Category Archives: business modeling

Iowa Stored Energy Park

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For some reason I’ve become interested in energy storage.  I seem to be thinking that storage is the nub of solving the problem of peak oil (et. al).
So, currently I’m reading Energy Storage: A Nontechnical Guide (isbn, worldcat) which was published in 2006.  It’s a fun book for a geek.  Fun, like reading popular science but a bit more serious.  It focus is on the electric utility industry and it’s working premise is that something is about to happen in that industry which parallels a switch which occurred in the natural gas industry a few years back.  The natural gas industry was deregulated so that a number of elements of the distribution system, storage included, were broken out in ways that created a bloom of different markets.  The author Richard Baxter states that both before and after this change the natural gas industry managed to limit the cost and extent of new distribution pipelines because they used storage as a way to smooth load.
Un-bundling creates distinct markets for lots of different qualities.  For example an electric distribution system needs to keep everything running at 60 Hertz, and some of these storage systems are useful for archiving that.  Dependable steady power is another quality and these systems enable variable demand (such as daily or seasonal variation), variable supply (such as wind or tidal power), or distribution bottlenecks to be smoothed over.  And then there is the usual buy low sell high scenarios where the storage systems enable market timing.  The point is that these systems have lots of value generating scenarios that one might not notice at first blush.

There are only two schemes for storing huge amounts of energy; hydro and compressed air.  The compressed air systems push the air into an underground storage cavity, usually a salt dome.  Which is nice since they are easier to get permits for in developed regions, as contrasted with hydro-systems that sit on top of scenic mountain tops.  I was surprised that the compressed air systems are implemented as complements to natural gas powered generating stations.    Apparently a natural gas power generating station needs a lot of air, and it wants it under pressure; so absent a source of compressed air it spends some of it’s output to compress the air – 66% of it’s output!
Which brings us to this marvelous hack – the Iowa Stored Energy Park.  This place deals in four kinds of energy.  It has a large wind farm.  It has a large compressed energy store.  It has a large natural gas store.  It makes electricity.  The result is a marvel of arbitrage opportunities.  Buying and selling across numerous markets.  For example profiting on seasonal volitility in the natural gas markets.  While at first blush you might think this thing is about smoothing out the wind energy produced by their wind farm I suspect that only time will tell what aspects of the operation are the most valuable.  Baxter points out that there are profitable scenarios where compressed-air/natural gas electricity producers run both the compressors and the generators at the same time to selling frequency stabilization services.    I suspect that their own wind farm is a demonstration, than that they can sell a smoothing service to all the other wind farms in the region.

Of course from here on in I’m going to think of my laptop battery as an energy park and yearn for a compressed air version.

Search v.s. Community

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It seems to me that these two are complements.  Search is outward facing and community is inward.  Search is many many short transactional relationships, like shopping, while community is deeper longer transactions – i.e. real relations.  That Google is a search company and Yahoo is a community company.  Even Facebook, for all it’s flaws, is a community company.

Advertising is more at home in a searching context, and less so in a community context.

Huh?  I don’t seem to have told the whispering hammer story.

As the marginal cost of goods decline there is some threshold where advertising can pay.  Information goods, who’s marginal cost approaches zero, are the most common commodity paid for with advertising.  But my barber gives away cheap combs, address books, key chains, credit card magnifiers, and a half dozen other things.  His phone number is printed on them.  I picked up the bag I carry my computer around in at an Apache Software Foundation conference some years ago.  It was paid for by advertisers.  I will note in passing that I carry both my barber’s comb and ASF bag because of my enthusiasm.

So the question arises why advertising doesn’t appear in some venues where the marginal costs are extremely low.  For example why did Eudora’s Ad supported email client fail? Why doesn’t Microsoft sell a discounted version of Word that features embedded advertisements.  I think the reason is because people find it extremely irritating to have their concentration interrupted by their tools.  Advertising is intolerable when in the flow of real work.

My summary of this insight was a joke.  Presumably the marginal cost of a hammer is really quite low.  Not much higher than a plastic comb.  So someday soon we should see the whispering hammer.  As you lift it to strike the nail it would whisper advertisements for band aids and stainless steel nails into your ear.

Well, so it maybe that search v.s. community is one of those complementary balances that shakes out with one side being commoditized while the other garnering all the profits.  I don’t know.  But commerce does have a significant corrosive effect on community and this appears to be more of the same.

