About “Five Not-So-Easy Steps to Save Microsoft”

Microsoft Fading (from JasonKolb.com)

While I’m not in the habit of link blogging, Jason Kolb blogged a similar take to my recent themes about Microsoft entitled Five Not-So-Easy Steps to Save Microsoft. Jason starts with:

Let me stick a disclaimer on the front of this post: I cut my teeth on Microsoft technology and have been a big supporter of them in the past. I would really like this company to survive because otherwise I’m going to have a lot of useless knowledge cluttering up my brain. However, I am a realist and this is a company in a dangerous situation. It saddens me to see this once great company slowly dying, and I hope they do something to stop the bleeding before it’s too late.

Microsoft is in an interesting situation right now. Their monopoly is fading fast, and the only product they have that’s driving any significant level of buzz is the Xbox 360. They’ve gone from  absolutely dominating the technology space to almost falling out of the cutting-edge technology consciousness. They’ve done very little in the past couple of years to enhance their standing as a leading technology company, and I think a lot of people view them as living in the past.

He continues with (emphasis mine):

I think Microsoft is in a precarious situation right now–it’s on the verge of becoming irrelevant. The reason Microsoft has been so dominant over the past twenty years is because they have not only courted programmers, but they (it) made much easier for programmers to use their technology as a platform than anything(body) else. This resulted in the majority of mainstream software being written for Windows. Which resulted in more people buying Windows, which resulted in more developers writing for Windows. It was a catch-22 in favor of Microsoft, and they made money hand over fist because of it.

That’s what I’ve been saying recently, though my posts came from a slightly different angle. Jason’s take is that operating systems and language no longer matter (emphasis mine):

The result of this software lifecycle shift has been that developing for a mass audience has a lot less to do with the operating system and a lot more to do with the end-user experience. The language and platform no longer matter, it’s just the end result now. In fact, more than which operating system or language is used, it’s now the ability to scale on an as-needed basis that is the primary requirement for applications. Microsoft fails miserably at this requirement because of their licensing model and the way they try to monetize their software, which they haven’t really changed since the 1980’s.  Just from keeping an eye on the Net I sense a mass migration to open source development platforms, and the search trends seem to back that up–as a bonus bad omen, the news volume for their languages is practically non-existant.

While I don’t disagree with his main premise, I don’t completely agree that the language and platform don’t matter; they are still what is used to create and host applications, be they local or on the web, and those things take time to learn and build expertise in. Jason even acknowledges that at the start by saying “…otherwise I’m going to have a lot of useless knowledge cluttering up my brain.”

In my (humble :) opinion, the problem is more in Microsoft’s licensing model which makes it so much easier for people to choose open-source. And I believe people are choosing open-source in droves over Microsoft’s solutions as I know I am starting to. Jason addressed this point in the last paragraph above by saying: “Microsoft fails miserably…because of their licensing model and the way they try to monetize their software, which they haven’t really changed since the 1980’s.

Jason then goes on to recommend the following five (5) “not so easy” steps to fix Microsoft, which I think are spot-on (except for the last one, that’s at the same time both obvious and too vague to be an action item):

  1. Release .NET as open source.
  2. Release Windows as open source.
  3. Release a SaaS version of Office, ASAP.
  4. Find a Steve Jobs clone.
  5. Start innovating again.

Jason of course goes into far more detail and his post is definitely worth a read if you care about these things. Oh, there is one final pull quote I’ll reference on his second step to drive the point home (emphasis mine):

What’s really going to hurt them, however, is the licensing model for the server products. When you compare the cost of running and scaling a Windows-based application versus running and scaling on Linux, it becomes a no-brainer. I can’t think of a single good reason for developing a SaaS application for Windows when you’ll be paying Microsoft licensing fees every time you need to scale, and you could be getting that software for free using Linux. Microsoft needs to consider the operating systems loss leaders and an incredibly powerful way to market their other products, before everyone stops developing for them and everyone stops using them as a result.

Via Ben Coffey.

P.S. I have numerous posts that are in various stages of completion covering some of this same ground from, again, a slightly different angle. But when I finalize and post them, please don’t think them a copy-cat of Jason’s post. :)  This is such an obvious area to discuss these day’s, there are lots of similar independent thoughts, for hopefully obvious reason.

