Category Archives: Business

New Page: Free Downloads

I’ve just posted up a new page on this site for free downloads. Right now the only thing up is a document I wrote recently on how companies can properly budget for SEO (or general internet marketing) campaigns. I’m hoping to be able to release other material – both ebooks and software – on this website, on some kind of public distribution license.

Open Source Manufacturing: The Implications of a Factory in Every Living Room

The following is the second chapter in the free eBook I am working on. I’m indebted to a number of people who commented on this text; the changes that resulted will appear in the final product. What appears below is somewhat more crude than I’d hoped, as I haven’t had as much time to edit it as with some of the previous items posted here.

We’re already well along the path that leads to devices like Star Trek’s replicators being freely available everywhere. This is likely to lead to some interesting societal changes, but more importantly (for the purposes of this article anyhow!) it implies a series of interesting and potentially quite profitable business models.How do we make a living when “stuff” is free? Devices like the RepRap are becoming mainstream, so we’d better start thinking about it.

When you think of the word “manufacturing”, the image that may come to mind is a gigantic tin-roofed building, acres of land area occupied by thousands of workers wielding pneumatic tools.

If you’re more familiar with “light” manufacturing, you may picture instead the niche tool and die shop, its steel lathes turning out custom parts that feed more complex industrial production elsewhere.

The hobby enthusiast may envision instead their workshop, the garage or basement converted to the art of creating – furniture perhaps, or model railroads.

The act of manufacturing something, anything brings to mind first and foremost an act of human labour; taking raw materials and transforming them by sweat of brow into something else.

Its been clear for some time though, that the process of manufacturing is slowly moving downstream.

What once was the work of thousands, becomes – in time – the work of hundreds, assisted by ever more  efficient machinery.

The inevitable result has already been written about and speculated about endlessly. If you’ve ever watched Star Trek, you understand at least some of the societal changes implicit in “Tea. Earl Grey. Hot.”. As the enameled cup appears in the hand of the thirsty tea drinker, we already get it.

The manufacturing sector is already well along the path of democratization – digital presses and home workshops are asymptotically approaching a world in which anyone can make anything in an instant of time, for essentially no cost.

The world of Neal Stephenson’s “Diamond Age” is near upon us. Its a world in which “things” have absolutely no value, because they can be created and produced in any quantity without effort or cost.

Need a car? You can “print” a disposable one at home. When you’re done with it, toss it in the recycling bin.

The only items of value in such a world become those things created by craftspeople – one-off efforts created through manual labour on behalf of a wealthy customer.

Or ideas themselves.

Have you stepped inside of a dollar store recently? There’s an amazing one near my house. For now, everything is actually one dollar (I’ve noticed some dollar stores now sell certain more expensive items), and the number of different kinds of items for sale is amazing.

What really blows my mind though, is that the store isn’t even going to bother selling something unless they make good margins on it – that means some of those things only cost them a few cents each. Maybe even less.

The quality has also come a long way from my earliest experiences in such stores. Back then dollar stores sold cheap plastic implements – things that you used once or twice and then threw away.

These days you can buy relatively high quality tools, stationery, kitchen implements – identical to those in department stores that sell “name brands”.

The Western World Got Hit First

If you pay any attention at all to the manufacturing sector – maybe you work for a manufacturing company, or you know somebody in a union – you also know that manufacturing companies in North America have been going through a rough time over the past decade, and the situation is getting worse, rather than better.

For better or worse, the manufacturing process has largely gone overseas, primarily because companies can reduce one of their largest costs (labour) that way. Salaries are simply lower in many parts of the world.

This is obviously a great simplification of what is going on: for one thing, heavy or complex objects tend to have their parts manufactured in many, many places around the world. The components are then shipped to some place close to where the final product is going to be sold, and then assembled there. That is roughly how the automobile business works.

People love to blame China for this process, but the truth is that in many cases Chinese companies have moved their plants off-shore to still cheaper places as well.

At the end of the day, the cost associated with building anything from scratch is three-fold: the raw materials required, the cost of designing it, and the labour involved in actually making it.

Clearly a highly mechanized plant has some obvious advantages over one in which there are many humans working. This approach has never been able to gain much ground in North America, partially due to the high initial cost of robots, and partially due to strenuous resistance from unions.

Keep this idea in mind though: there already exists a way to manufacture items, such that the cost of the item basically is reduced to the cost of raw materials, plus some factor for externalities: electricity, transporting the goods afterwards, marketing.

Computer Aided Design / Computer Aided Manufacturing (CAD / CAM)

Somebody I know has a room full of Computer Aided Manufacturing (CAM) devices that he uses to build  gadgets with.

A CAM system is basically a small machine shop in a box, connected up to a computer. It allows you to take a three dimensional drawing and turn it into an actual object.

CAM has been around for decades, but the equipment is typically expensive, bulky and messy to operate. Usually such systems are used to build prototypes or one-off items out of metal or wood or various kinds of plastics.

Basically a CAM system is the kind of tool that any red-blooded, tool obsessed male would love to get their hands on – if only they could afford it.

Enter a little gizmo that is going to change the shape of manufacturing for good – one of these days.

