Networks of the Future?

Matias Costa for The New York Times

Martin Varsavsky, in his Madrid home, started FON to let members piggyback on the wireless access of other members worldwide. But his big idea is encountering some obstacles.

By JOHN MARKOFF

Published: May 25, 2008
Copyright 2008 The New York Times Company

SITTING on the porch at Finca Torrenova, his 800-acre retreat on this Mediterranean island, Martin Varsavsky ticks off the credentials of the group of Internet entrepreneurs finishing lunch at a nearby table.

“He has 40 million uniques, he has 50 million, and he has 8 million,” Mr. Varsavsky says, referring to the number of visitors to Web sites owned by his guests — many of whom are also business associates and have joined him for several days of brainstorming about the digital future.

These days, commercial victory on the Internet is all about scale, and Mr. Varsavsky, a 48-year-old from Argentina, can be forgiven for speaking longingly and in detail about his peers’ achievements. No stranger to success — he has had a tidy crop of new media and telecommunications hits since the 1990s — he is still struggling to bring his newest Internet venture to fruition.

Three years ago, aiming to create a global wireless network, he founded FON, a company based in Madrid that wants to unlock the potential power of the social Internet. FON’s gamble is that Internet users will share a portion of their wireless connection with strangers in exchange for access to wireless hotspots controlled by others.

The swaps, in theory, would allow “Foneros” to have ubiquitous, global wireless access while traveling for business or pleasure. But despite $55.2 million in backing from such corporate heavyweights as Google and BT, the former British Telecom, as well as newer enterprises like Skype and a handful of venture capital firms, FON and Mr. Varsavsky are still missing a crucial ingredient: scale.

At the moment, there are just 830,000 registered Foneros around the world, and only 340,000 active Wi-Fi hotspots run FON software. Because it’s built upon the concept of sharing Wi-Fi access, FON works well only if there are Foneros everywhere.

And as he struggles to expand the FON network, Mr. Varsavsky faces particular hurdles now that the Internet’s commercial side has reached a crossroads. Born a few decades ago as an anarchic, digital version of a barn-raising, the wireless Internet is now a battleground between two giant technology consortiums seeking to rein in the Web’s chaotic openness in favor of creating uniform, global access built upon wireless data networks.

The two camps, known as WiMax and L.T.E., for “long-term evolution,” are both top-down, highly structured approaches that will cost billions of dollars to build and may close a door on some of the architectural openness that led to the rapid growth of the Internet.

But their potential advantage is that closed standards can encourage the kind of growth that offers more access to mainstream consumers and business users, as occurred when Microsoft imposed a measure of conformity on software development.

For his part, Mr. Varsavsky hopes that FON can offer a middle ground — deploying the original, bottom-up strengths of the early Internet movement and at the same time wedding them to a more formal, corporate approach to expansion.

Although FON faces huge obstacles in realizing those ambitions, the company also has a growing number of devotees.

“The wireless Internet market today is fragmented and complex — it can be accessed through 3G operators, through WiMax, through private hotspots, through paid hotspots and through corporate networks,” said Michael Jackson, a partner at Mangrove Capital in London and a former FON board member. “In summary, it is a nightmare for a consumer. FON can and will change this.”

But others have their doubts.

“I know that the people at Google like this idea,” said John Saw, the chief technology officer at Clearwire, the WiMax start-up of Craig McCaw, which recently announced a $14.5 billion joint venture to build a nationwide WiMax network with Sprint, Google, Intel, Comcast and others. “But we’re skeptical.”

Undeterred, Mr. Varsavsky says that what he currently lacks in scale he can make up for in huge cost savings, particularly because FON avoids the expensive proposition of having to build a worldwide network of cellular towers and Wi-Fi nodes from scratch.

“Our army of Foneros is a much more efficient way of distributing a signal,” he says. “We believe WiMax operators will be happy to have some customers use their services for free and save billions in infrastructure deployment.”

MR. VARSAVSKY has worked overtime trying to line up more high-profile partners for FON. To that end, he traveled to Cupertino, Calif., last fall to meet with Steve Jobs, the chief executive of Apple.