My Amazon aStore

Amazon's aStore Logo

Amazon recently came up with a really simple idea for their associates but one that is so obvious I’m surprised they hadn’t thought of it before.  Basically they let their associates specify a list of products and then they generate a mini-store for them. They call these mini-stores an "aStore."  

Amazon even provides a clean url for an associates aStore ( unlike most of the Urls on their website; yeech!) 

My aStore Url is http://astore.amazon.com/mikeschinkels-20.  On the other hand, they don’t let people define their own "Associate ID", mine being "mikeschinkels-20" for whatever reason!  I would much rather have had my aStore Url be: http://astore.amazon.com/mikeschinkel/ but as they say, ya can’t always get what you want… 

So I’ve set up an aStore that I named "Mike Schinkel’s Miscellaneous Readings" which you can see embedded below using an <iframe>. The name is a pun on the name I chose years ago for this blog, of course, but the book selection is anything but random. I only selected those business-related books that made an indelible impression on me; the ones that gave me true epiphanies. 

These are books I think every technology-related entrepreneur must read.  The good news is you can pick most of them up a used cost for most of them for next to nothing. And even if you are not in the technology industry or even an entrepreneur, these books are still great reads as long as you are interested in the wheres and whys of business success.

Update (2008-06-15): I hosted this on my blog when I was using dasBlog but I’m haven’t decided if I will host it again since I’ve updated to WordPress. I never got any revenue from Amazon for it and nobody ever emailed me and said "Thanks for creating the list."  We’ll see…

The Roadkill of the Web 2.0 Era!


Lately I’ve become be very interested in Web 2.0 with particular interest in Mashup development. Microformats, REST-based web services using RSS and/or Atom that empower mashup development, and Building APIs for the web. The concept that the web can finally start evolving into a programmable set of services and data instead of just electronic brochures and self-service applications really energizes me!


On the other hand, even though I am incredibly excited about this trend, I’m frustrated by how few companies are actually doing it!  Very few business people have thus far gotten that “Aha!” moment where they realize what so many technologists instinctively understand; the business benefits of opening up data and systems as web services on the Internet can be vast!


Even with such highly successful companies as Google and Yahoo freely sharing so much of their data via REST-based web services, and Amazon driving significant revenue1 from it’s pennies-per-transaction SOAP and REST-based web services, most business people I speak to either just don’t get it! Or worse, they are either scared to death of it or convinced it makes absolutely no sense!


Well all I can say is that old saw will definitely be true: “What you don’t know can hurt you!” The late majority to this game (and even some of the early majority) that continue not to get it, avoid it in fear, or just plain out deny it are going to become the Roadkill of the Web 2.0 Era





1 Significant for such an early stage

But Microsoft Can’t Scale!

One of the more interesting conversations I had during my tenure while President and CEO at Xtras, Inc. was in October 1997 when Network+Interop came to Atlanta for it’s annual visit. One of the Microsoft Windows NT Server Product Managers Luis Bonifaz decided stopped by my office for a visit and gave me an education of how Microsoft positions its competitors; I’ll never forget it.

Anyway, for those of you who remember those early formibable days when Windows NT Server first became a serious operating system, around v4.0, it was a fun time. In those days, the major systems players were feeling (rightfully) threatened and so they came out with continuous anti-NT campaigns with the simple message of:

Windows NT Server Can’t Scale!

Legend: Microsoft in Blue vs. Oracle and Sun in Yellow

Many vendors jumped on the "Let’s bash NT" bandwagon, but probably the loudest two were Scott McNeely of Sun Microsystems and Larry Ellison of Oracle Corporation. Being a Microsoft kool-aid drinker at the time (Xtras was running a reseller focused on Microsoft systems and developer tools after all) I was of course ready to do rhetorical battle with ol’ Scott and Larry. But what Luis told me was truly educational and amazing; talk about an on-the-job MBA in marketing!

Windows NT Server Market share in the early days vs. Bigger SystemsWindows NT Server Market share as NT starts to gain momentum vs. Bigger Systems

Luiz told me that, unlike most companies that focus on attempting to position their company in their prospect’s eyes, Microsoft was excellent at positioning their competitors, and further that Microsoft trained all their marketing people to think this way. Luis then went on to say that the anti-NT crowd had been trying to taint NT with the "can’t scale" brush for quite some time as he started drawing a triangle on my whiteboard to illustrate. He said that the Microsoft strategy was this:

"We’ll accept that. We’ll accept that we can’t scale up to operate the largest systems on the planet. Okay, but we’ll counter with the fact that you can’t scale down and we can, and that market is much, much larger!"

