Business Models

Went to see Wired Editor Chris Anderson talking about his new book, Free, at the RSA earlier this week (slides above, ht Made by Many who also covered event). What a difference a year makes. This time last year I was railing against the original Freeconomic vision that Chris Anderson originally had (see here for The Economists' debunking). A year later, and the vision has been pegged back somewhat. The title has been shortened to "Free", the Ad and VC funded binge that Freeconomics was based on has been replaced. At the RSA we were treated to the full history and detailed exploration of various permutations of giving away something to catch a bigger prize - permutations of the "Razr and Blade" (give away device, sell consumables) and "Freemium" (Free for the bulk and Premium for a few).

All in all a very nice time was had by all galloping through the Economics 101 of Indirect Payment, until the questions. There were some other bits in the book, assertions which had been glossed over inm the presentation - such as the assertion about Free, that:

"It's the animal force of economics. The internet is the most competitive market we have ever seen and costs are nearly zero. The law of physics means that if you do not make your product free, gravity will do it for you."

First off was the little matter of "Near free" not quite being the same as "free", and even a small number (say price per digital video copy) multiplied by a very large number (like number of YouTube downloads) still equals a stonking loss if you aren't making any money. Now ordinarily this doesn't matter in the selling of a New Thing, because it only gets pointed out by economists, mathematicans and irritating small-cap bloggers.

Unfortunately, this time it had been pointed out, in public, by an equal but opposite Guru, Malcom Gladwell, who had noted that "Free" drives a huge demand, and:

When you let people upload and download as many videos as they want, lots of them will take you up on the offer. That’s the magic of Free psychology: an estimated seventy-five billion videos will be served up by YouTube this year. Although the magic of Free technology means that the cost of serving up each video is “close enough to free to round down,” “close enough to free” multiplied by seventy-five billion is still a very large number.

And he went on to note that, via example, the bit that is going free is not the only cost in the supply chain that needs paying for - using the example of the falling cost of biotech, he notes that its not just the drug design thats in the supply chain:

... he’s forgotten about the plants and the power lines. The expensive part of making drugs has never been what happens in the laboratory. It’s what happens after the laboratory, like the clinical testing, which can take years and cost hundreds of millions of dollars.

Ditto the internets - at the moment those costs are being resolved by letting us pirate content (IP law hasn't kept up) and buy our bandwidth and devices (DSL, iPhone = Not Free).

Mr Anderson chose to ignore this question, and dissembled magnificently (and unhelpfully). However, the next question unsportingly came at it again from a different angle. Someone pointed out that the cost of any good is set by 3 inputs - time, resource input and quality. If resource input was minimal, what about time (oh, instant), and quality.

"Quality is a very semantic thing" said Mr Anderson, and off he went again in another flight of fancy, but we got the message. Caveat Emptor.

At this point may I just point out a very old law of economics, which I think should be called "The Freemium Law" as it addresses this issue very well. In essence it says:

"If you ain't paying for it, you ain't the customer"

The Customer is the one who pays the bills. So you are not Google's customer - the Ad Industry is the Customer. And you are the user, so your role is to get used. To adapt the old poker adage, if there is a free lunch and you can't see anyone else at the table who is paying, you're the lunch. This typically takes the form (in digital media) of extracting your future net present value in 3 ways:

- Advertising
- Datamining your clickstream for better advertising or on-sale
- Getting you to contribute content for free that is then sold on - or sold out (Bebo et al)

This is all covered in Freeconomics Parts 1, 2 and 3 - start here for the full essays or here for the slideshow, but we didn't cover Freemium in any great depth.

Freemium simply means that a small % of users pay a price for a premium service so that the rest are subsidised to go free. At its simplest it means in any Freemium service, you have to ensure that those paying get their moneys worth and the Free users get what you can afford from the fees you collect. Other revenue streams such as advertising, datamining etc can then be added to the mix.

The challenge of Freemium is this: typically only a small % of users will pay - say 10% (its typically less than this) - and they have to pay the costs of all the free users. Clearly the lower the marginal cost and the cheaper it is to serve extra users (ie the higher the fixed over the variable cost ratio is, and the lower all costs are) the better. But there is also the dreaded supply/demand curve effect - push the premium price up, and the volume prepared to pay goes down - and finding the optimum price that premium people will pay AND that will pay for the free users costs is a non trivial exercise.

Simple maths says that its best to have many premium users paying a small % fee, but as premium penetration is usually a small % of all users, a low premium fee means that in effect not a lot of free stuff can be given away - but raising the price usually reduces penetration (its trying to balance 2 different siding scales where each impacts the other, ie its a dynamic system).

