November 2018

Episode #218: Interview with Warren Meyer

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Biography

Ron and Ed were excited to have on economist and blogger Warren Meyer. 

Warren runs a large small business, by which he means that it seems to require a tremendous amount of work for the money it makes. His company runs parks and campgrounds under concession contracts with public recreation authorities. Before becoming an entrepreneur he worked from other people in companies as large as Exxon and as small as 3-person Internet startups. He has an MBA from the Harvard Business School and a mechanical engineering degree from Princeton University.

But we are going to speak with him about his blogging activities including his work at CoyoteBlog.com and Climate-Skeptic.com. He also has written a novel called BMOC and several books and videos on climate change.

Ed’s Questions—Segments One and Three

Let’s talk about yourself and your company, Recreation Resource Management?

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I’m a staunch libertarian, as I think you are, often times when I hear public/private partnership, I think crony capitalism, but it sounds like you have a good deal going here?

The California wildfires, is this mismanagement of the Park Services. Any thoughts on that?

It sounds like a worse mess than the Fed, which is to balance unemployment and interest rates because there’s five or six competing interests here?

Your video presentation at Claremont College, explain what you mean when you call yourself a luke-warmer?

You have another proposal regarding healthcare. It’s one of the most innovative proposals. I love it and hate it, so it must be a good idea.

We’d also see a dramatic expansion of concierge and direct primary care medicine where people would subscribe to a doctor.

Reminds me of a line, if you look at a balance sheet of the US government you realize it’s a large insurance company with an army.

If we were responsible for our first 10% of heath care, what percentage of the transactions would that be, it has to be like 90% right?

Ron’s Questions—Segments Two and Four

We were discussing during the break this FEE article, “Why We Need More Climate Change Skeptics” by Doug Casey his point is climate scientists are not prophets. Scientists have made many mistakes, from Rachel Carson’s book, Silent Spring, causing the deaths of 30-50 million people in Africa from malaria due to the banning of the pesticide DDT. He defines the 97% consensus on climate change as “climate scientists actively publishing in scientific journals. That’s who the survey was sent to, so there’s obviously a selection bias, as only those advocating are going to publish, not the skeptics. Do you think it’s become too political?

Science progresses by dissent, not consensus. At one point, most doctors believed bloodletting was effective.

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Plate tectonic theory [and how it was rejected for so long] is a great example. You can be alone and still be right in science. It’s not up for a vote.

Some of this climate science based on computer models, and the Club of Rome had computer models, too, which were wrong. Garbage in, garbage out, right?

It seems like when they do release the data, it’s disproven. We just had that mathematician call out mistakes in some recent data released.

You have an interesting proposal on the carbon tax and income tax. Can you explain that?

It’s a great idea, that’s the problem with it, it’s too logical. Do you think Congress would ever do it?

Picking up on your proposals that both sides tend to hate, what is your position on the Universal Basic Income.

That’s Charles Murray’s idea, pass a constitutional amendment to get rid of everything else, including Social Security, and replace it with a UBI. But that doesn’t seem like it would fly politically.

You wrote a post about doing business in California, and how you are pulling out due to the regulatory environment, not so much the taxes.

In your post, Doing Business In California, you cite how Governor Brown signed more than 1,000 bills this year. The governor Tweeted that he decided on nearly 20,000 bills in his 16 years." (source).

I love how you pick on Elon Musk In my extended article the other day about Tesla I wrote of Elon Musk [“Elon Musk is not the smartest guy in the world. He is clearly a genius at marketing and brand building. He has a creative mind -- I have said before he would have been fabulous at coming up with each issue's cover story for Popular Mechanics.”]. Do you think Tesla would sell without the subsidies (it doesn’t in OZ, other countries)?

What is your novel "BMOC" about?

Episode #217: The Subscription Business Model

We used to know the people we bought from: the butcher, baker, blacksmith, barber, farmer, etc. All that knowledge got lost when the Industrial Revolution ushered in the product era. That knowledge is coming back in a big way!