Windows NT Server Market share after NT gains significant momentum vs. Bigger SystemsWindows NT Server Market at market maturity vs. Bigger Systems

Using his triangle he showed the marketshare they attempted to guard (in yellow), and the marketshare they didn’t even attempt to take from Microsoft (in blue.) Luis continued:

"Then we’ll just continue working it," "We’ll continue improving the operating system and we’ll continue riding Moore’s Law. Eventually we’ll add the features that are needed to scale, by those who demand the bigger systems, and eventually the hardware we run on will be able to match all but the most demanding applications in the world. And then we will be able to scale; from the bottom all the way to (almost) the top. And the absolute top won’t really matter. At that point, what do you think will become of the "NT Can’t Scale" crowd? Like Zack Mayo (Richard Gere) in "An Officer and a Gentleman" they will have "nowhere else to go."

Fascinating. Anyway, it was fascinating to me back in 1997. And here we are almost ten year’s later; have Luis’ projections proven accurate? I’d say he was pretty close to correct.

P.S. What is all the more ironic about this story is how Microsoft doth protest too much these days about open-source software and Web 2.0 companies when they make pronouncements about not being able to scale and/or they are not being good enough for prime time. If history is any indication, Microsoft had better watch their back or people may soon be saying: The King is dead. Long live the King. :-)

Starting a New Chapter in Life…

Those of you who follow my blog are aware it has been a long time since I’ve last posted. Some of you already know what has been going on in my life, but most of you don’t. For those of you who do not as well as the rest of you it’s time for me to fill you in. 

But let me start with some background. Back in 1994 I founded Xtras, Inc. (then as VBxtras, Inc.) and I proceeded to grow it like mad. Then in 1999 Inc. Magazine honored us with their award for fast growth, placing us as #123 out of 500 on their Inc 500 list. It was a wild ride and I loved almost every minute of it!

Probably the best part were the people who honored me by working for Xtras during that period. I’m going to name a just few of them; the ones who contributed something so critical that Xtras would possibly have never succeeded had each of them not been involved (I’ve linked to their website or blog if I was able to find one):

Without each and every one of them, Xtras would never have reached the levels of success that it did. They helped me fulfill a dream; I thank them so muchl.  But there were also many other fabulous people who worked for Xtras from 1994 on, and I value every last one of them too. So if you dear reader are any one of them, please accept my thanks and forgive me for not mentioning you personally; you were very much appreciated.

In addition, there are also many fabulous vendors/catalog advertisers that Xtras dealt with during the VB3/4/6 heyday (1994..1998) when there was so much energy surrounding the Visual Basic industry. There was an almost all-for-one-and-one-for-all kind of feeling in the industry during those early days, which unfortunately does not exist in the Microsoft add-on vendor community now. To find something similar, sadly you have to go to the Web 2.0/Ruby on Rails crowd to get the same vibe.

Back then it was the people that made it so great, back before everyone started guarding their vested interests, back when it was Sheridan Software and Crystal Reports, not Infragistics and Business Objects, for example. Back when we were all about building an industry together. So I’m going to name the names of the people I remember, but there’s a good chance I’ll screw up and forget somebody because there were so many more people involved back then. So here goes, with links to their current blog if I could find one, including their company at the time (and the company it became if applicable), with links to whatever companies still exists. In no particular order, of course.  And anyone that’s forgotten, I apologize in advance:

Anyway, about the same time Xtras’ growth spurt peaked (around 1998/99; Xtras having been underfunded, I might add), the dotcoms boomed and, as I’m sure everyone remembers, VCs threw far too much money at companies without business models, none of them having being Xtras. This led to Xtras’ stasis; our inability to grow Xtras’ business and for the next six, we just operated pretty much doing the same thing over and over, day in and day out. Of course I wanted us to try new things, but we someone never managed to have the resources, and/or I could never manage to rally the troups.