A few years ago, one of my staff tapped me on the shoulder and said “you have to see this”.

“This” turned out to be the website for a gadget called the RepRap (www.reprap.org).

What’s a RepRap?

Basically its a CAM device, only it can build copies of itself, and it costs only a few hundred bucks.

Your friend has one and you have gadget envy? You can get him to “print” you a copy on the spot.

Let’s clarify a bit: the RepRap is still very much an early prototype. It can only make objects out of one type of plastic, and it is still very limited in terms of the shapes and sizes of object it can build. When it “duplicates” itself, it currently can make a portion of the parts required – it can’t do any of the electronics, and it can’t assemble the parts once they have been printed.

What exists right now is still extremely impressive. If – no, when – the technology becomes more mature, it will change the manufacturing process like nothing before.

There are some nice photos on their website of things that people have made at home with their RepRaps. One person made his children some nifty sandals. Others have made replacement parts for all kinds of items that have broken.

We’ve already been through a similar downstreaming process with industries such as publishing (between the home laser printer, small digital presses, and Amazon’s “fat tail” – everybody is suddenly an author), the movies (think YouTube), as well as others (ask any experienced doctor about the implications of Wikipedia; ask a software developer about OpenSource).

The home workshop / factory / replicator is going to do the same with pretty much every tangible object that you can hold in your hands. Instead of going to the dollar store to buy kitchen implements, you will be able to make them yourself, with minimal effort.

The computer drawings required are being created in freely available format, so that people will be able to easily share designs.

There is already a community of enthusiasts working on the technology from basements and garages, and the occasional university laboratory.

One of the most exciting parts of the idea, is that the systems are designed to be upgradable – as each new advance in the technology occurs, the new designs are spread around over the internet, and the parts required are built on the existing platform.

We’re still some way away from “replicators” as depicted in StarTrek, but its hard to say that the concept is really science fiction any more. It has become more a matter of decreasing the costs involved by a few orders of magnitude, simplifying the process so that you don’t need to be an electronics or software wizard to make it happen, and then allowing the concept to spread around.

The RepRap and similar tiny manufacturing devices are really only the beginning. There has been a lot written on the topic of nanotechnology and how it will reshape our world (See: http://www.crnano.org/bootstrap.htm), but in essence a “nanofactory” is really just a smaller, more effective RepRap. The concept is that anybody will be able to make pretty much anything, at virtually no cost (beyond raw materials, and possibly the design).

What is the implication for business then?

I think it would be all too easy to focus on how a factury in every living room is going to permanently damage the manufacturing industry and lead to the doom of civilization as we know it. Inevitably a change like this is going to result in both economic and sociological changes, but I find myself focusing on the immense opportunities that present themselves.

1. The Design is Often More Important than the Object

Companies like Nike discovered a long time ago that the real money isn’t in the actual manufacturing of shoes. Instead they focus on design and marketing. All of their manufacturing processes are outsourced or franchised away to other companies.

Provided that copyright and intellectual property laws keep pace with technologicaly change (not something we can take for granted, I realize), I suspect that we’ll see a further shift towards companies that create the underlying notion of a product and produce specifications that can be used to build them.

Not all objects will follow this process – there are always going to be things that are more effective to mass produce than to create in small numbers (think blank DVD disks), but there’s a good chance that in years to come people will download a design for an item – let’s say a spaghetti twirler – and then produce the item themselves, rather than running to the dollar store.

The following business models come to mind:

  • Online shopping malls that sell designs from many companies
  • Search engines for finding free designs
  • Producing free designs that incorporate advertising (imagine a company logo embossed into your spatula!)
  • Custom design services (much like you would hire a graphic designer to make a website today)

2. Things that can’t be Reproduced

In the book “The Diamond Age”, much value is given to items that exist only in small numbers, or that cannot be easily reproduced (by law or because they are unique).

a) The status of the artisan or artist, who creates unique items, may rise.

In addition to art, there are other things that will be hard or just plain more expensive to manufacture through CAM or nanotech.

b) Items such as quality furniture are frequently made out of wood, because it is both attractive and extremely durable.

While there are synthetic amalgams that come close to wood, it could very well be cheaper and more effective to continue to manufacture certain large, durable items in the traditional ways.

c) In addution, home-based manufacturing is likely to struggle with building anything bigger than a few tens of centimeters in each dimension. This could lead to some interesting new businesses:

There are already machine shops that specialize in building one-off items for people (usually prototypes of items that will later be mass produced). These shops aren’t likely to go anywhere in years to come.
Small scale mass-producing facilities that are highly flexible – picture a room full of larger RepRaps, connected together by assembly lines – may be a good opportunity for companies already in the manufacturing sector. One of the nice things about this would be that the plant could build parts of itself. If demand picks up, just build a few more assembly lines. These types of plants will probably focus on building larger items that people won’t easily be able to make at home.

3. Raw Materials

Without a steady source of “something” to use in the manufacturing process, our home DIY factories aren’t going to be able to make anything. This means that the mining industry probably isn’t going to fade away in the near future (I’m planning on writing about the effect of space-based resources in a future article), but there’s more to it than just digging lumps of iron out of the ground.