During that 90-minute meeting, Mr. Varsavsky says, the two men discussed why a partnership might make sense.

Apple has sold millions of its Wi-Fi routers to residential customers, and its community of Wi-Fi users who share router access would be an ideal platform for FON. For his part, Mr. Jobs had developed an interest in Wi-Fi sharing because of the expanding number of iPhone users who are often frustrated by locked Wi-Fi access points.

But, Mr. Varsavsky says, from the moment that he and Mr. Jobs met, their discussion devolved into an argument. (Mr. Jobs did not respond to requests to comment on the meeting.)

At the outset, Mr. Varsavsky recalled, Mr. Jobs asked sharply, “Who needs your community?” and “Why should British Telecom bother to do a deal with you, and why shouldn’t people just leave their routers open for sharing?”

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FON, via Associated Press

FON hopes its routers, open to anyone in the network, will help its service catch on.

Mr. Varsavsky says he responded, “Why should you bother to do a deal with AT&T? Shouldn’t iPhones just be connected freely with any cellphone network?”

Mr. Varsavsky says he left the meeting with the uncomfortable feeling that Apple might end up as a competitor rather than as a partner. But it wasn’t only because of Mr. Jobs’s legendary stubbornness that the Apple meeting apparently went awry. Mr. Varsavsky’s own substantial ego also came into play — something he freely acknowledges when he talks about how he first got into business.

“My father died and my mother was saying, ‘Martin, get a job, get a job,’ ” he recalls. “And I would go to job interviews and they would say, ‘How do you see yourself in five years?’ And I would say, ‘Well, at least as your boss!’ ”

That attitude surfaced in other forums as well. In high school in Argentina during the 1970s, he says, he persuaded classmates to open their own office supply store to compete with a store across the street from their school. He also declared his interest in left-leaning politics, which he said attracted the attention of the Argentine military junta that was purging high schools of dissidents. In the “dirty war” of 1976-83, the government killed thousands it suspected of being leftists.

An officer told the school to expel him, Mr. Varsavsky says, and he left for Brazil. Around the same time, he believes, his cousin was kidnapped and killed by the military. The Varsavsky family fled to the United States, and Mr. Varsavsky earned his undergraduate degree in economics and philosophy at New York University in 1981. He later attended Columbia University, where he received graduate degrees in international affairs and business administration.

MR. VARSAVSKY says start-ups got into his blood during graduate school, when he made his first million in a real estate foray: renovating and reselling lofts in New York.

After moving to Spain in the 1990s, he had three big telecommunications and Internet successes. He says that a $200,000 investment he made to start a long-distance company, Viatel, in 1990 was worth about $240 million when he cashed in his stake in 1999; that the 5 million euros he used to start Jazztel in 1997 has given him a stake now worth about 150 million euros; and that the 38 million euros he used to start a Spanish Internet service provider, Ya.com, in 1999 had grown to about 149 million euros when he sold the company the next year.

Then, after this first round of success, Mr. Varsavsky was hit with a loss that he describes as a striking, gut-wrenching failure. His German start-up EinsteinNet, founded in 2000 as an effort to sell software over a private fiber optic network, collapsed in 2003, leaving him with a personal loss of $50 million.

“I used the most money of my own in a company where I lost it all, and I consider it my business black eye,” he recalls, saying that he also drew a valuable lesson from the misadventure: “I don’t invest on my own. If other people don’t want to back me, it’s a sanity check.”

TO that end, Mr. Varsavsky has become a tireless networker, traveling the world to participate in a continuous parade of technology conferences and cultivating a global retinue of friends and contacts. He has also been active on the philanthropic front, earning kudos from a onetime resident of the White House.

“Martin represents the future of entrepreneurial culture and is helping to transform the way people give,” former President Bill Clinton says. “He has found different ways to use his acute business sense and creativity to improve our world and the lives of others.”