So in May 2006, I left Xtras. I left to decompress and to clear my head. After a little over twelve (12) years of running Xtras I made a deal with one of my shareholders to buy my stake in the business and now Bill Kaylor has taken my place as president of Xtras. I wish them luck, but at this point I have no involvement and absolutely no financial interest left in Xtras. Of those twelve years, the first five (5) were some of the best years of my life, and last seven (7) were some of the worst. Be that as it may, plenty of fodder for future "lessons learned" blog posts. Although I have been working a little since May, I’ve mostly been catching up on things I neglected for so long, including renewing old friendships and cultivating new ones.

But now that I’ve had a short breather, I’m ready to leverage both my 19 years of business and marketing experience and my 21 years of technical/developer experience to pursue exciting new ideas and to once again work with the bright, enthusiastic and highly motivated people that make work so much fun. But you might ask why leaving Xtras will allow me that? 

The plain fact is a reseller like Xtras has a high number of customer transactions, is capital intensive, runs on low margins, and is held in pretty low esteme within the industry. In the early days we published a printed catalog which was the guide for the industry, but the Internet and Google replaced the need for that, so we devolving into being "just a reseller." After many years of metaphorically banging my head against the wall I realized it was virtual impossible for me to devote the time, find the funding, and/or gain interest from the people needed to form the loosely-coupled business relationships.that work so well to pursue the incredible Web 2.0 opportunities that are presenting themselves today. So it was better for me to just leave Xtras in other’s hands and start anew.

In what areas do I want to focus? I want to improve the world! I want to make things and life better, faster, cheaper, easier! Heck, if I could devote my life to world peace with 100% certainty, I would do that!  I have several projects in mind, some are for profit and some I have absolutely no profit motive whatsoever. For the latter I want to be a catalyst just to see them happen as I believe my doing so will improve some aspect of an industry or of life in general, depending on the project. And for almost all of these projects I want to work collaboratively with partners, anywhere from a loose open-source collaboration to jointly-owned companies.  And I will be able to be far more open and share my ideas on my blog unlike the past five-plus (5+) years as I won’t have the constraints on me that I was under while president, CEO, and fiduciary of Xtras.

So I am idealistic, but I am also pragmatic. This time I want to make sure my ventures are cumulatively far more profitable than Xtras was during my tenure. I’m not twelve years more experienced, and hopefully twelve years wiser. I want to accomplish my idealistic goals, not just dream about them. But I’ve learned the world does follow "The Golden Rule," just not the one they taught about in Sunday school. I’ve learned it is far better to be the one holding the gold otherwise you get stuck following someone else’s rules. :-)

For those of you who are interested, stay tuned to my RSS feed. I’ll be posting more about my upcoming adventures shortly.

Kudos to Microsoft: Visual Studio Express Tools Free Forever!

I just learned that Microsoft has decided to make the Visual Studio Express tools free forever. This to me shows Microsoft’s acknowledgment that people are not willing to invest their time learning a product that they will eventually have to pay more for then they have funds available or earmarked, especially young people. I greatly applaud this move, and I wish more software vendors would do this with their products (and I’m thinking of component and tools vendors for .NET developers.)

But how can companies make money giving away their software? I believe software has a lot more value to someone once they’ve learned it and can concretely understand it’s value after which they would be more then happy to spend their money to upgrade to more advanced features.However, to those software vendors who think they can release a free but essentially crippled product, don’t.  No one will waste their time learning to use a crippled product. 

We are in a new era, one where software is not so much viewed because it offers value to a user but instead viewed by whether it is worth someone’s time to learn. This because of the plethora of software (and information) available and because most people won’t realize there is value is software until after they have learned it.  A software vendor’s job today needs to be to convince someone that their product is worth that person’s time to learn.

Simple technologies recombined, not technological breakthroughs, spur disruptive innovations

Clayton Cristensen's Book - The Innovator's Dillema

Yesterday when I blogged about simplicity I forgot to mention Clayton Christensen’s take on simple technology. Clayton’s ground-breaking book was entitled "The Innovator’s Dilemma" and is a must-read for any developer who wants to understand the business dynamics between market incumbency and innovative uses of technology.

From his extensive research Christensen states in The Innovator’s Dilemma that disruptive innovations are almost never the result of technological breakthroughs but are instead recombinations of existing and often inexpensive technology in forms the former market leaders don’t pursue. He states the driving reason for the market leaders ignoring disruptive innovations the people in their sales organizations fight against pursuing them because they don’t see big enough market opportunities and/or they can’t make large enough margins compared to their incumbent business. That is, until it’s too late.

