Perpetual Motion

Wander the halls and classrooms of a place like The Wharton School and you will hear much discussion of “optimizing for profit”.  Chapter 1 of my textbook for Managerial Economics states quite clearly:

“The basic model of the business enterprise stems from what economists designate as the theory of the firm.  In its most stripped-down version, this theory assumes that the firm tries to maximize its profits… a richer version of this theory assumes that the firm tries to maximize its wealth or value.”

One would imagine that reducing life to a simple goal like profit (or value) would streamline the answers to many questions, yet the 831 pages that follow this quote seem to signal otherwise.  The drumbeat of this glorious march toward profits can get a bit monotonous and thus it is a true pleasure when one is greeted by a story of a cavalier business executive breaking the profit mold.

Such a story flashed across the news late last week when professional basketball player, Stephon Marbury announced his new sneaker line- the Starbury One – cost, $15 a pair.  Marbury cited conversations with former NBA star and now New York Knicks President and Coach Isiah Thomas as inspiration:

“He [Thomas] was explaining to me how my generation never went through anything…There was a generation that went through things that we never even envisioned. For me to be able to talk with him, get insight on how things were back in the day, I got a picture of what he created for me to see. It made me feel like I want to put my mark on history as far as letting people know that I’m a part of something that I’m moving with. All this is brand new, this is revolutionary, the thing that we’re doing right now.”

The “thing” that he’s doing right now is not a charity either.  It is a joint business venture with Steve & Barry’s, a discount sporting goods retailer, with over 140 stores nationwide and $700M in annual sales (the chain was started here at the University of Pennsylvania by two childhood friends frustrated with the high price of college sporting goods).  I can only assume that Marbury, Steve, and Barry are not out to lose money.

Which begs the questions – what is Nike doing with all that margin between $15 and $160? Marbury’s line is purportedly being manufactured in China with materials and labor quite similar to Nike.  Despite the massive markup, Nike runs at about 12% operating margins(this actually looks like an impressive margin when compared with the GAP’s most recent quarter at 5% operating margin).  There is an almost comic cyclicality to Nike spending all of that margin on advertising to simply recoup the money that they are spending on advertising.  And at the end of the consumer merry-go-round is a shoe that poverty level families are buying.

Which makes Marbury’s mission that much more inspiring.  Many people talk about giving back to the communities that they came from.  Often that is in the form of charity – an act that while generous and meaningful can at times be momentary and not necessarily empowering to the recipient.  Marbury’s mission is decidedly different.  By invoking the struggles of past generations, Marbury seems to be challenging people to do something meaningful, something for themselves, with that $145 (the difference between $15 and $160).  By “meaningful”, I do not mean to imply something altruistic or even non-commercial.  I am a fan of the market, which makes this venture that much more exciting.  To me, Marbury is your typical entrepreneur challenging the status-quo, breaking the economics of incumbents, and in the process spreading a little wealth. 

His mission has a calling… Instead of contributing to the merry-go-round, take that hefty margin, hop off, and build your own amusement park.

Wander the halls and classrooms of a place like The Wharton School and you will hear much discussion of “optimizing for profit”.  Chapter 1 of my textbook for Managerial Economics states quite clearly:

“The basic model of the business enterprise stems from what economists designate as the theory of the firm.  In its most stripped-down version, this theory assumes that the firm tries to maximize its profits… a richer version of this theory assumes that the firm tries to maximize its wealth or value.”

One would imagine that reducing life to a simple goal like profit (or value) would streamline the answers to many questions, yet the 831 pages that follow this quote seem to signal otherwise.  The drumbeat of this glorious march toward profits can get a bit monotonous and thus it is a true pleasure when one is greeted by a story of a cavalier business executive breaking the profit mold.

Such a story flashed across the news late last week when professional basketball player, Stephon Marbury announced his new sneaker line- the Starbury One – cost, $15 a pair.  Marbury cited conversations with former NBA star and now New York Knicks President and Coach Isiah Thomas as inspiration:

“He [Thomas] was explaining to me how my generation never went through anything…There was a generation that went through things that we never even envisioned. For me to be able to talk with him, get insight on how things were back in the day, I got a picture of what he created for me to see. It made me feel like I want to put my mark on history as far as letting people know that I’m a part of something that I’m moving with. All this is brand new, this is revolutionary, the thing that we’re doing right now.”