EBay changes

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Fascinating. EBay is eliminating seller’s ability to give buyers negative feedback. Nicer for buyers, worse for sellers. That’s really the tip of the changes. Amazingly they have noted that sellers leave negative feedback eight times more often than buyers. And it seems like they are going to substitute some more private in house means of giving sellers a way to negatively effect buyer reputations.

I love the PR speak: “Donahoe revealed that eBay will update its feedback system to reinforce healthy, vibrant trading and keep bringing buyers back to eBay.” It appears they have noticed that when buyers get negative feedback they don’t come back.

Markets work if there is a balance of buyers and sellers. So, presumably as market maker eBay had decided it to make it more attractive to buy. This is analogous to how the credit card companies presume the buyer is right and the seller is wrong when disputed payments arise.

Buyer reputation isn’t as actionable as you might think. Sellers must accept bids, even if the buyer has a lousy reputation. Buyer reputation is more important if the buyer is also seller; but that’s pretty rare.

Watching the soon to be CEO of eBay speak to their top 200 sellers at their eCommerce forum is fascinating. This is an elite club, no doubt they account for a huge slice of eBay’s income. He, in effect, tells some of these 200 that they won’t be kicked out of the club. The real meat of what they are thinking is hidden in this talk; though you have to suffer through a lot of organizational change. All that change is a signal of how significant the changes they are into.

For their elite sellers they are setting up very significant carrots and sticks (they call that motivate and reward). They appear to be very concerned about how some bad sellers are causing buyers to flee. Discounts on fees for well behaved elite sellers. Search engine ranking that disadvantages lower reputation sellers, elite and other.

It is interesting that they are setting standards to raise the tone of the market place. This is one of the kinds of standards settings that I find most interesting. For example how the airline industry once agreed to set a floor on exactly how lousy a “sandwich” can be. I’m more interested in the collaborative cases where floors, for example professional ethics, are introduced.

control is failure

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Great quote.

You’ve just got to keep reminding yourself that control is failure. — Daniel Taylor

That probably sums up my theory of both parenting and technical management.
The quote appears in Deep Economy.  Taylor’s president of Future Generations a 3-4 Million dollar a year nonprofit working in Afganistan, China, Peru, and India on programs.    The idea is to create seeds by aiding communities to activate problem solving on a problem, and then to replicate that across regions to achieve scale.

Here’s another quote: “Change happens not because of how we invest our money.  Change happens because of how we invest our human energy.”  I don’t think that’s quite right.  It’s right to focus on the human energy; coordinating that is the hardest part.  A franchise business model solves this by creating a rigid structure and channeling the labor through that.  But what does he mean by “our human energy;”  if we means by that the community members then yes.  If he means by that the organizers then not so much.

The first quote is a delight because it’s clear he knows that when you create these systems you can’t prescribe how the human energy will be coordinated; you can only attempt to create a context in which that coordination emerges.  This is particularly necessary when you maybe uncertain what problem your solving, how your going to solve it, and what issues will arise as soon as you get into it.  At that point you want frameworks that enables the human energy to remain engaged.  At that point it’s unlikely control is going to be much help.

Oh sure, there are of course are plenty of systems where control is a means to success.  Your lucky if you’ve got one of those, since such systems scale more easily.  Once you get them blocked out you can replicate them: some standards, some mass produced capital equipment, some training, some quality metrics, some architectures of control.  You see lots of that in large scale franchising.  And it appears that to a degree the folks at Future Generations do just that.  If their seeding attempt succeeds they attempt to replicate the pattern for solving a problem developed in the first community into others.  Stamping out of duplicates.  But the problems they are grappling with requires much more adaptable problem solving schemes; so I suspect that the duplicates feature substantial variation.

Interesting.  This is a kind of grass roots franchising model.  If one community puzzles out how to run a farmer’s market, a community tool shed, a library, a wifi network, knitting circle, etc. etc. then others can mimic that.

Notice how there is a two step process here.  In the first phase you need to attempt to get a solution to emerge that works for community members, at all.  In the second stage you want to strive to get it to replicate.  These probably call on different kinds of entrepreneurial skills.  But the build out is where you can create really significant change.