Christensen defines disruptive innovations as those "innovations1 that allow small companies to topple once strong, market leading companies and establish themselves as market leaders. His first example was 8" disk drives manufacturers who put out of business all 14" disk drive manufacturers. The latter sold to mainframe vendors at 60% margins, and their customers were interested in larger capacity and faster drives, not in more expensive slower smaller drives with less capacity (which had to be sold at only 40% margins!) But mini-computer manufacturers purchased the 8" disk drives and over time the 8" disk drive manufacturers improved their products to the point of being good enough (key phrase) that mainframe vendors decided to buy from them rather the pay for the increasingly feature rich and increasingly expensive 14" disk drives.  At that point, with cost structures requiring 60% margins, the 14" disk drive manufacturers couldn’t maneuver and they all failed.

Examples of recent disruptive innovations with which you might be familiar are:

  • Open-source ASP.NET apps and .NET developer tools such as DotNetNuke in the content management space, and NUnit and related for testing tools. Both of these started out much more simple than commercial alternatives, but are evolving.
     
  • Simpler .NET components. Five years ago most components vendors were US-based. Today, the Internet has empowered many vendors outside the US to compete on price alone for the simpler components. One only need look at the number of the vast number of Internet Email Components for .NET to see this trend for what it is.
     
  • Small-project Outsourcing. Another trend near and not-so-dear to many developer’s hearts - outsourcing - is all about being able to offer development services for less. Look at places like RentACoder where you can have small projects developed for literally a tiny fraction of what it would cost to hire a developer in the US to do the same work (smart and entrepreneurial developers should see this as an opportunity rather than a problem…)  Today RentACoder’s projects are simple and inexpensive; tomorrow, who knows?
     
  • RSS vs. incredibly fragmented and expensive alternatives to content syndication; RSS is simply XML, after all.
     
  • Wikis, "The simplest thing that could possibly work" according to the Wiki’s inventor Ward Cummingham have edged out many commerical collaboration solutions, and most people say they do it better than what came before.
     
  • MySQL started out as a simple and basic alternative to Oracle, SQL Server, and DB2.  When you look at all the people who deployed early versions of MySQL because of its price (optionally free) instead of going with one of the big three, you realized that good enough really was an important concept at play. Now MySQL v5.0 is out and has stored procedures, triggers, views, and more. And if MySQL ever becomes good enough for everybody, Oracle, Microsoft, and IBM can’t compete at their margins.

I could go on, but those should be enough to help you understand the concept if my abstract description wasn’t enough.

Actually, if you think of another example, it would be cool if you would make a comment here and let me and my readers know about it!

 

1 - Also note that Christensen defined the term "innovation" to encompass a broader scope than just what we think of as technologies. He included business models as innovations too. 


BaseCamp Project Management: Blinded by Ideology

Some people just don’t get it.  They are so caught up in their own blind ideology they won’t consider alternative views.

I’ve been looking for a reasonably-priced web-based project management system for quite some time, and yesterday I thought I found it: BaseCamp from 37Signals.  Problem is, after an email exchange with the founder Jason Fried, they don’t now and won’t ever (he claims) support a visual view of a project in the form of a GANTT chart.

Why won’t BaseCamp ever support GANTT charts?  Maybe it’s BaseCamp’s competitive positioning, or maybe it’s because of ideology; based on BaseCamp’s Manifesto, Jason just doesn’t believe in them.  From my email conversation with Jason, is seems to be the latter.  Plus, isn’t a manifesto ideological by definition?

Why do I need GANTT charts?  Because I’m a visual learner and I need a GANTT chart to be able to see the big picture related to a large number of parallel projects that all share resources. I need this so I can keep from missing deadlines when I’m bombarded with almost literally 100 choices for how to spend my time each day.  I even proposed I could try to put BaseCamp and DBI Technologies together for DBI to provide optional GANTT charting of BaseCamp projects via DBI’s Solutions::Schedule product, but Jason wasn’t even interested in entertaining the idea, even if someone else was doing the work.