Here's the kicker. In essence the removal of the "Ad funded" model, and the melting away of VC money, has now left the Freemium model to carry the banner as default Business Model for all these Web 2.0 companies still standing and many a startup. And, just as we showed Advertising wasn't a big enough bucket to fund everything, it is unlikely freemium will work in all cases either.

Those services that work best are those that gain incremental benefit from having extra free users on board, as they get a network effect of increasing returns at a faster rate than the linear increase of costs (dotcom era chatroom and dating sites essentially let paying customers peek at more of the data on other user's profiles and activity). As long as they can monetise this extra benefit at a higher rate than it costs, they are fine (which is why revealing user data is so appealing - its near-free to provide and has voyeuristic value-add. (This may well explain Facebook's recent activity on privacy restructuring, it potentially allows premium peek-usage services as well as data on-sale)

That is Freemium in a nutshell. Anyway, on with the show.

There was then a question about the boundaries of the Free system - if everything depended on free content to copy, and no one was paying for using anything, how ya gonna pay the mortgage?

It was at this point that Mr Anderson revealed the Deus Ex Machina of this Freecosystem, the thing that actually keeps the wheels turning in this economic perpetual motion machine. "Thats for the Day Job"

The Day Job! Of course! Yes, the Day Job is what earns the Real Money. You then use your Free Time to make Free Stuff to sell on the Free World. But if your Day Job is making stuff that people that people are making for free, then what?

There followed another meandering ramble up to the heights of cloud computing and the depths of the Open C community, but the upshot is this - the Silicon Valley Model (of which Wired is the Bible and its Editor the Prophet) wants free content to run on its Big Aggregators, get a Free Ride on the (evil, not Net Neutral Yah Boo) Telcos/ISPs and come painlessly onto your (Another SV Company - Yay!) groovy Gadgets. If you are so churlish as to suggest your creative content should be worth something, well you aren't with The Program.

(Did anyone note Umair Haque's post pointing out that Michael Jackson, over his entire lifetime, earned far less than the CEO of even a moderate Hedge Fund socks away in a year, or a YouTube founder in one sale? And imagine how much money poor old MJ would make if he started today)

Anyway, there endeth the lesson. You are welcome to create your user generated content, and even Freemium services - but keep the Day Job, eh .

Update - the FT doesn't think its much cop either.

Fascinating piece of research by Joseph Bonneau on the Economics of Privacy on Social Networks (blog here, report here). This piece about consumer social networks is fascinating:

The most interesting story we found though was how sites consistently hid any mention of privacy, until we visited the privacy policies where they provided paid privacy seals and strong reassurances about how important privacy is.

We developed a novel economic explanation for this: sites appear to craft two different messages for two different populations. Most users care about privacy about privacy but don’t think about it in day-to-day life. Sites take care to avoid mentioning privacy to them, because even mentioning privacy positively will cause them to be more cautious about sharing data. This phenomenon is known as “privacy salience” and it makes sites tread very carefully around privacy, because users must be comfortable sharing data for the site to be fun.

Instead of mentioning privacy, new users are shown a huge sample of other users posting fun pictures, which encourages them to share as well. For privacy fundamentalists who go looking for privacy by reading the privacy policy, though, it is important to drum up privacy re-assurance.

So - two markets. Over time the "privacy fundamentalists" force changes, but the new sites are a bit "Wild West":

The privacy fundamentalists of the world may be positively influencing privacy on major sites through their pressure. Indeed, the bigger, older, and more popular sites we studied had better privacy practices overall. But the desire to limit privacy salience is also a major problem because it prevents sites from providing clear information about their privacy practices. Most users therefore can’t tell what they’re getting in to, resulting in the predominance of poor-practices in this “privacy jungle.”

To which we would add, mosts of these sites are free, and you have to remember the difference between a user and a customer. A customer pays money, users get used.

We address a lot of these issues in the 3 papers we wrote on the "Limits to Freeconomics" but the essential lessons are these:

- There is no free lunch, so if you can't see it on a Social Network then its you
- Your data may be free, but its everywhere in change.
- Caveat Emptor, especially if its Gratis

QED.

Been invited to the Activate Summit 09 (programme here), the Grauniad's conference on Politics, Economics, Technology and Society – strapline is "Building a better future through the internet".

Apart from the opportunity to (i) listen to some interesting people and (ii) talk endlessly and bore the pants off anyone who bothers to listen to me, it also gives an opportunity to argue with Umair (Haque), which should of course always be taken

Looks like a good lineup and some good topics overall. Also, they will be talking in one of the sessions about:

The means of production in the hands of the many: Will the internet lead to a rewriting of the rules of civilization?