Think of your laser printer – it takes two inputs (ignore electricity for now): paper, and toner. Both printer paper and toner cartridges have been designed and packaged in a particular way that makes them easy to deal with.

Similarly, I think that there is a magnificent opportunity for companies to work on ways to package raw materials in a way that makes it easy for a tiny manufacturing device to use them.

The RepRap, for instance, currently uses a hopper (basically a big funnel) filled with pellets of plastic that are heated to melting point and then squirted through a nozzle.

Larger CAM devices often have the ability to make objects using metal that has been ground into a powder (like printer toner). The company or companies that can find ways to package new materials for this purpose may be able to leverage that into an advantageous position.

Yes, its a commodity market, but so is printer toner.

Items made out of rare materials may also present an opportunity; although the definition of rarity may change.

Expect things like diamonds to decrease in value as the processes to make artificial ones improve. Good conductors and high quality semiconductor materials likely will not.

In Conclusion

I don’t claim to have an understanding of the kinds of changes that are going to happen to our society in the next twenty years as a result of “open source manufacturing”.

Maybe Neal Stephenson or Eric Drexler have a inkling of part of it, but the future doesn’t really lend itself to accurate prognostication.

I hope though that we can create a world in which there is room for regular people to lead regular lives.

The doom and gloom tends to grab the headlines: everyone’s industry / livelyhood / job is going down the drain.

The truth is hopefully going to be somewhat different. Technological change will result in as many new industries as it will destroy.

People will innovate new ways to make a living, even if the underlying things that we value disappear.

There are always dangers implicit in change, but also great opportunities, and all in all, I’d rather focus on those.

Addressability – and why it matters to you

The following is going to be part of a mini downloadable booklet that I’m planning on releasing on this site – as soon as I can finish it. I have a few chapters written already, and a rough outline of the rest. Stay tuned here over the next few months for more sample chapters. Comments will be very useful for me as I revise this.

Addressability – and why it matters to you

Imagine you are living in the early 1700s. You’re living at Fort York, in Upper Canada (later to become Toronto, Ontario). You need (I know its a contrived example, but bear with me) to get somebody living in China to move a precious porcelain vase 6 inches to the right on the pedestal on which it is standing. In turn, they need to you take off that ridiculous beaver-skin hat, and hang it up by the door.

So how would you go about doing this?

I assume that – even in the pre-mass communication age, something akin to the concept of six degrees of separation must apply. The number is likely higher though.

So you pass the message along to your friend, who knows a ship’s captain who is travelling to China, who in turn knows a merchant in the port area of Hong Kong – you get the picture. Eventually, probably several years later, the message is handed to the person you had in mind, who moves the vase. Two or three years after that, you receive the message back about your hat.

The idea that I’m trying to convey, is that most of the objects in the world have a defined way in which you – no matter where you are – can reach out and touch them. This concept is called addressability, and it isn’t new.

A large part of the history of technology over the past few hundred years essentially boils down to finding better ways to send a “message” to somebody or something – to have ways in which there is a defined address for the information that you are sending.

Some examples:

1. When the Royal Mail started operating in the UK in the 1800s, people typically didn’t have well defined mailing addresses. Yes, you could probably get a letter to them based on their name, the city in which they lived, and possibly their neighbourhood. Beyond that, a courier potentially had some guesswork to do in order to hand a letter to its intended recipient. The assignment of street names and numbers, along with the invention of postal (or ZIP) codes, are all ways of attempting to formalize how to reach somebody.

2. The telegraph, and later the telephone, are both methods by which information (either a written note or a verbal conversation) can be delivered directly to a person. Hence telephone numbers, area codes, international dialing codes and the like.

3. The internet relies heavily on a concept called an IP Address, which assigns a unique number either to a computer, or to a part of the network in the close neighbourhood of the computer. This allows traffic – such as email – to get to its intended destination.

Why Does All This Matter?

You’re probably already thinking something along the lines of “this is all very interesting, but how does it matter to me?”.

My best guess is that the process of making everything and everyone in the world addressable is going to accelerate in the near future, with some interesting effects. There will be a number of business opportunities that open up as a result, along with privacy and security issues (which can also be business opportunities for some people!).

There are two areas in which this is going to happen:

a) Firstly, addresses are going to become more “fine grained”. This means that instead of (for example) a computer having an IP Address, each part in the computer may have an IP Address. Your clothing may have IP Addresses (if you purchase something with a RFID tag, it may already have one!), your car will have an IP Address – not just that, but every part in your car may have its own IP Address.

b) Secondly, there will be an increasing effort to solidify and catalogue all of the massive amounts of information that result from everything having an address. This means finding ways to reach somebody or something without having to know too much information about.

The result of all of the above, is that there are dozens of categories of businesses that are going to become feasible in the next ten years. I’ll list a number of them below. Some of these businesses already exist to a certain extent, but they’re going to become actual specializations and business plans, rather than occasional services that are offered.

Opportunity Knocks!