The “thing” that he’s doing right now is not a charity either.  It is a joint business venture with Steve & Barry’s, a discount sporting goods retailer, with over 140 stores nationwide and $700M in annual sales (the chain was started here at the University of Pennsylvania by two childhood friends frustrated with the high price of college sporting goods).  I can only assume that Marbury, Steve, and Barry are not out to lose money.

Which begs the questions – what is Nike doing with all that margin between $15 and $160? Marbury’s line is purportedly being manufactured in China with materials and labor quite similar to Nike.  Despite the massive markup, Nike runs at about 12% operating margins(this actually looks like an impressive margin when compared with the GAP’s most recent quarter at 5% operating margin).  There is an almost comic cyclicality to Nike spending all of that margin on advertising to simply recoup the money that they are spending on advertising.  And at the end of the consumer merry-go-round is a shoe that poverty level families are buying.

Which makes Marbury’s mission that much more inspiring.  Many people talk about giving back to the communities that they came from.  Often that is in the form of charity – an act that while generous and meaningful can at times be momentary and not necessarily empowering to the recipient.  Marbury’s mission is decidedly different.  By invoking the struggles of past generations, Marbury seems to be challenging people to do something meaningful, something for themselves, with that $145 (the difference between $15 and $160).  By “meaningful”, I do not mean to imply something altruistic or even non-commercial.  I am a fan of the market, which makes this venture that much more exciting.  To me, Marbury is your typical entrepreneur challenging the status-quo, breaking the economics of incumbents, and in the process spreading a little wealth. 

His mission has a calling… Instead of contributing to the merry-go-round, take that hefty margin, hop off, and build your own amusement park.

I think that making a public declaration of my intent to run the Philadelphia Marathon on November 19th is going to provide helpful motivation for my training.  Hopefully, the risk of letting down the reading public will be a powerful driver over the next couple of months.  I have never run a marathon (I have never even run a half-marathon), but I have been running consistently over the past 3 months and have worked my way to a comfortable (well, not comfortable, but not overly painful) 8-9 miles on my long, Sunday training runs.  Running is a welcome diversion for me and has proven to be a great way to get to know my new home-away-from-home of Philadelphia.  I can’t say that my loop today from the Schuylkill River to the Liberty Bell holds half the inspiration of my former route across the Golden Gate Bridge, but it will certainly do for the time being.

13 training weeks and counting!… as Tour de France cyclists in the Alps like to say “Suffer Well, Finish Strong” (I can’t find any web reference for this quote, but I am certain it was used during the classic, sensationalized montage during ABC’s coverage of the final stage)

(Small print caveat: They have announced a half marathon version as part of the event, so I am reserving the right to downgrade to the shorter distance should my training regimen falter)

I had my first taste of the Wharton Entrepreneurial Management (WEP) program this past week when I attended an introductory lecture by Professor David Hsu. It was a stimulating two hour session where we discussed the nature of what made an idea “entrepreneurial” and the relative importance of disruption to the likelihood of an idea’s success (i.e. is an idea truly disruptive vs. incremental?). We then spent 30 minutes breaking into teams for what was to be an entrepreneurial brainstorming activity. The activity was to brainstorm what was “next” for Google in 2007.

Given that Google hires Ph.D’s, engineers, and MBA’s (hopefully more of the former and less of the latter) by the hundreds to tackle the same challenge it was no wonder that, by my count, 14 of the 15 groups settled on ideas that Google is already pursuing in one form or another – this includes my own team that took a swing at flushing out a more expanded Enterprise product – Google already serves this market. The winning team, by class vote, was Google Health – a Google-style health portal. As a self diagnosed hypochondriac, I was sure that this one was already in the works in Mountain View (google “influenza” and watch how the page template changes – there was some good chatter about their healthcare plans earlier in the year here and here).

The only novel concept out of the class was Google Gaming – a new foray by Google into the online gaming world that would attempt to solve problems of profile portability across MMORPG’s. I think Google execs would have been tickled with this one – not because it is in their sweet spot (though I suppose profile and reputation information could conceivably fall under the mission statement of “organizing the world’s information”), but rather because it illustrates a prevailing public opinion that Google will tackle nearly any online problem.