Aka Socialism 2.0 - something I've been mulling over since I was in Berlin last year for a conference next to Karl Marx square in the autumn, just after capitalism shot its bolt. In may ways the "transaction costs" of socialism as a system are higher than capitalism (the invisible hand being a cheap organising system), but as the 'Net has massively reduced these costs it is now much easier to act in "social" ways of self organising which is arguably a more natural human way of structuring things (witness the rise in social networking).

Anyway, no one can argue that Social Nets haven't already had an impact on Society - now we await the impact on Politics, Policy, Regulation etc...... interesting times methinks.

There has been quite a lot of discussion in the last few days and weeks about what precisely a Social Media "Expert" is these days (or even if its wise to call oneself such a thing), and naturally this discussion came up at the Tuttle Club this morning (one of the outcomes of that is a decision to write a few posts on Social Media Economics, part 1 being here.

Anyway, I've tried to encapsulate my thoughts in the above diagram, but in essence the storyline is:

In the Beginning....Social Media (The Web 2.0 variety, that is) is not at all well known, a variety of techniques are being explored, and the emerging tools are pretty rudimentary. The Pioneers (bottom circle) in the space come from a wide variety of backgrounds and blaze the trail, inventing much of the early area from scratch. (I would also note that in this phase a lot of practitioners have an evangelical, semi-religious tone which is great for creating passion in the early stages, but lousy for the practicalities later on)

However, this very activity of blazing the trail brings two other constituents into the game, namely:

(i) Those who build the tools and techniques - the Digital Media technologists and consultancies (I'd count us as one of these) that get pulled in. For example in 2005 our first clients were asking us to build - or integrate - Social Technologies, either standalone or, with increasing frequency, to graft onto existing Web 1.0 digital assets. In 2002 you're reading Barabasi and cudgelling your braincells to recall 10 year forgotten maths, by 2005 it's "what are these social network things and can you build us a blogging platform", by 2007 it was "can you build a social network system and blog that connects to our existing systems" and by by 2009 its "how do we filter all the stuff coming off the Social Network?" (Drupal now having a social network module). Ditto the User Interface / User Experience people start to get sucked in as it becomes clear this also drives competitive advantage. And did I mention mobile, or location.....

(And of course in the course of this you delve into social network architecture theory, economics, algorithms*, system dynamics etc etc - and then to implement you dig out all those helping model, influencing, change management and program management skills that any consultant uses)

(ii) Early Day customers - typically from the Marcomms side of clients - tip off their existing suppliers by dint of their activity that this new field is emerging, so the Marcomms suppliers (PR, Marketing, Digital Media) start to build in this capability. In Social Media's case this was exacerbated as the "SocMed" industry initially believed it could fund itself from Advertising so there was even more reason to become involved (there has been little call yet for e-Commerce plays in Social Media, for example - but it will come).

As the market expands, new operation start to form at the intersections. So, for example the Systems Houses and Marcomms suppliers both find that the ROI issue is key, and that the metrics don't yet work to measure impact - and immediately start to work on this, and thus you see the emergence pf what I'd call "Social Media Strategists" - its no accident that Will McInnes (of Nixon McInness) kicks off something like MeasurementCamp, nor that those involved are mainly a mixture of Marcomms and Tech ( or MarcommTech) operations. Its no accident that you're sitting in a late night bar with Porter Novelli's Mat Morrisson arguing influence algorithms on paper napkins, or that ideas like VRM emerge from Cluetrain authors, or that the Tuttle Club's hivemind adapts Wisdom of Crowds and "Tribes" into Crowds, Tribes and Teams", or that Anthropolgists start to seriously look at the behavioural psychologies of Online communities and you find yourself mapping Maslow's laws to Social Graphs ..... these are the intersection industries emerging.

In addition, some of the PR/Marcomms companies start to look at the work the pioneers have done, sort out the promising wheat from the chaff, and then start to use their own know how to build "next generation" offerings for the clients that the Pioneers have had sole influence on to date.

This exact same process occurs from the technology side as technology system designers, consultancies etc increasingly build and integrate new tools into ever more sophisticated offerings as clients demand more automation to increase productivity. (We did our first real time social media search engine design 2 years ago, for example)

And in the middle, at the point of the convergence, it increasingly becomes clear that the endgame is a combination of strategy, technology, operations, economics, marketing, human factors etc - and it also becomes clear, like ERP, 6 Sigma, Lean Operations and other cross-company systemic fixes that have come before, it requires a whole set of cross-company activities and starts to look like good old Business Process Re-Engineering.

And this requires a whole range of new skills like program management, systems analysis etc and a new industry is born.