Disintermediation: the landlord

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Here’s an amusing thought.  Quoted over at calculated risk: “We’ve attracted a lot of borrowers who are really renters  It is disheartening as a servicer to see the willingness [to walk away]  [borrowers] simply don’t care.”

Ha!  The bankers have disintermediated the landlord; and like usual when you cut out a middleman you discover, a while later that he had a function which surprise surprise you now have to fill.  And since you haven’t been filling that role well to date there are more surprises to come.  No doubt there is a business opportunity there; a variant of the condo management companies, but this time beholding to the bank rather than the condo board.

Big Horns

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Before we all got excited about building systems that would leverage Reed’s law we were into systems that leveraged Metcafe’s law, and before that we all wanted to buidl systems that tapped into Sarnoff’s law.  Radio with it’s one broadcaster to many listeners is the classic example of a Sarnoff law system.  Of course before radio you had public speakers.  If you want to build one of these older systems, say by starting your own mega-church, you’ll be wanting some big speakers.  Maybe if you watch this video you can make your own, save some cash for refreshments.

Esty – two kinds of entrepeurship

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For about the last six months I’ve been observing etsy.com with some interest. To first order it is a classic two sided hub, so naturally I’d be interested.  A market place in this case.  It aggregates a large number of small sellers of handmade goods and their buyers. Providing shops, search/browsing, transaction orchestration.

As a business they are not built to flip, but rather to last.  That is always risky and thus more respectable. Over all they are a rough but solid operation.  It’s no wonder that they have attracted some very high quality folks as advisors/investors/coders.

For me the most interesting aspect of esty might be called their branding.  But boy that is far too bloodless.  Worse, it leads to a misunderstanding. Etsy is entrepreneurial in two or more ways. They are building a business. One that can turn out to be a quite significant retailing hub.  Thus, they are classic business entrepreneurs with all that implies; much of which is unfortunate.

Success in creating that hub would be significant.  As a rule internet hubs aren’t good for small enterprise.    I am conflicted about that conclusion, but there it is.  Generally the internet has accelerated the hollowing out of small business.  The Internet’s power to create major intermediaries and thus break and thin out the connections between producers and consumers ain’t a healthy development for us all.

I’ve written before about my hypothesis about how to help counter that. You need to create more connections horizontally between parties. Which I call small group forming. These are hard to create in scalable ways.  But  when created they shift social and economic flows downward on the distribution of wealth rather than upward.

So should Esty succeed in doing what, say OSCommerce has failed to do, it can create a bloom of vibrant small business activity inside of the Internet.  That, in turn, it would help shift the curve. That could be a real help tempering rather than worsening the distribution of wealth.

Which brings us to the second kind of entrepreneurship that Esty is trying to execute on. It is a kind of social entrepreneurial activity. An effort to change the nature of the economy. You can hear that in some of their communication. For example talking about creating a more adaptable or robust economy is one sign of that.

This two for one kind of entrepreneurial activity is hard to execute on. There are powerful systemic forces in play that tend to hand the power to economic rather than the social side of the balancing act. There is a wide spread presumption (a fair one!) that firms talking about the social side of the game are only playing a branding game. That they are the capitalist version of a corrupt politician who uses populist rhetoric.

But, Etsy is taking a interesting swing at the problem. Surprisingly practical. For example if you look at the list of things that make businesses resistant to consolidation (franchising, chain store, mail order, etc) the Esty target market (handmade goods) is a good choice. For example their efforts to encourage their sellers to engage in local organizing is another sign of taking seriously the puzzle of how to strength, rather than suck the life out of local and small business.

The Smallest are the Biggest Customer

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Quite a few times over the last months I’ve found myself talking to somebody with a lot of customer relationships to manage.  Actually it is more accurate to say a lot of relationships.  As a certified power-law nutter I presume that some of these relationships are deeper than others and the distribution is highly skewed.
There was a short period, years ago, when I was the benefit of Apple’s out reach to their high value developers.  Somebody from Apple would appear at my office door.  We were well fed while on nice junkets.

In the conversations I’ve been trying to tease out how various people and firms organize to address this highly skewed set of relationships.  My guess, call it my hypothesis, is that they do not treat everybody equally.  That what emerges as they adapt to the highly skewed distribution is a two headed strategy.  One approach for the high value relationships, and a second approach for the rest.    This puts, for example, a new light on Apple’s old slogan: “A computer for the rest of us.”    In many cases the strategy for the rest is a kind of populism.