With that context, it would seem quite hard for us to really generate any idea that falls in the category of a “new venture”, rather, most anything could be argued to be a product extension for Google. The challenge illustrates a larger problem and opportunity for today’s current crop of Interent entrepreneurs. With rapid and extensible development environments, product features masquerade by the hundreds as new ventures (as Mashable asks here, “are there any startups that don’t plug into MySpace these days?” ).  The release of Facebook’s new API, should spawn a similar proliferation of ventures taking advantage of these network effects.

We can look beyond these rather cliche examples from the consumer web services space and observe what Salesforce.com has done with their AppExchange to see that even in today’s enterprise software market, open architectures are allowing companies to outsource non-core feature development to new ventures (unlike the rather Wild West style plug-ins that proliferate on blog spaces and personal homes pages, Salesforce has an established marketplace tab within its dashboard directing customers to third party products).

While budding entrepreneurs now have immediate access to potential audiences and customers; and customers have a remarkable array of new toys (for the consumer) and tools (for the enterprise) to play with, I do worry about the sustainability of many of these ecosystems (especially on the consumer side). Despite Google’s mindblowing revenue numbers, I do not believe that there is an endless stream of revenue from contextual advertising (perhaps that is why I am more of a tools guy than a toys guy).  I am by no means a cynic in regards to the power of these networks – in fact, there are few things (technology speaking) that interest me more than how this will play out in the enterprise – however, our inability in class to generate what I believed to be a true venture idea, really illuminated for me some of the future business model challenges.

I had my first taste of the Wharton Entrepreneurial Management (WEP) program this past week when I attended an introductory lecture by Professor David Hsu. It was a stimulating two hour session where we discussed the nature of what made an idea “entrepreneurial” and the relative importance of disruption to the likelihood of an idea’s success (i.e. is an idea truly disruptive vs. incremental?). We then spent 30 minutes breaking into teams for what was to be an entrepreneurial brainstorming activity. The activity was to brainstorm what was “next” for Google in 2007.

Given that Google hires Ph.D’s, engineers, and MBA’s (hopefully more of the former and less of the latter) by the hundreds to tackle the same challenge it was no wonder that, by my count, 14 of the 15 groups settled on ideas that Google is already pursuing in one form or another – this includes my own team that took a swing at flushing out a more expanded Enterprise product – Google already serves this market. The winning team, by class vote, was Google Health – a Google-style health portal. As a self diagnosed hypochondriac, I was sure that this one was already in the works in Mountain View (google “influenza” and watch how the page template changes – there was some good chatter about their healthcare plans earlier in the year here and here).

The only novel concept out of the class was Google Gaming – a new foray by Google into the online gaming world that would attempt to solve problems of profile portability across MMORPG’s. I think Google execs would have been tickled with this one – not because it is in their sweet spot (though I suppose profile and reputation information could conceivably fall under the mission statement of “organizing the world’s information”), but rather because it illustrates a prevailing public opinion that Google will tackle nearly any online problem.

With that context, it would seem quite hard for us to really generate any idea that falls in the category of a “new venture”, rather, most anything could be argued to be a product extension for Google. The challenge illustrates a larger problem and opportunity for today’s current crop of Interent entrepreneurs. With rapid and extensible development environments, product features masquerade by the hundreds as new ventures (as Mashable asks here, “are there any startups that don’t plug into MySpace these days?” ).  The release of Facebook’s new API, should spawn a similar proliferation of ventures taking advantage of these network effects.

We can look beyond these rather cliche examples from the consumer web services space and observe what Salesforce.com has done with their AppExchange to see that even in today’s enterprise software market, open architectures are allowing companies to outsource non-core feature development to new ventures (unlike the rather Wild West style plug-ins that proliferate on blog spaces and personal homes pages, Salesforce has an established marketplace tab within its dashboard directing customers to third party products).

While budding entrepreneurs now have immediate access to potential audiences and customers; and customers have a remarkable array of new toys (for the consumer) and tools (for the enterprise) to play with, I do worry about the sustainability of many of these ecosystems (especially on the consumer side). Despite Google’s mindblowing revenue numbers, I do not believe that there is an endless stream of revenue from contextual advertising (perhaps that is why I am more of a tools guy than a toys guy).  I am by no means a cynic in regards to the power of these networks – in fact, there are few things (technology speaking) that interest me more than how this will play out in the enterprise – however, our inability in class to generate what I believed to be a true venture idea, really illuminated for me some of the future business model challenges.