Also, while this is happening there are two other shifts in the market:

(i) The increasing market size attracts new entrants, many of whom are not particularly good (my favourite is a recently self declared Social Media Expert who only got on Twitter in March this year). Sadly, as is the way in all service industries, in these hectic days it is hard to tell charlatan from competent, and Akerlof's Law suggests in this case the market assumes all players are charlatans - and prices accordingly. So unless one can prove otherwise it is a time of poor margins. Proving otherwise then becomes an issue of exposing track records, customer referrals, and good old marketing - ie the cost of doing business goes up. You also get the reverse problem, as the market expands very respected players enter....when the McKinsey Quarterly drops its first articles its market validation, but its also just raised the bar several feet!

(ii) Also, as the market size increases, the tech hype machine is attracted like a moth to a candle, and so the space begins its steady progress up the hype curve until promises are being made the the current sate of the art cannot fulfil, and the aether becomes full of sillier and sillier stories. Akerlof would again point out that all sorts of Animal Spirits get involved, and a hype bubble emerges and inflates way past its pop-by size, and when it bursts the fall is a long way down, into the mud of the Slough of Despond.

At some point, all these players start to face the same strategic issue, but because of their positions on the gameboard will play it differently:

Initial pioneers face a tough choice. By and large the early skills are no longer sufficient, and in fact the body of knowledge has moved on and is expanding and fragmenting rapidly. They either need to get some depth in an area (the classic "T" shaped person - broad overview plus one area of deep skill) or move again to the next new frontier where pioneering work is required.

The other two players - Technologists and PR/Marketing - face the opposite, and need to expand from their areas of expertise to encompass more breadth so they can play systemically, holistically across the space. Not only that, but their companies need to decide if they will dedicate themselves to these new market niches - the intersections (to compete with the new startups springing up there) - or retreat back into their traditional areas for now.

This is my view of where the market is poised now, roughly. Where does it go? Well, this is my view based on the familar progress along the Hype Curve:

(i) The Hype Bubble pops, and all the buzz in the area disappears. No one invites you to cool conferences anymore. The last thing you want to be at this point is a standalone "Social Media Expert" - you need another schtick to beat clients with.

(ii) In its dive into the Slough, it doesn't go backwards to Pioneerville though - what it does is sloughs off the stuff that doesn't work (and a lot of the "religion"), adopts other stuff that does, and starts to adapt, and adopt to get to where the emerging experience says the real value lies. At some point, in a few years time it re-emerges - often re-branded with a new name - as an industry that is creating value.

Also, if I were to put my 20 year "been here before" hat on, I'd say that Social Media at the end of the day is a set of tools, not a new way of doing business, and as such those tools will be adopted and adapted to integrate with existing systems. If I may give an example. Intranets were once upon a time going to change the ways companies did business, were going to tear down the walls, create open, collaborative societies - you name the social media hype object, Intranets had them 12 years ago. Didn't work that way, they got adopted, adapted, used where they worked, rejected where they didn't and are now just part of the enterprise's knitting.

That my 2p worth anyway - this is a "straw man" so thoughts/criticisms/etc welcome.

*Social Media has been fun in that those dusty old Ops Research and System Dynamics textbooks have seen the light of day again and sit alongside Barabasi et al, along with bits of Sociobiology, Behavioural Economics and Marx (Karl and Groucho)......

Update - looks like fellow Tuttler Benjamin Ellis was also mulling over the debate, here is his post on the subject - his thoughts around the naive consumer problem (Akerlof's Law corollary) is interesting. Also, Suw Charman Anderson wrote her thoughts on the matter over here. Any others blogged the debate?

Nassim Nicholas Taleb (writer of the excellent "Fooled by Randomness" and misleading - imho anyway - "Black Swan" * has an excellent piece in the FT about the problems with how the banking and financial system is (not) being fixed - expurgated version below:

1. What is fragile should break early while it is still small. Nothing should ever become too big to fail.

2. No socialisation of losses and privatisation of gains. Whatever may need to be bailed out should be nationalised; whatever does not need a bail-out should be free, small and risk-bearing.

3. People who were driving a school bus blindfolded (and crashed it) should never be given a new bus. It is irresponsible and foolish to put our trust in the ability of such experts [the financia experts of today] to get us out of this mess. Instead, find the smart people whose hands are clean.

4. Do not let someone making an “incentive” bonus manage a nuclear plant – or your financial risks. Odds are he would cut every corner on safety to show “profits” while claiming to be “conservative”. Bonuses do not accommodate the hidden risks of blow-ups.

5. Counter-balance complexity with simplicity. Complexity from globalisation and highly networked economic life needs to be countered by simplicity in financial products.