The idea is turn customers into subscribers—the Subscription Economy, according to Tien Tzuo in his book, Subscribed: Why the Subscription Model Will Be Your Company’s Future—and What to Do About It.

World is moving from products and services to subscriptions, favoring access and outcomes (Transformations) over ownership and deliverables. Customization, not standardization, constant improvement, not planned obsolescence. Lock-in and Switching Costs effects.

According to McKinsey, the subscription ecommerce market has grown by more than 100% a year for past five years. Subscription-based companies are growing eight times faster than the S&P 500 (17.6% vs. 2.2%), and five times than US retail sales market (17.6% vs. 3.6%). Companies running on subscription models grow their revenue more than nine times faster than the S&P 500.

Tzuo argues this model is industry agnostic:

Health Care, Concierge, Direct Primary Care, Amazon Prime and Rx, Education (it fires their customers after four years); Insurance; Pet Care; Utilities; Real Estate; Finance; Automobiles; Newspapers, etc.

Subscriptions are a forward-looking revenue model, as seamless as buying a book on Amazon. It changes the question from “How many services can we sell?” to “What does our customer want, and how can we deliver that as an intuitive service?”

Competitors can steal your service features, but they can’t steal your insights you gain from an active, loyal subscriber base.

Salesforce and Amazon don’t have customer segments, they have individual subscribers (Prime has 90 million subscribers who spend an average of $117 billion per year). Other businesses that have subscription models, either in total or in part:

  • Apple: Earnings call Feb 1, 2018: service revenue $31.15 billion in 2017, growing at 27% a year, more than half of Apple’s growth

  • Spotify: 50 million subscribers > 20% global music industry revenues

  • Netflix: Spends $8 billion a year on original content, providing new and innovative services to its subscribers

  • Gillette: Market share decreased to 54% (2016) from 70% (2010), because of Harry’s and Dollar Shave Club

  • Warby Parker: Averaging $3,000/sq. ft. retail space (slightly less than Tiffany’s), because 85% of foot traffic has done extensive browsing online

  • Uber/Lfyt: 60 million riders (testing flat-rate subscriptions, no surge)

  • Starbucks: More than 13 million Starbucks rewards program

Old business model: Products/Services > Channels > Customers

New business model: Services > Subscriber > Experiences > Channels

From linear transactional channels to a circular, dynamic relationship with your subscriber.

Fender guitars, 90% new users quit within one year, so Fender launched subscription-based online video teaching, Fender Play. By simply reducing the abandonment rate by 10%, it could double the size of its market (applying a service-oriented mindset to a static product).

Instead of margins and unit sales, thinking about subscriber bases and engagement rates.

Other industries where subscription business model is happening:

Automobiles

Hyundai’s new hybrid, Ioniq, you can subscribe to for $275/month. Makes owning a car as easy as a mobile device.

Porsche’s Passport, half dozen models, covers maintenance, insurance, and vehicle tax and registration, starting at $2,000 per month.

Cadillac, $1800/month, switch out vehicles as frequently as 18 times per year.

Volvo: XC40, $600/month.

One out of five autos are expected to be subscription by 2023. Here’s the differences between subscribing to a car and leasing one: 

  • Not bound to specific vehicle

  • Signing up with the company, not the car

  • R&M, etc., go away

  • Can’t buy the car at the end (company’s interest to keep car in good condition, not yours)

Data and services associated with vehicle > vehicle itself (Spotify, Sirius, OnStar). From car manufacturers, but transportation solutions (Ford: make that “bed to bed” journey as simple as possible). 

Airlines

SurfAir: Uber of the skies: limitless flights for a flat monthly fee, western USA and Europe (more than 200 million frequent fliers up for grabs!).

Newspapers

169 million US adults read newspapers online, 70% of the adult population.

  • Financial Times metrics: Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read)

  • The Economist: Charges for digital and print, increased revenue 25%

  • New York Times: 60% revenue comes directly from readers, more than $1 billion, digital-only subscription revenue exceeded print advertising revenue in the second quarter of 2017.