From a recent Newsweek article entitled, The MBA Backlash: B-Schools Rebound from an Identity Crisis:

“The M.B.A. is increasingly an environment in which people can expand their horizons, working with others with international experience and merging ideas,” says Richard Barker, director of the M.B.A. program at Cambridge’s Judge Business School. Rather than drilling students in, say, using math models to optimize inventory levels, Cambridge classes now “deal with the complexity of an international supply chain, understanding cross-cultural management issues in a much broader way than in the past,” says Barker.

This brought a smile to my face as I, and my 800 peers, have spent the last 48 hours cramming and trying to dredge from the depths of our memory the math we learned in high school (differentials, integrals, compound interest, etc.). Our pre-term math test is tomorrow where we will most assuredly be asked to “use math models to optimize inventory levels”.

(The following thoughts are the product of a wonderful lecture that I attended this week given by Professor Peter Fader on his work developing mathematical models of the music market.  It was a lecture that has stuck with me for the past couple of days as I have been musing on the implications – hence the long post – and constantly reminds of exactly why I came here – i.e. to be challenged and stimulated by truly exceptional faculty)  

As I have been told repeatedly during my pre-term “math-camp” classes here at Wharton, all simple functions have an input, a transformation, and then an output (“something goes in the box, something happens to it, and then something comes out”).  It seems that in trying to optimize this equation for the music industry, we are overly focused on the transformation and the output (if only we could just differentiate and get the answer, but alas the real world doesn’t function like calculus).  In focusing on the transformation (in this case, the question of how music is packaged), I think the majority of discussion ignores two important factors: (1) the input (i.e. will the music product itself change to compensate for new market dynamics) and (2) is there a Z factor (I would argue live, performance revenue) that will provide a compelling replacement good for packaged music causing rotation of audience spending.

Whether you are selling a shrink wrapped CD, digital downloads, or access to a streaming subscription service, you are selling the same input.  Don’t get me wrong, I am quite intrigued with discussions around how best to deliver and purchase recorded music.  As an aside, I have been using Yahoo! Unlimited for the past week or so and am generally pleased with the service.  I generally agree with those who extol the virtues of the all-you-can-eat approach to packaged music; from Fred Wilson:

One day, everyone who enoys music will be getting their music like they get a dialtone.  Music will be a subscription service.  It is already but there are lot of technical, implementation, and business model hurdles that need to get worked out before everyone gets their music this way.  But I am absolutely convinced its going to happen.  It has to frankly. Because the current way we get music is ridiculous in a digital world.

While the subscription model seems like a good solution to rethinking traditional music delivery, let me return to my equation and the relatively outside-the-box factors that I believe need to be considered. 

(1) Increase the input: As a former performing musician, I have an agenda with this argument.  I think that the current over-produced state of American popular music is, well, pretty pathetic.  Artists are generally rewarded for being pretty faces on an album cover and constant self-promoters on red carpets and Hollywood clubs.  I am obviously over simplifying and stereotyping and there are plenty of top selling performers who are true creative forces.  For the most part, however, the production process seems to reward unadventurous albums.  How would I suggest changing the input? If we assume that the amount of revenue per unit is going down, the simplest solution to the math is to drive the # of units up.  Artists should be writing and recording more (whether in the studio or through recording live performances).  Starbucks and XM Radio seem to recognize this relationship and announced a new live performances album series yesterday:

Starbucks and XM Satellite Radio will soon deliver a slate of live performance CDs from artists Coldplay, Willie Nelson, Tori Amos, Robert Plant, and more. The exclusive discs are being culled from an XM in-studio performance series called “Artist Confidential.” The CDs, which carry the same title, will be available only at Starbucks coffeehouses and through the Starbucks website. The volume one compilation will be positioned starting August 29th, and will retail for $14.95. “The performances captured during an XM Artist Confidential taping are always so incredible, we wanted to share some of our favorites with the larger community of music fans,” explained Lee Abrams, chief creative programming officer at XM.

Another (albeit somewhat cliche) example of packaging “more” is Live Phish Downloads.  The popular, no longer touring, improvisational “jamband”, did a great job at commercializing the previously informal (and non-commercial) recording of their live shows.  I know “tapers” everywhere are probably shocked at the commercialization of a process that has long been considered a free right, but as a progressive capitalist, I applaud these efforts.