6. Do not give children sticks of dynamite, even if they come with a warning . Complex derivatives need to be banned because nobody understands them and few are rational enough to know it. Citizens must be protected from themselves, from bankers selling them “hedging” products, and from gullible regulators who listen to economic theorists.

7. Only Ponzi schemes should depend on confidence. Governments should never need to “restore confidence”.

8. Do not give an addict more drugs if he has withdrawal pains. Using leverage to cure the problems of too much leverage is not homeopathy, it is denial. The debt crisis is not a temporary problem, it is a structural one. We need rehab.

9. Citizens should not depend on financial assets or fallible “expert” advice for their retirement. Economic life should be definancialised. We should learn not to use markets as storehouses of value: they do not harbour the certainties that normal citizens require. Citizens should experience anxiety about their own businesses (which they control), not their investments (which they do not control).

10. Make an omelette with the broken eggs. Finally, this crisis cannot be fixed with makeshift repairs, no more than a boat with a rotten hull can be fixed with ad-hoc patches.

I honestly do think most people would come up with a list something like this, but what is good about this piece is that Taleb is an ex-trader as well as being fairly good at maths , so has the necessary gravitas and gets into the FT with it. The scary thing is that virtually none of these have been enacted in the UK.

As he notes, the solutions are not hard - but are hard to do given the power structures:

Let us move voluntarily into Capitalism 2.0 by helping what needs to be broken break on its own, converting debt into equity, marginalising the economics and business school establishments, shutting down the “Nobel” in economics, banning leveraged buyouts, putting bankers where they belong, clawing back the bonuses of those who got us here, and teaching people to navigate a world with fewer certainties.

Then we will see an economic life closer to our biological environment: smaller companies, richer ecology, no leverage. A world in which entrepreneurs, not bankers, take the risks and companies are born and die every day without making the news.

Amen to clawbacks, I think that would send a message that would reverberate for generations. Right now there are a lot of wealthy, irresponsible people out there who have been well rewarded for their activities, and that cannot be good for trying to "nudge" better behaviour if everyone knows that the minute the world's back is turned it can all start again.

The failure to address this will result not in Black Swans though, but in the Black Elephants* of Collapsonomics

Question for us Web-heads, is how can we use the new technologies to force the hand of Them to change the path they are still on, as the macro-economic path we were on was - and is - unsustainable.

*My beef with Black Swans is that many are in the "so what" variety, and even if huge and relevant, in most cases in my experience you cannot stop doing something in the very unlikely event that something very nasty will happen (tiny probability of large building collapse cannot prevent opening of coffee shop next door etc) . What is more scary is when the problem is big, nasty and very likely and still no one wants to deal with it, ie its a "Black Elephant" in the room. I think the notes above are describing that sort of situation.

...from ReadWriteWeb, 7 points:

- Open data
- Structured data -> smarter
- Filtering content
- Real-time
- Personalization
- Mobile (location-based, so you could say that's smarter use of data too)
- Internet of Things (the Web in real-world objects)

Good list, can't argue with most of it it - point 1 is still mainly a pipe dream and 2 is is probably expandable to "Structured Metadata", but it tallies largely with our observations.

I'd also add 3 more to make it a round 10

- Something around the continual expansion in bandwidth driving ever more video based services
- Feedback loops and data scraping/mining for making "Personalization" happen
- Software becoming increasingly virtualised - Clouds, widgets, Open Source stacks, Ecosystems.

Oh - and 2010 will be the first "Year of Mobile Web 3.0 ;-)"

This is a great piece, I wish I'd written it before Josh Young did, as I was saying much the same a few days ago in talking on Twitter (hmmm...sans Twitter would I have written a blog post - discuss) about Micropayments not working for News:

“The difficulty of distinguishing good quality from bad is inherent in the business world,” Nobel laureate George Akerlof wrote in the kicker of his most famous paper, published in 1970. “This may indeed explain many economic institutions and may in fact be one of the more important aspects of uncertainty.”

Akerlof fired an early shot in a scholarly marathon to study the effects of asymmetric information in markets. What do parties to a potential transaction do when they know different sets of facts? Maybe that seems like an obvious question, but economists in the middle of the twentieth century had been pretty busy worrying about perfecting complicated models despite their grossly simplistic assumptions.

So Akerlof set about to write about how markets can fail when some of those assumptions turn out to be bunk. The assumption he tested first, in “The Market for ‘Lemons,’” was certainty, and he showed that when sellers know more about the goods being sold than the buyers do, sellers abuse their privileged position and buyers leave the market.