It’s a damn shame to find a product like BaseCamp that does 90% of what I need but, because of IMO blind ideology, its owner Jason Fried won’t even consider adding a feature for which arguably 65% of people would benefit. Jason’s last comment to me was: “Look at it this way… Go use another tool, get the Gantt charts, but miss the other 90%. Which tradeoff is worth more to you?“  The sad thing is, if it were not for blind ideology, it wouldn’t have to be either/or. :-(

Is Google becoming a Monopoly?

I really love using Google for search, for news, and for my default home page.  I think they’ve done an awesome job of really meeting users needs when many others can’t or won’t.  I also expect to see them rapidly grow and expand into new lots of areas. As a technologist, I’m really looking forward to the many cool things they are going to make available for everyone to use.

On the other hand, Google scares me to death.  People love to hate Microsoft because of it’s marketshare in O/S and office suites with Windows and MS-Office, but I don’t think Microsoft controls the fortunes of so many small and medium-sized businesses nearly as heavily as Google. In terms of total number of businesses, at least in the USA, most live or die by their Google traffic today.  We had a glitch at Xtras.Net that caused Google to remove us from their index for a few days, and our sales dropped by over 40%!!!  Many also hate WalMart because of how they have crushed most local businesses replacing them with a behemoth that is locally ubiquitious and pays practically slave wages.

However, I’m thinking people will soon look back on Microsoft and WalMart as a very benevolent dictators when compared with the future of Google.  Google’s mantra may be "Do no evil", but I’m pretty sure the truth contained in the old adage "Power corrupts, and absolute power corrupts absolutely" will prove to be undeniably intoxicating when compared to the early ideology of a few idealists who where at the time isolated from reality.

How soon will it be before we hear the calls to investigate Google on grounds of anti-trust?  I for one am starting to believe that sooner is better than later.

I guess time will tell…

 

Pricing, and the Economics of Value Creation

I’m not an Economist; during my high school and college, economics was for me in the category of “couldn’t be more boring.” But time has passed and both events of the world and my life have increasingly interested me in economics, especially as they relate to making business decisions. And I’ve read a lot about the topic econmics in recent years including books and magazines. I love to pick up the Economist from time to time, but since it takes me a week to read an weekly issue, I don’t subscribe to it for fear I’d get nothing else done! :)

Anyway, today I’m writing about a concept I’ve both witnessed and studied many times over the past several decades: the economics of value creation. I’m going to use examples, but am trying to keep it very short so I won’t be referencing other factors that might complicate the picture.

Clayton Christensen argued in Innovator’s Dilemma that good companies trend “Northeast” by which he meant companies typically strive to increase prices and margins (the direction Northeast refers to the trend of the graph of margin over time.) If you speak to any enthusiastic sales rep, you’ll see the same desire; to close as big a deal as possible.

So the tendancy to strive for higher prices is ingrained but often, doing so it counterproductive. What I believe people often fail to consider is the value provided to the potential customer. Yes there are value-based pricing models, but those are focused on convincing a prospect of the “value” to justify a higher price. Instead, I’m referring to the value that can be derived from each and every potential customer; the lower the price the more potential customers can derive value from the service or item sold. Further, I’m focusing specially on services and items used by businesses to create things of even greater value.

Let me explain by using a contrived example:

Let’s assume a small US town somewhere in the 1800s far away from any other town or city (i.e. essentially a closed system.) Let’s assume most inhabitants were farmers, and someone opened a fertilizer plant. Let’s consider two of the farmer’s crops: squash and tomatoes.

Each crop requires a certain amount of fertilizer; let’s assume one (1) unit to grow a squash and three (3) units to grow a tomato. Further, let’s assume that one (1) squash produced twice (2 times) as much food as a tomato, but the town’s people would buy twice as many tomatoes if price were no object.

At first the fertilizer plant owner charged 0.2 cents per unit of fertilizer, and the market set the prices for squash and tomatoes at 5 cents each prior to adding the cost of fertilizer. The town’s average monthly purchases for squash and tomatoes were 10,000 and 20,000, resectively. The fertilizer plant owner made $370 per month, and the farmers made $1640 per month in aggregate for those two crops.

Later, the fertilizer plant owner decided he could raise his prices since he had a local monopoly. He increased by 0.3 cents per unit to 0.5 cents. This forced the farmers to raise their prices to six (6) cents for squash and seven (7) cents for tomatoes. Times being hard, that extra cent for the tomatoes caused the townspeople to rethink their spending habits. Consumption changed to 17,500 squash and only 5000 tomatoes (remember that a squash provided twice as much food as a tomato.)