This month, Mr. Varsavsky brought together more than 70 Internet business people and technologists from Europe, Asia, Latin America and the United States for a conclave on his Menorca farm. Some guests represented the more than 20 digital enterprises in which he has a stake; others were “friends of Martin,” a loose-knit group that comprises his informal business network around the world.

The four-day conclave featured several unscripted “tech talks” in which entrepreneurs described problems they faced building their businesses. Participants included Lukasz Wejchert, the chief executive of Onet, Poland’s dominant Internet portal.

Deals with companies like Onet will be crucial if Mr. Varsavsky is to make good on his goal of having a million FON customers on each of three continents by 2010. The two companies recently came close to a deal, Mr. Wejchert says, but Onet decided that it was still to early for it to become an Internet service provider in Poland because the regulatory environment worked against new entrants.

That major players like Onet are beginning to find FON a potentially profitable partner is promising, and Mr. Varsavsky’s formidable networking abilities with politicians and entrepreneurs are also a plus. Ultimately, however, FON’s success will hinge on its strategic soundness and operational prowess — not on Mr. Varsavsky’s skills at working the cocktail circuit

He likes to refer to FON as a “revolution,” but so far his crusade has had difficulty gathering momentum because formal corporate alliances have been slow to jell.

In Mr. Varsavsky’s approach, FON’s business is subsidized by non-Foneros — passing Web surfers who buy time for access to the network — which he can then share with FON’s customers. The approach is different from that of Boingo, a Wi-Fi aggregator based in Los Angeles that charges users a monthly fee for using hotspots while they are traveling.

Yet both FON and Boingo have faced significant resistance from Internet service providers that carefully restrict access to their customers, leaving the idea of a seamless wireless Internet based on Wi-Fi technology an unfulfilled dream so far.

Mr. Varsavsky said he initially hoped that selling $30 Wi-Fi routers embedded with FON software would be all he needed to expand the ranks of Foneros around the globe. But this approach failed to gain traction fast enough, and he shifted gears. Now he is trying to steadily stack up distribution deals with I.S.P.’s.

While some I.S.P.’s have ignored his company, Mr. Varsavsky says FON has gained ground among I.S.P.’s that are looking for a way to attract new customers in competitive markets as well as to compete with high-speed wireless cellular networks.

FON now has a growing range of alliances, including ones with the BT Group, Neuf Cegetel in France, Livedoor (a Japanese I.S.P.), and Time Warner in the United States, as well as a recent agreement with the city of Geneva, which is distributing hundreds of FON routers to residents. Now strongest in Britain, France and Japan, FON has recently made progress with new agreements with two major Japanese retailers and a Taiwanese I.S.P. And Mr. Varsavsky said he is close to major agreements in India and Russia.

FON’s losses have shrunk from more than a million euros a month to less than 500,000, Mr. Varsavsky says. He also hasn’t given up his belief that a coming generation of wireless Internet technology will eventually give FON an even bigger boost.

The first generation of Wi-Fi technology was limited in range, making it impractical for Foneros to share their routers widely. But a new wireless technology, known as 802.16, which should be more widely available to consumers over the next two years, will offer far greater ranges.

This next generation of wireless communication, called WiMax by Intel and others, may allow him to complete his dream — in effect making it possible to weave together a wireless digital network in an urban area with nothing more than an army of Foneros willing to let their routers be used as micro cell towers.

“Why should anyone have to build their own towers?” he asks.

FON’s future, he argues, will revolve around universal access to the wireless Internet. In the meantime, he faces a big obstacle in one of the world’s most lucrative communications markets: the United States, where newer cellular networks with flat-rate pricing may prove a challenge because they will provide universal high-speed coverage.

In Europe, the Internet landscape looks more promising. The European Commission’s decision last summer to place a price cap on voice calls — to make cellphones more affordable for residents traveling within the European Union — didn’t include mobile data. Recent high-speed wireless networks introduced in Europe also use per-megabyte pricing, discouraging the streaming of large files like video.

That leaves a potentially big opportunity for a widely accessible sharing solution for travelers. Yet even in Europe, there are potential roadblocks, not the least of which has been a historically inhospitable atmosphere for entrepreneurial gambits.