The following categories of businesses are likely to become viable in the near future:

1. Help, I’m out of addresses!

Currently, most of the world operates on an internet addressing system called IPv4. You’ve probably seen IP Addresses in this format; they look something like 192.168.0.1. Four digits, ranging in size from zero up to 255, separated by a period. The big problem is that even with the relatively small number of objects (usually computers or computing equipment these days), we’re already running out of addresses in this format. This is why there is an effort underway to switch the entire world over to a new addressing system called IPv6, which has a truly gigantic number of potential addresses. This process is proving to be extremely difficult to complete, leading some industry specialists to conclude that the world is going to run out of existing addresses first; only after the inevitable emergency will everybody switch.

The business opportunity? Start a company that specializes in finding places where equipment isn’t IPv6 compatible, and consulting with companies on the appropriate way to make the switch. There are already networking specialists who do consulting in this area. Look for this to become an actual business by itself – at least until the whole world switches. Its an opportunity similar to the Y2K bug, where a little bit of FUD and some technical know-how lead to many people making big money.

2. Help, I need an address!

The process of assigning addresses to physical objects that aren’t computers or networking equipment, is already well under way. The biggest push has been by companies like Walmart to have all of the items that they sell tagged with an RFID tag, which allows them to track what they sell with great precision. RFID tags allow each item to have a unique ID number associated with it, which – combined with a database of the items – allows somebody with a scanner to discover information such as price or inventory levels about the item.

What RFID does not do – yet – is allow each of those items to be directly connected into the internet. The concept that your fridge or toaster will be network accessible has been promised by futurists for years, but hasn’t really progressed much outside of the lab. Yes, you can purchase a coffee machine with a network jack off the web right now, but most people don’t. Yet.

When you factor in the growing adoption of technologies like wireless internet, along with a gradual reduction in the amount of power required to actually run all the “fancy stuff” needed to connect, eventually not just appliances but also things like clothing, or auto parts are each going to be able to connect to the internet.

This raises a number of privacy and security issues, along with business opportunties such as creating the addressed items in the first place.

Some possible business models that result:

a) Manufacturing new kinds of RFID tags that can be incorporated into objects, which provide not just an ID number, but also an internet connection. A further business model: create the platform and standards by which all manufacturers of these tags operate. That means the underlying software, how the hardware interfaces with the part that it is embedded in, etc.
b) Inventing underlying technologies to reduce the size and power requirements of the above tags.
c) Creating ways for parts to let the manufacturer know when they are broken; this model already is underway with printers – many new printers will email the manufacturer and the servicing agent to let them know when the toner is getting low, or when there is something the matter.
d) Brokerages and middleman services for part c) – imagine a website that printer servicing people can be members of, which will automatically list all of the printers in their area that are low on toner, and then allow them to bid on the job.
e) Security and privacy services: locating and removing tags from sensitive equipment; “firewalls” for objects – for example a way to allow you to access anything in your house, but prevent anyone else from doing so. Its an interesting world we live in when we need Object Firewalls, not just network ones.
f) Quality control – during the manufacturing process, each and every part can be separately quality controlled, and a record attached; then, during assembly, an automatic record for the entire complex object (i.e. a car) can be created on the fly. There’s room for software and equipment manufacturers to build systems that assembly lines can use to do this.

3. Help, I can’t find something! (Or I can and I don’t want to!)

If all of the quadrillions of objects in the world have a unique address, and a way to reach them via the internet, we’re going to have to find new ways to sort through that data. There are a great many business opportunities that arise from this, including:

a) A new kind of catalogue – grouping items (your car, your shirt, your cell phone) based on who owns them, who is allowed to use them, who can see that they exist. This would be a golden opportunity for an existing search engine company to get a leg up on their competition. I suspect that there’s only room for one viable business in this sector. If you were to login and authenticate yourself, you would be able to see all of the items that you have permission to access from a single control panel – you can turn on your oven and send an SMS to your wife that dinner is cooking at the same time.
b)  Some items should be publically accessible – for instance things like traffic cameras etc. Cataloguing such items – along with more detailed security functions such as who can view, who can modify settings – will also be a big part of item a).
c) I can forsee a business opportunity where a consultant helps people find things – either a specific item, or a category of item – based on such catalogues. This is like an Object Librarian job,  combined with that of a Private Detective. Instead of sorting and cataloging books, they would do the same thing with objects.
d) Single point of access. Currently, I can be reached via about half a dozen email addresses, three or four phone numbers, two Instant Messaging addresses, and about fifty to one hundred social networking website profiles. If somebody can figure out a single way that I can be reached – anywhere in the world – through a single device, it would greatly simplify my life. We’re already seeing some convergence in this area. My cell phone also can access email, in addition to being an SMS device. What I’m getting at though would be a device (probably combined with a proliferation of standards and platforms) where all messages – voice, text, video – are transparently routed to me, no matter where in the world I am. We’re getting there, but there are still opportunities for software developers and hardware manufacturers.
e) Reputation management – to some extent, this already exists as a service that some Search Engine Optimization specialists offer to customers. The specific case in mind is one where negative information about a person or company has found its way onto search engine results, or internet archives. It doesn’t necessarily have to be negative: for instance some States in the US have been digitizing property records without removing sensitive information such as Social Insurance Numbers. The process of removing information from the internet once it exists is extremely tricky; not only are there many places that can cross-reference information, but there are also many places that tend to cache information long after it is gone from the original sources. The process of removing information actually usually involves creating vast amounts of counter-information or meaningless nonsense that makes it difficult to actually obtain useful results from a search. Expect this to become a viable business model in coming years.

