms – ah – managing the air supply‘ of the complementary products in “their” eco-systems.

The Internet makes car shopping a lot more interesting than it used to be. I like skimming the boards at townhall.edmunds.com though it’s hard to know how statistically valid the impressions one gets there might be.

So, I was curious about the used car market and with a little poking around was able to find articles from the last few years discussing trends in used car
prices. A lot of people think that used car prices have fallen due to the aggressive price reductions that new car makers have been using to maintain
volume. Some people think that cars comming off lease are creating an
excess supply. But most interesting was that the Consumer Price Index data
contains a category for used cars.

The July data shows that over the prior 12 months used cars fell by 9.3 percent. Over the last decade used car prices rose during the bubble and then fell back again.

One of the articles, from back in 1997 says that dealers (I suspect that’s new car dealers) make around $1,900 profit per car on used car sales. But then, in that usual good news bad news style of journalism the article goes on to say that was expected to decline over the coming years.

The CPI data is fun. One of the components is “Whiskey consumed at home.” Prices? Up 3.4% over the previous 12 months ending in July 2003. Increased demand in the face of limited supply? Where is higher productivity when you need it?

I’ve been reading about discriminatory pricing and here’s something I’d not realized before about product bundling.

In pricing problems the puzzle the seller is trying to solve is to
get the maximum revenue while remaining both reasonably ethical and
avoiding an unreasonable amount of negotiation. A key part of this
puzzle is trying to guess what the buyer is actually willing to pay.
Of course different buyers are willing to pay different amounts. So
you might be able to sell your widgets to group A for a hundred bucks
but only sell them to group B for fifty bucks. If the product’s
production cost is five bucks then, in the seller’s fantasies at
least, he needs figure out how to sell to both group A and B at their
maximum price.

There are lots of solutions to that puzzle. For example book
publishers sell hard cover books to group A and then make group B wait
for the paper back. Consumer electronics makers sell to group A at
list price and then force group B to shop around a lot until they find
a coupon or a “open-box” or “refurbished” version for sale. In both
cases group B is forced to do some work (waiting, shopping) to prove
(negotiate) they are really part of group B; that seems kind-a-fair so
these schemes are kind-a-ethical.

I’d not realized that bundling provides another solution to this
problem – in some cases.

Imagine your selling two products: widgets and gadgets. You
discover that group A and B have opposite preferences. So your
faced with a willingness pay that looks like this:

	group A	group B
widgets	100$	50$
gadgets	50$	100$

Assuming the two groups are about the same size and you have to
pick a single price your going to pick 100$ and forgo the revenue from
the group that isn’t that interested.

But wait! What if you bundle the products. Then you get this:

	group A	group B
bundle	150$	150$

Happy day, now your grabbing all the money on the table. In fact
if group A and B are equal size this trick grabbed a 25% increase in
revenue.

You can see this pricing strategy in practice with the pricing of
Microsoft Office. While you are likely to only use one or two of the
products in the office bundle the you tend to figure that the
remaining products are worth another ten or twenty bucks, so why not
get the bundle.

You can also see this in automobiles where option packages are
typically full of junk that you don’t want, but you take the option
package because of one or two features you value highly. For example
one person might highly value the cruise control and another might
highly value the rear seat air conditioning. It costs the vendor
practically nothing to add these features but he wants to charge you
what you think they are worth.

One aspect of discriminatory pricing that has caught my interest
recently is how it feeds back into the problem of design, i.e. the
problem of engineering. For example most engineers appreciate the
value of modularity and simplicity in a design. But both modularity
and simplicity become slightly different design principles in the face
of the demand for pricing flexibility.

A modular design can deliver to marketing a range of pricing
options. I find that extremely interesting because engineering tends
to value rich option spaces (i.e. things with tool like nature) and
marketing tends not to (i.e. they prefer things with solution like
nature). That’s why it’s often hard to convince marketing of the
benefit of adding a scripting language to a product.

A simple design will have a preference toward not bundling
features. But, as we can see above bundling features can offer ways
to substantially increase revenues. This, I think, goes a long way
toward explaining why Microsoft Word is such a hair ball of
features.

Ted’s having fun in old fart mode singing the nostolgic praises of OpenDoc.

Back in the late 70s folks got excited about the idea of tying applications together. Why have two applications: a word process and a spread sheet why not have one unified application? Lots of people tried building these grand unified apps. Lotus 123, Symphony, ThinkTank, ClarisWorks, and today Office are example in that design space – but there are a lot of others.