Software

Gartner predicts by 2020, 80%+ software providers will have shifted to subscription-based models (no growth left in on-premises software).

Swallowing the fish: as the revenue curve temporarily dips below the operating expense curve before climbing back upward again.

Adobe launched Creative Suite, a perpetual license in 2012. The new metrics (not GAAP): AAR = Annual Recurring Revenue (ARR); ACV (Annual Contract Value).

Digital subscriptions in May 2013 (Adobe Creative Cloud), let customers know, no longer updating Creative Suite: from 0 to 100% subscriptions in three years, inspired Microsoft, Autodesk, Intuit, and PTC. Today, over 70% Adobe’s revenue is recurring

Microsoft, Office 365, IBM, Symantec, Sage, HP Enterprise, Qlik: IT buyers prefer opex to capex.

Creates deferred revenue, so quarterly GAAP metrics can take short-term hit.

Hardware companies, too: Cisco is swallowing the fish.

IOT and Manufacturing

What can’t your subscribe to? A refrigerator? Roof? Tease out the service-level agreement that sits behind the product! 

  •  Refrigerator: fresh, cold food

  •  Roof: solar energy

Selling the milk, not the cow.

Komatsu uses drones to survey a site in 30 minutes, which changes the question from: How many trucks can I sell you? To How much dirt do you need moved?

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Advantages

  • Predictable revenue

  • Customer lock-in and Switching costs

  • Not selling services, but creating annuities with a lifetime value that far exceeds whatever you paid to acquire them

  • Collective knowledge of our customers is a competitive advantage can’t be duplicated

  • 1:1 Marketing: Changes the 4 Ps of marketing (pricing is most important). We’re not pricing a service, we’re pricing an outcome and insurance (peace of mind)

  • Monitor usage, solve problems, pursue opportunities, and provide Transformations 1:1

  • Shift to a long-term relationship focus rather than delivering tasks

  • Allows for faster growth, as will attract new customers (rather than just selling more to current customers)

  • We can plan capacity more effectively

  • Moving beyond efficiencies and into possibilities (don’t solve problems, pursue opportunities, Drucker, otherwise starve your successes and feed your failures)

  • Breaks down silos, mold organization around needs of customer

  • Actuarial approach to risk pricing, work planning, etc. (20/80 rule)

  • Tears down silos: Portfolio approach to analyzing profit, rather than silo DCM and Realization Rates,

  • Truly “one-firm” model (this doesn’t just talk about one-firm, it achieves it!)

  • New metrics (not GAAP): AAR = Annual Recurring Revenue (ARR); ACV (Annual Contract Value)

  • Recency (last visit), Frequency (how often do they visit), and Volume (how many articles read); to keep customers renewing and re-engaging, have to provide real value

  • Dynamic cycle of action: renew, suspend, upgrade, downgrade, etc.

  • Experiment with different value metrics: tied to: seats, boxes, events, gigabytes, locations, texts, family members, you name it

  • Companies that employ a small amount of usage-based pricing in their revenue mix (less than 10%) grew more than twice as fast on average, with lower churn rates.

Episode #216: Interview with Dr. Walter Williams

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Biography

Born in Philadelphia, Pennsylvania, Dr. Walter E. Williams holds a B.A. in economics from California State University, Los Angeles, and M.A. and Ph.D. degrees in economics from UCLA. He also holds a Doctor of Humane Letters from Virginia Union University and Grove City College, Doctor of Laws from Washington and Jefferson College. Dr. Williams has served on the faculty of George Mason University in Fairfax, Virginia, as John M. Olin Distinguished Professor of Economics, since 1980; from 1995 to 2001, he served as department chairman. He has authored ten books: America: A Minority ViewpointThe State Against Blacks, All It Takes Is GutsSouth Africa's War Against CapitalismMore Liberty Means Less GovernmentLiberty vs. the Tyranny of SocialismUp From The Projects: An AutobiographyRace and Economics: How Much Can Be Blamed On Discrimination? and American Contempt for Liberty

Dr. Williams is the author of over 150 publications which have appeared in scholarly journals such as Economic InquiryAmerican Economic ReviewGeorgia Law ReviewJournal of Labor EconomicsSocial Science Quarterly, and Cornell Journal of Law and Public Policy and popular publications such as NewsweekIdeas on LibertyNational ReviewReader's DigestCato Journal, and Policy Review.