Conclusions

In the article above, I listed about a dozen possible business models that somebody could make money from based on the notion that more and more objects in the world are going to be directly linked to the internet. Yes, there are all kinds of security and privacy issues, in addition to which there are probably entire industries that are going to vanish as a result of this happening. There are also a great many opportunities for new industries to arise though.

How to Compete With Free

The Wall Street Journal issued an interesting article today on a topic that I’ve been pontificating about (here and on Yahoo Answers) for a while now: how are businesses going to switch from mindlessly burning up investors money to actually making money?

Last week I wrote about the 4 categories of business model that exist online. I’d like to take a quick look at a few of the successful (and not yet successful) examples (some from the WSJ’s article and its comments), and see if I can come up with a few specific ways in which websites can compete with “free”.

The issue at hand is fairly simple to describe: in each niche market online, there are many, many competitors. Most of them are giving away their services entirely for free. Some of them charge for specific premium services, but users are often willing to shop around to find some set of useful (to them) services that don’t cost them anything at all. This tends to result in a race to the bottom, where the only way (and it is indeed a dubious way) to make money for a website is through advertising.

Let’s look at a few of the most successful online businesses and see if we can learn anything from them:

Google

Google’s success is based on being able to deliver the largest number of ads, to the largest number of placements, at (in general) the lowest price. This business model depends entirely on having extremely high traffic, a highly viral method for spreading their system around, and excellent system for placing the right ad on the right website (it ain’t perfect, but it is good enough), and constantly doing interesting (but usually non-profitable) things to attract even more attention. At this point in time, it would be virtually impossible for anybody to launch a competing bid for that ad space – in order to do so, they would need to be able to charge advertisers less, while paying website owners more, which would likely make their margins uncompetitive. Google’s model – essentially a middleman model – has a large “moat” to use Warren Buffett’s terminology. Yes, they’re going to take a hit with cost per click going down a bit, but they have enough critical mass to ride out the storm and fend off competitors at the same time.

Craigslist

Craigslist is also a high traffic-dependant model. Basically it is a twist on the “freemium” business model – almost everything is free, except for a few types of ads in specific markets. As far as I can tell, they were the first ones to cotton onto the idea of giving away virtually everything, making yourself completely indispensible, and then charging for a few specific features that are very worthwhile for a small set of people to pay for. There are a great many competing websites – some who actually have quite a bit of traffic – that are giving away for free the specific set of things that Craigslist charges people for. However, they have sufficient traffic to make it worthwhile for advertisers to pay for things that need to attract attention. Basically their model boils down to being sufficiently indispensible that people will pay.

Meetup.com

A former employee of mine first alerted me to this website. When they started out, they offered a completely free service for people to organize groups to “meetup”. Their traffic grew exponentially until several years after launching, they switched to a fee-based model. Users of the site get in free. Owners of groups pay a monthly fee. When they switched, they lost about 80% of their groups. The ones that remained provided enough revenue to keep things profitable. Their methodology: lock-in. One people have a successful group with a large member-base, moving it somewhere else – even though feasible – is a pain in the neck. The amount that they charge isn’t high enough to drive away their customer base, although I have my doubts as to whether they’ll be able to grow much further. Basically they’re now a cash cow.

Salesforce.com

Salesforce.com gets away with charging a fee for an essentially simple system (there are lots of CRM packages around, some of them free) by providing a high-end feature set, in addition to a lower startup cost. Its easy to get going with Salesforce – you pay per seat, so the initial cost isn’t all that high, it is more convenient than installing and maintaining a system on your own, and then you are locked into a system as you grow to have more seats (which is where they really make their money). With a paid userbase that is apparently around 50,000 customers, they’ve probably grown to as large as their market will bear. Their key strategy: provide lots of features that aren’t available in the free/cheaper competitors; make the initial costs so low that they are painless; tie users in so that it is hard to leave; gradually ramp up the fees. This is essentially a “utility” model. Anyone hoping to compete with them is going to have to provide more features at a lower cost (and hence lower margins).

Wikipedia

Wikipedia has a much lower operating cost than a traditional encyclopedia: their content is basically free, they have things set up to run on a surprisingly small number of servers,  the crowd-sourcing model of producing quality (mostly) lends itself to a large amount of useful and accurate content, and people are willing to donate to keep something so useful alive. Like many of the other examples above, this is a business model that relies on being the highest trafficked website in its niche – and it is viral in the sense that the more content it has, the more useful it becomes. By keeping costs down, and basically guilt-tripping a subset of users into donating money, they can make a profit and keep things free. I’m not quite certain how Brittanica hopes to compete with them – yes, Wiki often has high-publicity editing faux-paux, but for the most part they are good enough. I’m not sure that providing a higher quality service (but charging for it) will be sufficient reason for people to switch to a different service.

