There’s an interesting piece in the New York Times today by Farhadd Manjoo that dissects the Über business model and concludes that it might be good for Über but it doesn’t translate well to other services like home delivery for restaurants, supermarkets, and more. It turns out just slapping the “as a service” or similar tag on a business doesn’t always turn out well, if your idea of business and profits are tightly aligned.
While the players are new, this is really an old story of technological disruption and insufficient homework that has led to impressive valuations, big series B awards, and another bubble that seems set to pop. Let’s look at disruption first.
As you know, Über, the ride hailing service, enables anyone to be a driver for pay by subscribing to Über’s dispatch service. Customers seek rides through the dispatch and dispatch sends a car. It seems simple and for anyone who’s ever climbed into the back seat of a conventional cab, long overdue. Über cars are cleaner, prices are lower, and you might begin to think, “Why doesn’t everything I consume come this way?”
As it turns out, there are good reasons everything is not yet a service and a lot comes down to economies of scale, the idea that if it costs X to make something called Y then making Y times a big number should only cost X times a much smaller number. In other words the marginal cost of making 100 extra widgets might drop to the cost of raw materials and not the cost of all the R&D that went into widget number 1. There is a great deal of logic to this and we live in a society that proves it.
The article makes it clear that Über’s disruption depended on several factors in the taxi industry it disrupts like erratic pricing models, sub-optimal service, a fixed market so that during peak demand periods like rain storms it’s just about impossible to find a cab.
But when you try to translate this model to services you get into trouble. Services don’t gain the same amount from economies of scale in part because if you are providing a service to one customer, chances are good that you can’t provide the same service at the same time to someone else. That’s what’s happening in many other fields trying out the service model a la Über.
As with the manufacturing model though, there’s a great deal below the water line that makes the service possible, in fact it’s the same stuff, with a bit more automation perhaps, that conventional taxi companies need to provide including a dispatch service and tangibles like mechanics, all of whom must be paid. The taxi model collects enough money to support all this infrastructure. The service model doesn’t. So for instance the customer pays less in many instances for an Über ride than for a taxi. But from the smaller revenues that a driver collects, those same externalities still must be paid.
I am not out to trash Über because I have used them before, usually on someone else’s nickel and will continue to. But if you’re wondering where some of the anger and populist sentiment of this election season is coming from, it’s things like this new services or gig economy. Cabs might be a long way from perfect but the industry has found a way though medallions and regulation to prevent a service oversupply that would put pressure on fares and make driving a cab financially unrewarding. You don’t have the same protection as an Über driver.
The point of the Times article is that there are many areas in the economy that at first look like great opportunities to apply the Über business model. But increasingly entrepreneurs that enter these new markets are coming to the conclusion that the Über moment was special and the disruption of the taxi industry doesn’t spread easily to other sectors.
What is it with these guys? Everything was fine and the Times decided to improve its online reading experience. But the gesture backfired and turned my tablet into slate. For a few minor improvements, the UI is now completely FUBAR.
Let’s back up. I use an iPad to read the paper and I like it. There are no trees to kill, I can (could) size an article to be readable in all kinds of conditions and I can move between articles, email, and other apps and, best of all, I can write comments on stories that interest me without leaving the paper and going to another app.
At least it used to be that way. About a week ago much of the UI went dead. I should hasten to say that my iPad works fine on any other website so this is not a hardware problem. Instead it is a software and testing problem and it highlights the challenges that a company faces today when it tries to take a function like IT in-house.
Now you might say that a paper like the Times has a long history of doing its own IT and like many other large companies, it has to keep that skillset in-house because it is part of the secret sauce. I get it, really. But I have to disagree.
If you combine this latest UI snafu with the fact that the Chinese repeatedly hack into its systems (ironically the Times reports on this too) and that the company decided to build its own subscription billing rather than make nice with one of the many professional software companies out there that would have been glad to capture the Times as a client, then a different picture emerges.
In the last century we were vertically integrated, in-house, and manufacturing centric but not any more. Sure papers still “make things” they push out one or more editions a day and fill delivery trucks and all that. But even that business is changing. The mere fact that papers are also delivering content via the Internet and charging for it through subscriptions tells me they are straddling centuries and business models.