Letting my hypothesis run out of control I assume that firms, as they grow are consciously, or more typically unconsciously, rebalancing the resources they devote to one or the other of these.  For example Google certainly began by having very very light relationships with millions of web sites, and then as they built out more traditional sales and marketing organization for relating to the largest websites.  Possibly they did that consciously, but it’s just as likely the environment they found themselves in forced that.  Presumably the same scenario happened to eBay.

The way you execute on these different kinds of relationship is obviously very different.  For the high value relationships you can afford to assign labor, travel budget, etc.  For the vast number that make up the rest you expend money making self service web sites, doing targeted advertising, and engineering effective, but cost effective, customer support systems.

This problem, how to manage the resource allocation across a highly skewed set of relationships, is scale free.  Individuals have this problem just as do huge firms.  The address book, the rolodex, and social networking sites are all schemes to give individuals tools to manage the rest of their relationships.

Any group has this problem.  For example open source projects tend to many tiers of contributors.  Ben Laurie recently was reacting to a common accusation we encounter from outside observers about open source that we “don’t care about users.”  That word “care” is about relationships.  The accusation is that the open source project fails, somehow, to do it’s part in the relationship with users.  I’ve often heard this complaint from product managers in traditional consumer software companies.

The product manager in a traditional consumer software firm exists because the firm needs and funds labor to manage the relationship between the firm and the vast diffuse pool of users.  I.e. the product manager is labor of the second kind – the long tail kind.

Ben who embraces the accusation by highlighting the deep relationship that open source projects have with their developers.  That’s right, but at the same time some open source projects develop a second kind of relationship management that is modern substitute for product management.  For example the editors at Wikipedia are that. Most open source projects learn, after a while, that they should devote significant resources in support of the vast number of very low value relationships.  But they tend to devote those resources to making it easier to download and install the software (easy on ramps) rather than to better customer support systems.
But in most cases the question reflects a category error about what kind of institution an open source project is.  For most open source projects there is a long tail only to the extent that the easy access to the resulting code acts as a shout out that may attract addition developers, i.e. high value contributors.  Rather than a well funded call center broadcasting that “Your call is very important to us.” your  more likely to encounter a “Eh what?  Oh, sorry, gotta run.”

Visa risk

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Income inequality effects firms and individuals. Rising inequality moves hand and hand with increasing skew in the distribution of firm size. For firms this goes by various cliched names, consolidation for example. When it becomes extreme then we talk of anti-trust. In this framing talk of what’s good for small business is analogous to talk about what’s good for the poor and in those terms the ideas of consumer protection are mimic’d by regulations, like anti-trust, that temper the power of the large firms over the small ones.

The payment’s industry is a good exemplar for all these dynamics. Follow the money, and all that. There is a lot of high stakes antitrust litigation (2.1 Billion example) in the payments industry. Personally I think these cases should get more press coverage.  Visa has filed to go public (10 Billion).  These exchange networks are big money; e.g. UPS, or AT&T wireless (10.6 Billion) As an aside I find this is interesting from an industrial standards point of view. It makes me wonder if the folks that run the Universal Product Code hub could go public too?

The risk section in Visa’s S1 makes for interesting reading. It’s a guided tour of the business model. I love S1 since they are a rare attempt to speak clearly about the business. A good example: “Our management team is new and does not have a history of working together.” Where else would you get to see that? Or that they have a complex partnership with Visa Europe full of technical stress; and options for significant financial events they don’t control.
Regarding the introduction above it says that both banking and retailing are becoming more consolidated. It’s nice to have diffuse and weak neighbors in the supply chain; it’s a pain to have powerful neighbors since they tend to be difficult to negotiate with.

Consumer protection, i.e. government regulation targeted to protect consumers, hardly shows up in their list of concerns. Government regulation does. Privacy regulation is the closest the come to a consumer protection worry; and that appears to be less of a worry than dealing with the thicket of regulations thrown up after 9/11.

Its telling that they frame their concerns about credit card fraud entirely in terms of it’s effect upon the brand.
I love to anthropomorphize and these dozen pages are a great window into what keeps a payment network up at night.