I think that by now we can see a few specific trends:

  • Be the first one in your niche
  • Have the largest amount of traffic
  • Provide a service that is good enough
  • Make it difficult to switch
  • Make it expensive to start a competing business
  • Be willing to start charging and lose some traffic as a result
  • Charge only for those things that you need to charge for; keep most things free
  • Keep costs down

This isn’t all that different from any “brick and mortar” business model, is it?

Let’s take a look at a current favourite (of mine and many other people!): Twitter. What possible ways can they achieve their revenue goals, given that a) it isn’t necessary to login to their site in order to use it, and b) they provide a very small number of features, all of which are simple and easy to duplicate.

Their options (as I see it) are as follows:

  1. Make it harder to access Twitter from elsewhere. Start charging to use the API. Lock it down with additional security features.
  2. Place advertising on their site. This would rely on a larger percentage of users being forced to actually login to Twitter, as opposed to using tools like ping.fm.
  3. Create additional features that are currently being served up by other websites in their “ecosystem” – all of the cool profile rating, desktop tool, website plugin, karma-inducing stuff. Yes, I know, they would irk a lot of people.
  4. Sell products or services: branded versions of Twitter that are specifically for a particular company (i.e. for sales reps and customer service people, or for staff to tap into other staff’s knowledge). Services specifically for brands trying to tap into Twitter’s user base.
  5. Create their own desktop tool, with advertising spaces on it.
  6. Buy other websites with related features and tie them in.
  7. Find some other product or service (My husband/wife/parents went on a Twitter vacation and all he got me was this lousy t-shirt) that they can sell. Hey check it out: the Twitter eBay account! I don’t know if that would work.

In all of the above cases, they would certainly lose a percentage of their users. I think that is why they’ve been holding off for as long as possible – once they are “big enough” they can set things in stone. They’ll lose some people, and the rest will stay, but it will be hard for them to grow afterwards. I’m also not sure whether or not they would be successful or not with this approach – users could potentially just gravitate to other similar sites. The point is that they do have options, even if they are going to be hard ones.

There are plenty of lessons to be learned from a recession like we’re currently in. I tend to view these times as performing a tough but useful purpose – like controlled fires in a managed forest. Nobody really likes having to deal with reduced source of income (never mind venture capital), but this is an excellent opportunity for businesses to fine-tune their business models so that they can be more profitable once the recession is over. If website owners can move away from “everything is free and I make money from ads” to “I have some set of products and services that I sell, and I also make some money on the side from ads”, the online economy is going to be stronger going forward.

8 Ways Businesses Can Cut Costs

The key to cutting business operating costs during a recession is to avoid cutting in places that will be counter-productive in the long run.

Look for ways to cut costs without huring your business

I’ve seen a number of articles lately that show ways that people can cut some costs in their personal expenses in order to save money. Things like making coffee at home and skipping the latte (not so good if you are a Starbucks shareholder).

Most of the lists I saw had little or no bearing on businesses, particularly small businesses. I’d like to make up for it with the following list of ways that businesses can trim some “fat” during recessionary times.

Marketing and Advertising

Traditionally, when times are rough, businesses cut their advertising costs first. This can be somewhat counter-productive, because advertising is one of the ways that you can get new business. The trick here is to work on ways to get more for your money, or to only use the advertising that you really need.

  • Google Adwords – I’ve heard that there has been a drop-off in the cost per click for Adwords lately. If you rely on Adwords to drive business to your website, consider adjusting your price per click downwards. Do you absolutely have to be the first one on the list? Sometimes the second or third listing gets more clicks, and costs less. That said, Adwords is still the most targeted form of advertising that is available to most businesses.
  • Directories – Some businesses rely heavily on advertising in phone directories (“yellow pages” or “white page”) for their customers. Those businesses have more bargaining room than usual when it comes to renewing their ads. Consider going with less / smaller ads, or making your colour ad into a black and white one.

Rent

  • The price per square foot for rent is down in most cities in North America. If your rent is up for renewal, see if you can get your landlord to reduce their rates. Otherwise consider moving and locking in for a few years. Rent is one of the largest “fixed” costs that businesses face, and this is a golden opportunity to reduce it.
  • While you are at it: do you really need such large facilities? Think long and hard before you answer.

Staffing / Salaries

Having been laid off a few times in my life, I’m not a fan of suddenly downsizing. Layoffs should be an absolute last-ditch attempt to save a company from bankrupcy, not a way to maximize profits. There are a number of ways you can save on staffing costs during a recession though, not all of them immediately obvious.

  • Give bonuses, not raises. If you happen to have a really good year, despite the economy, pass back some of the joy to your staff via bonuses, rather than salary increases. A salary increase tends to be permanent. A bonus lets your staff participate in the windfall that they helped generate, without tying you to the same amount the next year if things aren’t as good.
  • Interns: I’ve had great experiences in the past “hiring” interns from high schools or college co-op programs, particularly over the summer. Its a great way for them to get experience, and it can be very helpful to boost your staff during peak seasons, without raising your salary cap.

