Desire

In response to Richard’s post

Companies create objects or services that they hope consumers will desire. They also must create, to truly succeed, a space, mental and physical, for the potential client to form a desire. The easiest way to do this is to understand desire at the conceptual stage of the project and push to match that desire. Itís remarkable how often exigencies distract from this process. In the space of desire, there are still many unfilled holes. The ideal mobile phone for instance. While perfection is asymptotic since desire is never satisfiable (whatever you are presented, desire is always elsewhere) bring on the businesses that shoot for what the consumer wants to buy, not what can merely be sold.

In the PDA world, that used to be Palm. It is no longer. They succumbed to forcing their products on people inherently unsuited to their way of thinking. In order to keep this new group happy, Palm had to change who it was and what it did. Instead of a loyal Apple-like followship (which it had), it now subjects itself to the wider market with an ever-diminishing list of unique features (case in point: recent move to Windows Mobile-based devices); an ever-diminishing ‘core’ market of users and an insufficient marketing* budget to address this expanded, diluted trigger-happy market.

* where marketing is defined holistically as the process of figuring out what your customer wants and delivering it.

As I’m in this space, I think I can say with some personal experience that the reason this happens to companies like Palm is the vast majority of the business world is ill-equipped to deal with the hard, risky decisions that come as part of a startup. Palm hit a natural equilibrium in the market defined by its core market times its average marginal benefit. This roughly equates to its economic surplus or profit. Where you face decreasing marginal returns and relatively unchanging costs of capital, economics tells you to start looking elsehwere for your profits, usually in the form of diversified investments (to eliminate systematic risk). What it doesn’t teach you, at least not directly, and what you have to learn is that some risk is a good thing. For Palm, the risk of being a small player in a larger market would have been a good one to adopt. Apple has been doing that for the last 20 years quite profitably, with a few Amelio-esk exceptions. For the directors and senior managers at Palm, most likely with significant degrees of hidden incompetence, keeping their high-paying jobs and cushy lifestyles and not having to make any particularly hard decisions (the kind that either get you sacked or make you a truckload of money), the road less travelled is the dangerous one. Unfortunately for the company and its shareholders, it’s usually the only long-term viable one.

This problem is a manifestation of the Agency Problem, but it intersections nicely with market economics. Few companies realise let alone strategise for the fact that their shareholders and customers have choice. By being open and resolute about who you are and what you do, you abstract away the individual desires (inherently illogical/unpredictable) of your shareholders and customers and shift the choice back to the market, allowing you to focus on your most profitable intersection: size of customer interested in your core offering x marginal benefit of that core offering to those customers with respect to the competition. A large company should be doing this in parallel over and over again across different industries and products, leveraging a common operational base. A small company should do it just once (then sell and start again elsewhere or use the operating surplus to rinse and repeat). I’ll write more on this some day, but in time it will be shown that this is a far less risky strategy to adopt than attempting to predict where the market will go. The only difference between most product/sales operations and share traders/fund managers is that everyone knows the risks of doing the latter. Fewer than 10% achieve super-market (sorry, couldn’t help myself) returns. What the hell are the rest doing?

Anyway, for companies like Palm, the problem is essentially one of existential choice. The rational economic decision may be to stay the same size (in which case, how are those options going to grow quickly so the executive can get a quick cashout?) or to start up new business (in which case, how is the executive going to get a quick exit when the new venture probably won’t show its mettle until years down the track?). The agency problem can be eliminated but it requires compromise on the capital structure front. It’s inefficient for owners of capital to actively work their capital, and it’s ineffective as the intersection of capital owners with business managers is but a subset of this overall market. Small is the new big. For these reasons and many more, small business is the way of the future. That is, of course, until we figure out some new structure (think project matrix organisational structure mixed with some as-yet-unknown capital structure) that maintains both the flexibility and risk-adopting attitude of successful small businesses.

I predict we will look back in 50 years at our current capital structures and think “What the hell were they doing? That’s just so obviously wrong!” the same way we look back at underpaying workers and miraculously expecting productivity gains. But by then, like now, the game will have changed. Today we have technology and service-based business. Tomorrow we will have access to cheap and plentiful capital, and an increasingly diminishing need for it. This is already changing the game rapidly. A start-up can be done in someone’s spare time on an average salaried income. Sure, maybe only 0.1% of this capital-poor type succeed, but there are millions trying. A startup used to take millions of dollars in hardware and hosting just to be able to handle the load of scaling globally. Now we have services like mosso.com which aim to give you your fair share of that for US$100 per month. Or mediatemple.net for US$20. Sure, these services are in their infancy and have plenty of problems to deal with at the moment, but the point is they’re examples of disruptive technologies that change the nature of the game. Reinvigorate.net is able to compete product-wise with Google Analytics with the addition of $20/mth worth of hosting cost. Sure, their market sizes are orders of magnitude apart, but market size is not what will dictate the profits of the 21st Century.

Watch this space.

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