(2) Rotate revenue toward live performances:  Similar to my argument above, I believe that musicians should be making their money playing (and creating) music.  One of the dirty little secrets (though not all that secret) of the music business is that few artists make money as it is from album sales (the majority of their “take-home-pay” comes from concert sales and merchandising).  There has actually been alot of interesting academic work done on trends in live performance revenue and it seems that this rotation effect is not a novel idea.  Back in 2002, Alan Krueger, a Princeton economist, was writing on this trend:

I suspect the main reason [for rsiting ticket concert ticket prices] is that the growing ability of fans to download music free from the Web — legally or illegally — has cut into artists’ revenues. Millions of people have downloaded music from Napster, Morpheus and KaZaA — and bought fewer records as a result. Music sales are plummeting, putting downward pressure on artists’ royalties.

In this environment, concerts take on a different meaning for artists and their managers. In pre-Napster days, concert prices were kept below their market rate to help sell albums, a complementary good. Now concert prices are set with an eye toward maximizing concert revenue.

He continues by quoting David Bowie who said:

“Music itself is going to become like running water or electricity… You’d better be prepared for doing a lot of touring because that’s really the only unique situation that’s going to be left.”

While there are clearly problems of concentration in the concert market (i.e. Clear Channel controls the vast majority of major concert promotion), I believe that the general trend in rising concert revenues is an encouraging sign and that long term rotation away from packaged music and towards live performance revenue will benefit artists and music quality.

For all those interested in issues of diversity in the workplace, there was a piece worth reading in the Sunday Times Business section, entitled, “Wall Street’s Women Face a Fork in the Road” (subscription required).  Similar articles have appeared periodically over the past couple of years, so this is not ground breaking material, but I believe it is important to keep this debate in the public spotlight.

First, I found myself standing up to applaud Joe Gregory, President of Lehman Brothers, who confirms what may seem obvious to some, but still may not be fully accepted on Wall Street.  Joe states:

“You can’t build a great company without great people, and great people are not just white, straight men aged 25 to 40.”

I was less encouraged by the comments of Wharton Admissions Director Thomas Caleel (for the record, I am quite grateful for my admission to the school, so my criticism should in no way be interpreted as unappreciative) who stated:

“It’s hard to work for four years, go to business school, spend three years slaving away in an investment bank or consulting firm and then try to leave to start a family…They haven’t achieved the seniority they need at that point.”

Responding to this concern, and in hopes of getting its graduates into the workplace sooner, hence achieving more before they “leave to start a family”, the article goes on to state that Wharton’s first year class this year will have twice as many students with zero to four years of work experience than it did last year.

This is a disturbing trend for someone who arrived at Wharton with seven years of work experience and still has high hopes to find classroom settings full of similarly seasoned individuals eager to share real world experience.  Moreover, the push to bring younger students into the classroom seems to signal an acceptance of the status quo (i.e. it is a given that individuals will drop out of the workforce at some point, thus we should compensate by accelerating their timeframe of participation). 

It would seem that leading business schools like Wharton, Harvard, and Stanford, should be minting graduates that challenge the status quo, that are at the vanguard of rethinking ideas of gender and diversity in the workplace, and that do not accept as ordained the idea that they will want (or need) to leave a career for a family.  Instead of adapting to professional environments that do not value work/life balance by feeding them younger (i.e. less likely to complain) graduates, MBA programs should be turning out accomplished, mature, and confident executives that can redefine corporate paradigms through their immediate excellence and leadership. 

In my opinion, lowering the age of the incoming class (a phenomenon occurring at most top tier MBA programs) seems a short sighted solution to workplace “dropout” and one that may ultimately degrade the quality of classroom dialogue.  It would seem more sustainable and productive to engage experienced classes of students (whom are often touted as the next generation of America’s finest business minds) in a process of defining new workplace models that will drive corporate productivity, personal fulfillment, and long term professional relationships.          

I have been struggling a little over the past 5 days waiting for inspiration to strike me in order to pen my first post since returning to life as a student (I was officially ”convocated” as a first year Wharton student on Friday night).  I had pondered writing about the sudden reality of being back in school (complete with name tent, rules on beverages in the classrooms, and controversies over grading policies).  I had thought about offering commentary on the convocation speeches or various welcome events.  All of these topics struck me as far too mundane and generic a way to discuss the experience.