Equipment

  • This could be an excellent time to shop for bargains on capital equipment. Many manufacturers are cutting their margins to clear out inventory. This doesn’t just effect computer manufacturers – even heavy equipment is selling at a discount at the moment.
  • Look for second-hand deals. I know of several companies specializing in second hand manufacturing equipment, and many of them are doing great business right now. They’re getting used equipment from companies that are either cutting back their lines, or going under, and reselling it. Even at a fraction of the price of new equipment, they’re still able to make good money. Conversely, if you are looking for equipment, you can get it for a big discount if you buy used.

There are a number of areas I didn’t touch on here, including the manufacturing process. I don’t think I have sufficient experience in those topics to comment usefully. As usual though, I’d be interested to hear if anyone has other ways to cut costs.

How to Make Money Online

There aren't that many ways to make money online
There aren't that many ways to make money online

The topic of how businesses can make money online is one that I have been thinking about pretty much continuously for about ten years now.

Obviously there are large numbers of online businesses that do all kinds of interesting things.

What I’m interested in though is classifying their business models, so that I can understand them better.

There are only a very small number of business models that I have found so far. I could be missing a few.

If so, please let me know!

  1. Sell a product or a service – this is the most obvious business model, because it closely resembles the most common way that “brick and mortar” businesses make money. I class websites that sell memberships under this category as well.
  2. Sell advertising space – this is how most blogs (like this one!) make money.
  3. Act as a middleman – a good example is eBay, which makes money by allowing others to buy and sell from their platform.
  4. Beg – this is a common business model in the Open Source community. I’ve never been able to determine whether it works though.

There are lots of combinations of the above, which can blur the issue. I’m still trying to figure out how to classify companies that live off of venture capital without any income, and other companies that live off of government handouts. I think they are probably best classified as #4 in the list above. I can’t think of any other models for making money online though.

An example of one of the above business models can be found in the odd looking box below this line.

IF somebody happened to click on the box, I would possibly wind up a few cents richer than I currently am. Note that I can’t actually ask you to click on it, a) because that would be a violation of Google’s terms of service, and b) because I would then have to reclassify my business model from a combination of #1 and #2 in the above list to #4. And my pride won’t let me.

In any case, if you happen to think of business models that I’m missing, I would love to know.

Who is going to win the microblogging wars?

Microblogs: the world is listening, but who pays for the party?
Microblogs: the world is listening, but who pays for the party?

There are a whole bunch of microblogging websites out there. Twitter is the biggest and best known right now, but I have accounts on about twenty other similar sites, and I’m probably missing a bunch  –  even though I research this sort of thing daily.

I think its pretty obvious that microblogging isn’t going away any time soon. It has too much value for too many people.

The big question is how companies in this space can actually make money. There’s a huge looming issue that isn’t going to go away any time soon, and its pretty simple: I have an account on an “aggregator” website that allows me to post to all twenty of the microblog websites that I use with a single button click. I have a similar system set up for my blog.

So how often do you think I actually login to those websites?

See, the big problem is that the only way a microblog site can make money – as far as I can tell – is by posting up advertising. And the only way they’re going to make money off of advertising is if people actually come to their site.

The vast majority of people who use sites like Twitter do so through software like Tweetdeck, or through aggregator websites like Ping.fm. If Twitter were to just turn off their API that allows other websites and software to post to it, its user base is just going to drift over to other microblog websites that still allow this function.

Charging money to use their API isn’t going to work either, because the software makers also aren’t making a buck yet. They give their stuff away for free too, and they also haven’t figured out how to turn their traffic into currency.

What we have here is a whole ecosystem of really useful websites, supported only by the burn rate of their initial venture capital investments.

My bet on who wins in the long term? Companies like Facebook, who actually have traffic “on” their website, not “through” their website. Maybe they will win by being the only ones left standing, or maybe they’ll win by buying up microblogging websites and keeping them on life support as a service to their users. Either way, my gut says that a bunch of sites that I really enjoy using aren’t going to be around for all that long.

How Not Do To Business

My wife’s laptop suddenly stopped working last night. The theory I’m operating on is that the AC adapter has burned out. I called the manufacturer this morning and they referred me to a local company that they use for servicing.

The following is an (unfortunately all too typical) example of lousy customer service. I’m not sure how this “service” company stays in business.

I tried calling them this morning. Got their voicemail. Wandered from box to box for 15 minutes before getting somebody who had no interest in talking to me. I had to ask him whether I should come by. They wouldn’t commit. I decided to try anyway.

I drive to their shop, and there is nobody at the counter. Some guy with long hair walks out of the washroom, looks at me like I’m a martian, and then walks away back into the warehouse without saying anything.

There’s a bell on the counter with a note that says “please ring for service”.

I bang on the bell a few times, and eventually a manager comes out of their office.

Me: I have a laptop that needs servicing. Toshiba told me to come here.

Manager: “Sorry the technician is out”.

Me: Well what am I supposed to do?

Manager: “I don’t know.”

Me: Should I come back later?

Manager: “I don’t know.”

Me: Well I’d like to get my laptop looked at…

Manager:  “I don’t know, why don’t you leave the laptop here?”.

Uh…so that you can lose it?