Writing in the same year, the economist Phillip Nelson studied the differences between what he called “search goods” and “experience goods.” Search goods and experience goods express a certain kind of asymmetry. For search goods, consumers can overcome the asymmetry before the point of purchase by doing their homework, while for experience goods, consumers must take their time and invest.

This is extremely relevant for how to pay for news and other journalistic output as:

News articles are experience goods. Just as with an apple, you need to consume the story, reading the article or watching the video or so on, in order to judge its quality. “Stories can vary in length, accuracy, style of presentation, and focus,” writes economist James Hamilton in All the News That’s Fit to Sell. “For a given day’s events, widely divergent news products are offered to answer the questions of who, what, where, when, and why.” We can’t know which one’s best till we’ve read them all, and who’s got time for that?

Not only that, but our options have now exploded:

We have now spent about a decade Googling. We have spent years indulging in information, and they have been wonderful years. We are overawed by our ability to answer questions online. Wikipedia has helped immensely in our efforts to answer those questions, but pagerank elevated even it. Newspapers compose just one kind of Web site to have plunged into the scrum of search engine optimization. Everyone’s hungry for links and clicks.

The article I'm quoting is more concerned about the near-monopoly Google has on the aggregation on news itself, but the above passages show the problems with charging in general (mass availability of good-enough news) and micropayments (charging for experience goods)

Every few years a new fad sweeps EnterpriseWorld as the New Panacea. We've had Re-Engineering, Total Quality, CRM, Balanced Scorecards etc etc in recent memory. The formula is usually the same - CXO hears about New New Snake Oil at conference after having all defences bashed down by superb booze, sycophantic babes and seductive promises from Smooth Salesguys, and comes back to BigCo Towers determined to get a program moving and "move the dial".

I'm afraid that Social Media looks like its tipping up as the next one, and what can be more Socmed today than Twitter. Of course Twitter can save your business, and here is the proof as AdAge (a neutral party if ever there was one) labels Twitter as "Proves Its Worth as a Killer App for Local Businesses". Proves? Killer App?

There are Five Tips for local businesses looking to use Twitter

TRACK EVERY SALE. Sure, Twitter's relatively cheap, but you still want to know you're getting something for the human effort. Naked Pizza's point-of-sale system codes the origin of every order -- was it from a specific coupon or a box topper? -- which allowed it to calculate that a recent "Tweetie Pie" Twitter promotion, accounted for 15% of his shop's revenue on the day it ran.

TWITTER IS NOT FACEBOOK. Twitter is more immediate -- if a person doesn't check their Twitter feed for an hour she could easily miss the message. Berry Chill CEO Michael Farah uses Twitter for real-time communication ("Spotted: Justin Timberlake at Berry Chill!") and Facebook for longer-lead calls to action, like enlisting focus-group volunteers.

CREATE A CONVERSATION. Don't blast promotions incessantly. Intersperse them with other nuggets of wisdom or news related to your products and industry or neighborhood. Or, if you have a broader social mission, use Twitter to communicate that. Naked Pizza co-founder Jeff Leach suggests that if these kinds of social technologies become game changers, there may be a day when companies' initial business plans take into consideration whether they have anything worth microblogging.

SELL LAST-MINUTE INVENTORY. Twitter's immediacy is its biggest strength -- so use it to pump up business during lulls or discount last-minute unsold goods, said Zack Steven, co-founder of LocalTweeps, a local Twitter directory, who caught same-day discounted tickets at the Guthrie Theater in Minneapolis via Twitter.

ALERT FOLLOWERS WHEN YOU'RE ON THE GO. Venture capitalist Fred Wilson likes to point to KogiBBQ, a Korean taco truck that drives around Los Angeles, alerting its almost 20,000 followers to its current and future locations via a Twitter feed.

I can't wait for every Laundry and Dry Cleaner, Pizza Parlour and Hairdresser to take this to heart, I am sure the planet is full of people like just waiting to subscribe to them all. Or having "@bozo - you just mentioned Pizza - Did You know that Joe Shmoe Pizzeria is round the corner" in your twtstream the minute you open your digital gob.

This.is.called.spam. People by and large don't like it but advertisiers desperately want companies to do it and pay for the priveledge.

The truth, sadly, is far more prosaic - a few early adopters will get some local advantage going while the airwaves are relatively unspammed, and its seens as cutesy - but when everyone starts blasting out the @messages it will just p*ss people off. Which means bribing 'em with giveaways to listen. Which means a giveaway arms race. Which means higher cost of sale. Which means doom, not delight.