One reason this idea is compelling, for the vendor, is that he gets positive network effects across the suite of functions. The UI is similar, the data formats are similar. Possibly most importantly is that he needs only one sales channel and he needs to close only one sale.

A delightful side effect, for the app. vendor, is that this denies your competing app-vendors turf where they might create a competing product. For example at one point in the evolution of the desk top applications business a new catagory of applications suddenly emerged and a number of really nice products appeared. Microsoft then entered that market with a weak offering, but since it was tied to office it slowly drove off all the competing products. For old farts like me we still remember wonderful features that the old products had that Power Point still doesn’t have.

These unified applications were a huge threat to the platform vendors. One key
goal for a platform vendor is to be sure that a rich population of complementary
products forms around your platform. That makes your platform attractive. You
want these products to compete with each other so you get lots of innovation
and cool stuff happening – that makes your platform exciting. What you don’t want is for a complementary product to emerge that has such huge market share that they are tempted to just swallow the operating system.

As the unified applications started to emerge the platform vendors reacted in two ways. Microsoft slowly decided that they would just go into the business
and the result was office. That’s the pattern they followed when Netscape
began to look like a similar threat – i.e. when Netscape started to get between
them and their users for too many hours per day.

Apple’s attempt to solve this problem was OpenDoc. They attempted to create
a framework that would allow the users to have the experiance of an integrated
application but to enable the individual elements of that to be minature applications. This of course threatened the business models of all the successful
software developers around their platform. That make it way hard for them
to get much adoption. But to be clear, when things fail there are many reasons.

These industry issues don’t go away, but these days it looks like the inter-machine issues are more important than the intra-machine ones. Particularly with the confusion created on two fronts: dedicated purpose devices (appliances, phones, routers), and the internet/telecom network of pervasive computing.

I’ve always liked this little B-School scatter plot. It compares different businesses showing how risky they are vs how much capital it takes bet on that venture.

In this example we have lawn care in the lower-right: low-risk, cheap-to-start-up. Generally low profits too. My canonical example for the upper-right is Motorola’s Iridium project; an adacious plan to transform the entire telephone industry by floating a huge mesh of satellites into low orbit.

This is a gambling game board. An economic entity (i.e. a person, a household, a small business, a rich man, a goverment, etc.) always decides how to spread it’s capital on the board. Even a poor man can usually buy a lottery ticket on the upper left. We are all allowed to take more risk than we can bear.

If you split your capital up you can diversify your risk somewhat. In exchange you get a more complex problem managing the risks. You can hire other people to do that for you, but that’s just a different kind of risk.

Motorola’s bet on Iridium hasn’t worked out and they have asked the court for permission to destroy the system. “Exit strategy.”

No man is an island so we all get to share in the jointly created gains and costs of this game. Iridium has certainly been very rough on Motorola and it percolates thru to the rest of the businesses under the Motorola umbrella.

“I have been to small claims a few times and have won a few cases. (I lost a couple as well.)” is probably a pretty good signal of two things: a person with a lot of amusing stories to tell, and a person with whom one might want to be a little tentative about forming too close a relationship.

Good story: How to get your money back for Windows XP when it came with your PC but you don’t use it. Good fun – pulling the tail of the discrimitory pricing beast. He hangs out a lot in the PC software industry.

So – how much of the discriminatory pricing software taps into the list of people who have participated in various kinds of court cases … hm business patent!

Why does one of these scenarios seem unfair while the second seems reasonably fair?

Vendors raise soda prices in heat wave.

Vendors lower soda prices in winter.

These could be describing exactly the same real world scenario.

The simple answer is of course that we identify more casually with the buyers rather than the sellers, so that falling prices are good news and rising prices are bad news; but I think there is a third bit and that’s what makes it not just good/bad news but adds an element of fairness, an ethical element.

The first story suggests that the vendors are taking advantage of a misfortune that has befallen their customers. Turning another’s misfortune into your profit doesn’t seem too strong on the ethics.

When thinking about the ethical puzzles around discriminatory pricing “don’t take advantage of other’s misfortune” seem to be a useful rule of thumb. For example if your discriminatory pricing takes advantage of the febbleminded it is more likely that society will sanction you.

Puzzling out good ethics about this stuff isn’t just about being able to show your face in polite company. It’s also about maintaining people’s trust – which lowers your negotiation costs.