Me (stalling): “Well its probably the AC adapter”

Manager: “We would have to order that in, we don’t stock those”

Me: “Well somebody should probably look at it first, just in case it is something else”

Manager: “Well you could come by later and see if the technician is in”

Me: “You don’t know if they will be in?”

Manager: “No”

(Note: it is about two hours before they close, and I reside half an hour away from them)

I leave. Try calling again later. Finally get through the voicemail to the tech support extension. Nobody picks up, and the voicemail is full. I dial zero. Finally get somebody (they don’t identify themselves).

Me: “I’m trying to get through to the tech support people and nobody is picking up, and their voicemail is full…”

Somebody: “Oh. Well they’re there. I’ll go and make sure that they pick up. Hang on.”

On hold. Five minutes pass.

Somebody (I assume a technician) picks up. Their English is heavily accented. I don’t hold that against them. They don’t sound like they want to be talking to anyone. I do hold that against them.

Me: “I was here earlier today and the technician was out. I need to get a laptop looked at.”

Technician: “Oh.”

Me: “Well how should I go about this?”

Technician: “I don’t know”

Me: “Do I bring it in tomorrow?”

Technician: “I don’t know”

Me: “Well will somebody be in?”

Technician: “I don’t know”

Me: “So how do I get the laptop serviced?”

Technician: “I don’t know. Maybe bring it in?”

Me: “Is there a standard way that you work? How do I go about getting a laptop serviced?”

Technician: “I don’t know. Bye.”

They hang up.

I’m not sure whether these people actually want the business of servicing the laptop or not. I’m not sure whether they even service laptops. I don’t know how to go about getting their service or their attention. I don’t know how to get in touch with anyone there. I don’t know what their standard procedure is. I truly don’t know how they stay in business.

Somebody Has to Say It

This is #10 on Chris Brogan’s 100 Blog Topics list, and is part of the 100 Topics Challenge.

I’m not somebody who particularly courts controversy. Personally, I think that saying things just to get a rise out of people is a waste of precious time. I suspect I’m going to irritate a few people in the next couple of paragraphs though, and I sincerely apologize in advance.

I just read a quote from Yahoo! news that a certain analyst thinks Google’s stock price is going to hit $500 in 2009. The basis for this estimate is that he thinks Google will ultimately be successful with its push into the mobile phone market. Now I’m not somebody who discounts Google – I think they’re a great company. If you crunch the numbers though, I don’t think that a share price of $500 makes any sense.

Let’s look at a couple of scenarios:

1. The numbers for 2008

In 2008, Google’s net earnings (i.e. after expenses, but before taxes – what is commonly referred to as EBITDA) were around $5 billion US. This is an estimated number as they haven’t yet released the final numbers for the fourth quarter of 2008. If that holds, then based on their current share price of $325, and 3.15 million outstanding shares, their earnings per share (EPS) is a pinch under $16, and their P/E is around 20.

2. Assume their P/E stays steady and their earnings grows in 2009

Assuming that their P/E continues to hover in the low 20s, in order for their share price to hit $500, their earnings would have to increase to around $7.7 billion USD, an increase of about $2.7 billion – or 54%. That’s a pretty substantial increase in the current economy, even for Google. Their earnings “only” went up 37% from 2006 to 2007. We’ll break these numbers down further in a sec.

3. Assume their income stays steady, and their P/E increases

Assume that Google’s net income holds around where it currently is, their P/E would have to be around 31 in order for their share price to hit $500. That’s pretty high for a tech stock these days. Apple’s P/E is currently around 17 for a comparison.

Don’t Call Me – I’ll Call You!

So let’s say that Scott Kessler is correct, and Google will bring in an additional $2 – 3 billion in revenue in 2009 based primarily on their mobile venture.

Bear in mind that Apple’s iPhone, which accounts for 39% of their 2008 revenue at $4.6 billion is likely to see some slide in sales based on the general economy.

Bear in mind that Apple is going to fight like crazy to hold onto market share – and we’re not even looking at the big boys like Nokia.

Bear in mind that Google’s Android platform is free open source software (FOSS), meaning that they’re giving it away.

The people at Google aren’t stupid, and they’ve put together a consortium of companies that are going to make Android-based phone handsets. I assume that they’ll figure out some revenue streams from that – driving more mobile traffic to their search engine (and hence their ads), or even selling hardware themselves in a pinch.

Given that Google is tightening the belt and laying off temp workers, I don’t think anyone in Mountain View is relying on selling 10 to 15 million handsets in 2009. ($2 billion divided by $200)

My prognostication (not that I’m any good at that!): look for a 10% increase in revenue for Google in 2009, based primarily on eating their competitor’s lunch in online advertising. Share price should go up accordingly.


Another Corporate Fraud Announcement

Yahoo! News reports that Satyam Computer Service’s Chairman has resigned after admitting to falsifying results.

It always fascinates me how some companies can get away for years with this kind of thing, then fold like a deck of cards when the economy takes a downturn.

Somebody wise once told me (they were talking about small business partnerships) that things always tend go smoothly when everyone is making money. I guess a recession just does a better job of highlighting underlying flaws in an organization that were always there.