I gained some motivation for trying to explore my own feelings and perspectives as a technologist and social venture enthusiast amongst a sea of financiers, consultants, and real estate developers.  I thought I might even take that thread one step further and ponder what that meant for the political and social leanings and opinions of my class.  That sounded edgy enough and even seemed in line with an orientation presentation given by Deputy Vice Dean, Peggy Bishop Lane, who pointed out that the desire for student body cohesion did not imply a need for conformity.

In parallel to beginning a post along these lines, I caught up on some bloglines reading that had been building up.  Christine Herron’s recent post on the challenges of multiple online identities really struck a chord with me.  I began to recognize that my case of writer’s block was as much from my struggle with how much to reveal in this public forum (syndicated directly onto Wharton’s official adcom blog) than it was from a lack of topical passions.  Christine writes:

“Blogging has forced many individuals to address the challenges of identity. Honest writing reveals our less-polished sides, forcing us to be honest about ourselves and to become more comfortable with our multiple identities.”

Those who know me would probably be quick to confirm that in person I am an open book who will rarely shy away from any topic, no matter how personal.  How should I, however, translate that openness in this forum? Will critical commentary about administrators, classmates, professors, or companies be misinterpreted without the availability/filter of face to face dialogue?  How will my (online) opinions translate into real world treatment by my community?

In challenging myself on these questions, I found the true struggle (and inspiration) of this past week.  There are things during the past week that made me truly excited, things that I found disappointing, incidents that brought out the cynic in me, and others that stirred passions.  The challenge of my next two years will be how I respond to these (publicly, privately, personally, communally).  As someone who believes in the beauty of malleable institutions, how will I challenge attitudes and prevailing norms? How will I assert my multi-dimensional identity in a landscape that while professing the need for non-conformity seems to often reward it?

I suppose it was a week more filled with questions than answers, but it was certainly a stimulating start.

I have been struggling a little over the past 5 days waiting for inspiration to strike me in order to pen my first post since returning to life as a student (I was officially ”convocated” as a first year Wharton student on Friday night).  I had pondered writing about the sudden reality of being back in school (complete with name tent, rules on beverages in the classrooms, and controversies over grading policies).  I had thought about offering commentary on the convocation speeches or various welcome events.  All of these topics struck me as far too mundane and generic a way to discuss the experience.

I gained some motivation for trying to explore my own feelings and perspectives as a technologist and social venture enthusiast amongst a sea of financiers, consultants, and real estate developers.  I thought I might even take that thread one step further and ponder what that meant for the political and social leanings and opinions of my class.  That sounded edgy enough and even seemed in line with an orientation presentation given by Deputy Vice Dean, Peggy Bishop Lane, who pointed out that the desire for student body cohesion did not imply a need for conformity.

In parallel to beginning a post along these lines, I caught up on some bloglines reading that had been building up.  Christine Herron’s recent post on the challenges of multiple online identities really struck a chord with me.  I began to recognize that my case of writer’s block was as much from my struggle with how much to reveal in this public forum (syndicated directly onto Wharton’s official adcom blog) than it was from a lack of topical passions.  Christine writes:

“Blogging has forced many individuals to address the challenges of identity. Honest writing reveals our less-polished sides, forcing us to be honest about ourselves and to become more comfortable with our multiple identities.”

Those who know me would probably be quick to confirm that in person I am an open book who will rarely shy away from any topic, no matter how personal.  How should I, however, translate that openness in this forum? Will critical commentary about administrators, classmates, professors, or companies be misinterpreted without the availability/filter of face to face dialogue?  How will my (online) opinions translate into real world treatment by my community?

In challenging myself on these questions, I found the true struggle (and inspiration) of this past week.  There are things during the past week that made me truly excited, things that I found disappointing, incidents that brought out the cynic in me, and others that stirred passions.  The challenge of my next two years will be how I respond to these (publicly, privately, personally, communally).  As someone who believes in the beauty of malleable institutions, how will I challenge attitudes and prevailing norms? How will I assert my multi-dimensional identity in a landscape that while professing the need for non-conformity seems to often reward it?

I suppose it was a week more filled with questions than answers, but it was certainly a stimulating start.