So, what is Twitter good for? Its an emerging aide to that most boring thing, running a business soundly with attention to detail:

LISTENING - its a Pub/Sub system, so sub to people you want to listen to

ANALYSIS - of what peopel are saying about you, your ecosystem etc

CUSTOMER SERVICE - helping people with problems, informaton etc

REWARDING LOYAL CUSTOMERS - these are the people you want to subscribe to you, your "Tribe". You want them to sing your praises elsewhere though, not bombard them with cr*p and turn them off

Its not for nothing that one of the fastest growing roles right now is that of "Community Manager".

Twitter - and Social Media overall - are just tools, means to an end. They are no more panaceas than ERP or CRM or TQM or WTF else pops up next. The way you run a successful small business has always been to sell more than you buy, to keep a tight handle on cashflow, try and be on a rising S curve. be friends with the local powers-that-be, and to be in the right place, preferably at the right time.

And don't drink Snake Oil, even if it is flavoured as Kool-Aid.

Andrew Orlowski ran a piece in the New Statesman last week about the limits to Freeconomics, which we are in agreement with (start here for a canon of our work). Andrew was kind enough to quote me in the article:

Alan Patrick, co-founder of the Broadsight media and technology consultancy, points out that despite falling marginal costs, the idea of anything being “free to produce” is a myth; the costs are hidden elsewhere in the system.

While at McKinsey, Patrick ran simulations of the “free to produce” business model and found that “it results in wholesale value destruction with no accruing market benefit, unless you can build an extremely commanding lead and get the whole positive dynamic of increasing returns working for you. But that’s hard and rare.”

If you go to the links above you will see my thoughts on how anything being free to produce is a myth. What I thought may be illustrative was to talk a bit more about the modelling mentioned in the 2nd paragraph. You may be interested to know that:

- it was done in 1996 (We've done others since, the point was we've known this stuff for a long time)
- It largely predicted the Freeconomic model of the dotcom era (ie give stuff away "free to user, but its expensive to investor)
- The "Free" of 2008/9 is largely a rehash of this mythos (ie you've known this stuff for a long time).

I was one of 4 people who did it, it was mostly written as spreadsheet macro by another chap, but we did run it in a number of business games with teams competing with each other, as well as a virtual simulation. The results were quite interesting:

- In the first few rounds, some teams went free while others tried to charge - of course, the "free" teams built share rapidly
- Once the others caught on, they too went to free and advantage was eroded, but...
- ....those who had established a commanding presence carried on gaining users due to virtuous circle (positive return) benefits

Once it had been played a few times everyone was wise to it so everyone started off free, and there was little benefit to be gained.

In the initial simulations we put a cap on the bounds ( 2 years if I recall correctly) and that created artificial winners, in that those who went free first won, as they then charged their huge numbers of customers a fee in the last round and made out like bandits. Of course, if you let the simulation carry on they then lost customers in droves the next bound.

But the majority of the Free strategies just lost money. The few that managed to get an early traction got bigger - but there was room for very few big plays, positive returns/network effect means the biggest just carried on growing and the smaller ones lost customers over time

But the issue was how to actually make, not destroy, value if you want a sustainable business. Free always gains customers but the cost eventually kills the business at some size.

Now bear in mind this was done long before Google even existed, but it was clear from these models that to make money you had to find a way of making it in another way from your users - eg advertising paying for search, as Google does, or being able to drive some other benefit from it. (I don't think this model was ever used for Freemium services, that I modelled later and found "interesting" interplays between price, cost and % uptake - ie very narrow "ledges" of stability)

Plus ca change - here we are in 2009, the same myth has popped up, and unfortunately the same tears will fall when it all froths away. A "Free" strategy has to have an offset approach to being funded that will sustain it, as it cannot run on risk equity (VC money) for ever. Costs are lower, but that just raises the bar - and they still catch you in the end as volumes increase.

The Design Council had an interesting session on Thursday night, Dr Alex King of the Horizon Scanning Centre was looking at the 30 year ahead scenarios for the UK. They use 4 potential scenarios (see above diagram) run along 2 axes of social orientation:

- From Open, Global society to Closed, Nationalist society
- From Highly Individualist to Highly Collectivist society

The Four scenarios thus are:

- Perpetual Motion: Open, High Individual
- Shaken Open: Open, High Collectivist
- Self Service: Closed, Hi Individual
- Protective Collective: Closed, High Collectivist

The UK is in the cross hairs of the diagram and can move in these 4 ways

Perpetual Motion

In this scenario recovery is more rapid owing to high mobility, but it’s a society with low security, high inequality and high social and familial fragmentation. High innovation and tech usage, but unequal deployment of technology. US Model in extremis, Aka the Rational Economist’s dream

Shaken Open

Takes longer to emerge from recession, but is a more equitable society with higher government involvement. Higher unemployment but jobs are more secure. High use of technology but more regulation and lower innovation (European Model)