But it would help all concerned if companies like the Times figured out where they really are in the time continuum and what’s important to customer satisfaction. I will give a hint: make sure the iOS product works.
“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.”
This is not a post about CRM.
If you could apply Fitzgerald’s definition of a first-rate intelligence to a thing or group endeavor—always a dubious proposition—Exhibit A might be the New York Times. This week the Grey Lady published two contrasting pieces that demonstrate the conflicted nature of our economics and the ways we think about globalization.
First up is Thomas Friedman’s opinion piece about Apple and its manufacturing prowess, through Foxconn, in China. Friedman makes the point in “Average Is Over” that manufacturing has increasingly moved to China over the last decade because China is so attuned to the demands of global manufacturing that it can easily outcompete American companies with its flexibility to changing global circumstances.
Friedman’s example is instructive. In his piece he references how a factory in China was able to move from a standing start to manufacturing ten units per day of revised versions of the iPhone (with Corning Gorilla Glass replacing plastic for a harder and more scratch resistant surface) in a matter of hours. Friedman tells the story of how 8,000 workers were roused from their beds in company dormitories, given a biscuit and a cup of tea and sent to work in the middle of the night to accommodate Apple’s revised demand.
Friedman extols the Chinese for their work ethic and ability to provide the manufacturing flexibility that modern markets demand. But a second article in the Times “In China, Human Costs Are Built Into an iPad” discusses in fine detail the cost of that flexibility. In the article we see what it really means to be dragged from bed and fed that heroic biscuit. It documents 60 hour work weeks, forced overtime and working environments that are, some cases literally lethal.
The article documents how poor ventilation led to fires and explosions in manufacturing facilities and death to some workers. It documents suicides too as workers jumped from their tall dormitory windows unable to cope with the demands of high production for $22 per day.
I think Friedman confused capitalism for what the Chinese practice aided and abetted by their government and by American business. Friedman envisions a plantation economy, not modern business. It is a form of mercantilism, not capitalism. It exploits workers and other resources in countries where the labor and safety laws are lax and environmental standards practically non-existent.
Take a look at this list of mercantilist characteristics from Wikipedia. How many do you recognize?
- Building a network of overseas colonies
- Forbidding colonies to trade with other nations
- Monopolizing markets with staple ports;
- Promote accumulation of gold and silver
- Forbidding trade to be carried in foreign ships;
- Export subsidies;
- Maximizing the use of domestic resources;
- Restricting domestic consumption with non-tariff barriers to trade.
Mercantilism requires two actors, the colony as well as the colonists, thus you have networks of colonies owned by the colonists and restricted domestic consumption in the colonies and this perfectly describes the relationship between Apple and other manufacturers and their Chinese partners.
Ironically while the business interests advocate a neo-mercantilism the U.S. government has had little success at getting the Chinese to open their markets to more capitalism, more foreign goods and to let their currency appreciate to more realistic levels. This might look like a disagreement between countries but it is actually an argument between American business and the federal government.
This relationship disenfranchises both the workers in one country and the citizen-consumers on the other. And this doesn’t even touch the issue of lost jobs moved overseas by the mercantilists chasing low labor costs and the ability to ignore health and safety laws.
A form of state sponsored desperation-growth drives Chinese mercantilism and a generation of its people ignore what’s happening in its factories in a vain effort to catapult the country from poverty to emergence and ultimately to first world status.
Friedman holds this up as some kind of aspirational goal for Americans. He seems to be saying that if only we could be a little more like the Chinese we could recapture our manufacturing base. But this amounts to prostituting ourselves, our country and its resources to a gratuitous mercantilist ideal.
Why not go in the other direction? The opposite of mercantilism is not suspension of trade but trade on a more level playing field, one where profits are not made through arbitraging safety and dignity. Real capitalism.
Companies like Apple have the upper hand. The conditions in their factories are sanctioned either explicitly or implicitly by them and will only persist as long as Apple applies benign neglect to the situation. Alone Apple determines what it will pay for components and labor so that it can meet price points in the Fast New World economy.