He has made scores of radio and television appearances which include “Nightline,” “Firing Line,” “Face the Nation,” Milton Friedman’s “Free To Choose,” “Crossfire,” “MacNeil/Lehrer,” “Wall Street Week” and was a regular commentator for “Nightly Business Report.” He is also occasional substitute host for the “Rush Limbaugh” show. In addition Dr. Williams writes a nationally syndicated weekly column that is carried by approximately 140 newspapers and several web sites. His most recent documentary is “Suffer No Fools,” shown on PBS stations Fall/Spring 2014/2015, based on Up from the Projects: An Autobiography

Dr. Williams serves as Emeritus Trustee at Grove City College and the Reason Foundation. He serves as Director for the Chase Foundation and Americans for Prosperity. He also serves on numerous advisory boards including: Cato Institute, Landmark Legal Foundation, Institute of Economic Affairs, and Heritage Foundation. Dr. Williams serves as Distinguished Affiliated Scholar at the Mercatus Center at George Mason University. 

Dr. Williams has received numerous fellowships and awards including: the 2017 Bradley Prize from the Lynde and Harry Bradley Foudation, the Fund for American Studies David Jones Lifetime Achievement Award, Foundation for Economic Education Adam Smith Award, Hoover Institution National Fellow, Ford Foundation Fellow, Valley Forge Freedoms Foundation George Washington Medal of Honor, Veterans of Foreign Wars U.S. News Media Award, Adam Smith Award, California State University Distinguished Alumnus Award, George Mason University Faculty Member of the Year, and Alpha Kappa Psi Award. 

Dr. Williams has participated in numerous debates, conferences and lectures in the United States and abroad. He has frequently given expert testimony before Congressional committees on public policy issues ranging from labor policy to taxation and spending. He is a member of the Mont Pelerin Society, and the American Economic Association.

Ed’s Questions

Your show Good Intentions, do you think the situation is better or worse, and why can’t we seem to shake this good intentions versus actual outcomes paradigm we’re stuck in?

What, specifically, do you mean by spiritual poverty?

Do you think the current welfare regime contributes to this situation because it encourages this behavior because of the way the programs are structured?

I’ve heard you speak eloquently on the freedom of association and the impact it has from an economic standpoint. Would you mind talking a little bit about that?

I’d actually prefer that bigots self-identify so I could avoid them.

Ron’s Questions

You published your autobiography, Up From The Projects: An Autobiography, in 2010. One story I found fascinating was about your economics professor Armen Alchian, who asked the class: why do we build the Golden Gate bridge when a military bridge would do just fine? He didn’t know the answer. Do you now have an answer to that question?

[Professor Williams recommends the book Universal Economics, based on Armen Alchian’s work].

In 1989, you published South Africa's War Against Capitalism, which sounded like an ironic title at the time. What would you say is the biggest misperception about apartheid [apart-hate]?

Speaking of immigration, what would be your preferred policy on immigration?

Would you be for more legal immigration?

Do you favor a point system, or charging people, to get into the country?

Do you think we’ll ever see a market for body organs?

I find it ironic that Iran allows the sale of body organs, but here in the capitalist west we do not?

You and Dr. Sowell have taught me that a shortage usually has nothing to do with actual physical scarcity but because the price is wrong.

If we had to rely solely on people’s altruism, we’d have a materially lacking life.

If you had a meeting with president Trump, what would be one piece of economic advice would you give him?