Self Service

Similar initially to Perpetual Motion, but more protective over local jobs and has reduced inequality. Requires high level of national self sufficiency, especially basics such as energy, food and . Highly innovative, but less technically advanced that Perpetual Motion. (Tory Eurosceptic Wet Dream)

Protective Collective

Like “Shaken Open” but moves to a more nationalistic identity, very protectionist. Lowest level of innovation and technology usage, high state intervention in activities. High equality and security. (Communism 2.0)

What Dr King and his colleagues do is take these scenarios and run public policies through them to see what are highly resilient, ie operate across the maximum number of scenarios. I asked whether thay had:

(i) worked out relative probabilities of these occurring in the UK
(ii) worked out a Nash Equilibrium (ie the state most likely to occur in game theory)

He said no, but later comments on work they've done to date made me suspect they have looked at these issues, and that it is either a bit sensitive or not yet finalised (or both )

Another thing one could do with these scenarios is run the Collapsonomics hypothesis against them.

“Collapsonomics” is a term recently coined to describe the sort of modelling a number of entities at the Tuttle Club (ourselves included) and others (eg Umair Haque) are doing on likely impacts and ways out of The Crunch. (See weblink just set up here) In general terms, the concepts are:

(i) This is going to be worse (deeper, longer) than most conventional Economists think it is (or more likely are prepared to admit publicly, for various reasons).
(ii) “More of the Same” is not the answer, we need to wind up at a new endgame or we hit Peak Water, Peak Crops, Peak Fish, Peak Bee etc
(iii) Use of modern technology will be a key part of the solution

Collapsonomics is coalescing around running scenarios around 5%, 10%, 15% and potentially 20% reductions in national GDP (the UK is at 4.5% reduction officially, probably higher, right now) and looking at the resulting impacts (For what its worth our own work involved what could one do in a scenario where there was a 10% reduction in the amount the UK government had to spend. Of the roughly £600bn they spend annually, a 10% reduction would take out the entire Defence and Local Government budget)

The key point is number (i) above however – the “worse” situation is far more probable than a lot of the “official” stuff – from Govt and Meedja etc – are prepared to admit, but its evident in some of their other actions. In other words it’s the “Elephant in the Room” that is no one mentions (except obliquely, such as here).

The reason the Government cannot admit it is that it has a very large impact and would necessitate hard choices they don’t want to take this side of an election – ie its treated as a “Black Swan” but is actually far more likely than that to occur – what Lloyd Davis coined as a “Black Elephant” event.

Hence this post on “Black Elephant” strategic planning – passing the Collapsonomics thesis through the Government models.

Lets take the 10% reduction in public spending case for example. That’s c £60bn – once upon a time a huge number, now noise of course given our commitment to the banks is 10x that so it may be worse, but….

Anyway, doing things like scrapping new defence spending, or cutting back on local councils, or even not paying MP’s has minimal effect. There are two huge budgets:

- Social Services, in all its ramifications
- Health, ditto.

The interesting thing then is to say assume 10% reduction in Health and Welfare and then run it through the 4 models and see what the possible outcome is:

- The Perpetual Motion model would suggest dismantling state supported services (NHS etc, reduced welfare) and outsourcing/offshoring that what can be done more cheaply elsewhere.

- The Shaken Open model would suggest that at the very least solutions may be worked through at an EU level, maybe a “best of breed” used or shifting resources where they can be well used .

- The “Self Service” model would imply in-country privatisation rather than offshoring, and probably a “Perpetual Motion Lite” approach.

- The Protective Collection Model would probably just degrade existing services without attempting any reforms - and is in my hypothesis of the UK default.

What becomes clear is that none of these outcomes are particularly appealing – thus the Collapsonomc view is that a different approach needs to be used, using new technologies and approaches to “tunnel through the cost base”. The issue if one does not is that it is only possible at best to arrive at local optimal solutions which are not likely to yield stable outcomes.

For example, we know that using networked technologies in government could yield major benefits, but there are major barriers. Ditto, changing the energy usage profile of the country or how and where healthcare is administered would have major impacts

- Reducing energy consumption reduces need for foreign energy and thus realpolitical necessities such as “Petrol Duty” in Iraq as well as reducing pressure on grid costs, nuclear and coal stations and new investment.
- Reducing health cost at from fixing health at “point of illness” and moving it to preventative care, and designing policies that nudge people towards more healthy decisions.

These are just high level thoughts, and there is much that has been – and could still be – done, but “Black Elephant” strategic planning tells us it this is more critical than anyone is officially admitting today, and the risk of not doing it risks muddling our way into some fairly unpleasant places..