Guess the net result? The fertilizer plant owner lost $101 per month in sales, and what’s far more tragic, the farmers lost $352.50 per month in aggregate because of a decision they could not control. Well the squash farmers were dancing a jig while the tomato farmers were devastated, but that’s not the point. :) Here’s a table showing the details:

Prices Description Squash Tomatoes Totals
Units of Fertilizer Req’d 1 3
Food Units Produced 2 1
Fertilizer Unit/Food Unit 0.5 3
Original Price of Fertilizer = 5 units for 1 cent
0.002 Original Fertilizer Price/Food Unit 0.002 0.006
0.05 Original Food Unit Price as Farmed 0.052 0.056
Original Food Items Consumed 10,000 20,000
Original Fertilizer Units Needed 5000 60000
Original Food Units Consumed 20,000 20,000 40,000
Original Fertilizer Revenue $10 $360 $370
Original Aggregate Farmer’s Revenue $520 $1120 $1640
New Price of Fertilizer = 2 units for 1 cent
0.005 New Fertilizer Price/Food Unit 0.005 0.015
0.05 New Food Price as Farmed 0.055 0.065
New Food Units Consumed 17,500 5,000
New Fertilizer Units Needed 8750 15000
New Food Units Consumed 35,000 5,000 40,000
New Fertilizer Revenue $43.75 $225 $269
New Aggregate Farmer’s Revenue $963 $325 $1288
Lost Revenue Totals
Lost Fertilizer Revenue ($33.75) $135 $101.00
Aggregate Lost Farmer Revenue ($442.50) $795 $352.50

Real life is not as clear cut as my example so the fertilizer plant owner would probably not realize the direct cause and effect. Of course in the world today someone would notice that the fertilizer plant owner was raping the farmers, build a second fertilizer plant, and possibly put the first out of business. Hopefully you can see from my example that raising prices doesn’t automatically increase revenue. Sure you might bring up the well known supply and demand curve as evidence this is a no-brainer, the most discussions of supply and demand don’t contemplate the effect of value creation downstream such as the value created by the fertilizer in producing tomatoes. At a reasonable price consumers would buy the tomatoes even though they provided less food. Once the price got too high, their consumption dropped, and so did the fortunes of the fertilizer plant owner and the farmers who grew those specific crops.

Let me bring it back to the real world and give more direct examples:

  • Imagine if a business having a toll free telephone number cost $10,000 per year and $1 per minute. How many business would never have started using them, and imagine how much business based on toll free access just would not happen?
  • What if the least expensive computer cost $5000 each, like the first PCs used to? Think about how many businesses that offer services today using computers couldn’t offer those services because they couldn’t afford those computers.
  • What if there had been no free browser software; if browser software was sold for $199 each, for example? Do you think the world-wide web would have developed?

I could go on and on with examples, but they all boil down to the following:

Items and services used to create added-value items and services follow a different economics model than pure supply and demand. If the price it too high for those initial items and services, overall value creation will be retarded. Conversely, if the price of those initial items and services is lowered, it can empower greater value creation, and the demand for the original items and services may increase exponentially. This definition assumes the value ultimately created supplies an existing demand, or empowers creation of new goods or services for which demand evolves.

I’ll finish with this final example and follow it with a few parting rhetorical questions:

Imagine you invented a process to create an alternative for oil that did not pollute, only cost you one (1) dollar per barrel to produce, and you had no limits on the quantity you could produce. Let’s also imagine you were able to secure exclusive worldwide rights to this process. You could price your oil alternative competitively with the current price of oil or even higher because it did not pollute. If you were a modern day oil company, you would probably do that. Since you controlled the process, you’d probably maintain your high price indefinitely. However, imagine if instead you priced it at half the cost of a barrel of oil? You’d quickly become the leading supplier of fuel in the world (and you would devastate the Middle Eastern economy, but I digress.) And then imagine you continued to slowly lower your price, approaching “essentially free” over time. In this scenario, if fuel were essentially free and it did not pollute, how many entrepreneurs do you think would find ways to create value in new and previously unconsidered ways? How much of your fuel do you think would ultimately be consumed?