Other computer and consumer electronics makers use some of the same Chinese manufacturing partners to make their products. We like those products a lot and we especially like their low prices. But hidden behind those shiny new things and their low prices are 16 hour work days, no time off, regressive discipline and dangerous working conditions.
I like my consumer electronics but not with the hidden costs that are attached to every device. Those costs include an eroded and impoverished first world manufacturing base and despotic working conditions where those jobs end up.
In 1906 Upton Sinclair published The Jungle, a book about the lives of American immigrants. The book spent many of its pages portraying life in the corrupt meatpacking industry. From that book we derived the sage idea of liking the sausage but of studiously avoiding asking how the sausage was made.
In effect, we’ve been told not to try to hold Fitzgerald’s twin opposing ideas in mind. But the Times was able to do just that and to offer us a compelling and discomforting contrast. The larger question is whether or not any of us retain the ability to, as Fitzgerald suggests, function in the face of this information.
What a difference a decade makes. The New York Times reported on Wednesday that Microsoft will file antitrust charges against Google in Brussels today. Just about a decade ago circumstances were reversed as Microsoft was the 800-pound gorilla in the operating system world. Today Google is the monster of search and all things related to it and Microsoft is looking to level the playing field for bing, its late entry into the search field. Timing is everything in this business.
From the Times article — Michael A. Cusumano, a professor at the Massachusetts Institute of Technology’s Sloan School of Management who has studied Microsoft said, “The company that was the 800-pound gorilla is now resorting to antitrust, where it is always the case that the also-rans sue the winners.”
That might be a bit harsh on Microsoft but the reality is that it coasted on the success of Windows and Office and a few other products while others invented new technologies. You might also say that the company was involved in a protracted legal tussle with the Department of Justice over its monopoly position in operating systems and browsers during that time. But that would imply the company couldn’t walk and chew gum, not something any self-respecting multi-tasking operating system vendor would willingly admit to.
There’s a lot at stake and search is only one of Microsoft’s beefs. Others include access to YouTube (a Google property) and mobile operating systems. If past is prologue this should provide entertainment for several years.
Implementation needlessly risky
I feel bad for the New York Times because they have taken another stab at on-line journalism and almost got it right. The Times announced today that starting in 2011 the paper would begin charging for frequent access to its reporting. I applaud this much of the announcement since I believe that charging for Internet access and then moving most or all of a newspaper’s subscribers to the Web is necessary for the future of quality journalism.
I applaud Times chairman and publisher Arthur Sulzberger Jr.’s high minded statement that, “We can’t get this halfway right or three-quarters of the way right. We have to get this really, really right.” Indeed the announcement article is full of such sentiments. The article also says, for instance, “Executives said they were not bothered by the prospect of absorbing barbs for moving cautiously.” And there’s this: “There’s no prize for getting it quick,” said Janet L. Robinson, the company’s president and chief executive. “There’s more of a prize for getting it right.”
The article says the Times will use the next year to figure out some of the details, like how many free articles to grant before the charging mechanism kicks in. That makes sense to me.
The only fly in the proverbial ointment, and it’s a big one, comes right at the end of the article: “The Times will not use one of the pay systems being marketed by other companies, like Journalism Online, led by Steven Brill, or the News Corporation, instead choosing to create the system essentially from scratch.”
Scratch!? You’ve got to be kidding me! The Times does not make its own ink and there are no lumberjacks or paper makers on staff: it buys paper and ink. But if it does not bother to vertically integrate these industries that got started somewhere in the Ming Dynasty, why on earth does it think it can get into the software business and “create the system essentially from scratch”?
Until I read those lines I thought early 2011 was conservative or even stodgy. Implementing a scalable and industrial strength billing capability should be idiot-proof and most of the next year would involve acclimating customers to the new reality.
Now? Who knows? The Times will now experience all of the joys of bet your company, major software development and chances are really, really good that the result won’t be really, really right. It didn’t have to be this way.
You can’t see this but I am shaking my head.