“Europe has a larger market than the U.S.A., but it is culturally fragmented and risk-averse,” Mr. Varsavsky says. “But the differences are narrowing, and now there are European venture capitalists and a local entrepreneurial culture.”

Yet he remains undaunted when he discusses his unfinished revolution and FON’s prospects.

“FON,” he said, “is like a telephone company built by the people,” he said.

Monitor

The battle for Wikipedia's soul

Mar 6th 2008
From The Economist print edition

The internet: The popular online encyclopedia, written by volunteer contributors, has unlimited space. So does it matter if it includes trivia?

Illustration by Frazer Hudson

IT IS the biggest encyclopedia in history and the most successful example of “user-generated content” on the internet, with over 9m articles in 250 languages contributed by volunteers collaborating online. But Wikipedia is facing an identity crisis as it is torn between two alternative futures. It can either strive to encompass every aspect of human knowledge, no matter how trivial; or it can adopt a more stringent editorial policy and ban articles on trivial subjects, in the hope that this will enhance its reputation as a trustworthy and credible reference source. These two conflicting visions are at the heart of a bitter struggle inside Wikipedia between “inclusionists”, who believe that applying strict editorial criteria will dampen contributors' enthusiasm for the project, and “deletionists” who argue that Wikipedia should be more cautious and selective about its entries.

Consider the fictional characters of Pokémon, the Japanese game franchise with a huge global following, for example. Almost 500 of them have biographies on the English-language version of Wikipedia (the largest edition, with over 2m entries), with a level of detail that many real characters would envy. But search for biographies of the leaders of the Solidarity movement in Poland, and you would find no more than a dozen—and they are rather poorly edited.

Inclusionists believe that the disparity between Pokémon and Solidarity biographies would disappear by itself, if only Wikipedia loosened its relatively tight editorial control and allowed anyone to add articles about almost anything. They argue that since Wikipedia exists online, it should not have the space constraints of a physical encyclopedia imposed upon it artificially. (“Wikipedia is not paper”, runs one slogan of the inclusionists.)

Surely there is no harm, they argue, in including articles about characters from television programmes who only appear in a single episode, say? After all, since most people access Wikipedia pages via search, the inclusion of articles on niche topics will not inconvenience them. People will not be more inclined to create entries about Polish union leaders if the number of Pokémon entries is reduced from 500 to 200. The ideal Wikipedia of the inclusionists would feature as many articles on as many subjects as its contributors were able to produce, as long as they were of interest to more than just a few users.

Deletionists believe that Wikipedia will be more successful if it maintains a certain relevance and quality threshold for its entries. So their ideal Wikipedia might contain biographies of the five most important leaders of Solidarity, say, and the five most important Pokémon characters, but any more than that would dilute Wikipedia's quality and compromise the brand. The presence of so many articles on trivial subjects, they argue, makes it less likely that Wikipedia will be taken seriously, so articles dealing with trivial subjects should be deleted.

The rules of the game

In practice, deciding what is trivial and what is important is not easy. How do you draw editorial distinctions between an article entitled “List of nicknames used by George W. Bush” (status: kept) and one about “Vice-presidents who have shot people” (status: deleted)? Or how about “Natasha Demkina: Russian girl who claims to have X-ray vision” (status: kept) and “The role of clowns in modern society” (status: deleted)?

To measure a subject's worthiness for inclusion (or “notability”, in the jargon of Wikipedians), all kinds of rules have been devised. So an article in an international journal counts more than a mention in a local newspaper; ten matches on Google is better than one match; and so on. These rules are used to devise official policies on particular subjects, such as the notability of pornographic stars (a Playboy appearance earns you a Wikipedia mention; starring in a low-budget movie does not) or diplomats (permanent chiefs of station are notable, while chargés d'affaires ad interim are not).

Jimmy Wales, the founder of Wikipedia, has himself fallen foul of these tricky notability criteria. Last summer he created a short entry about a restaurant in South Africa where he had dined. The entry was promptly nominated for deletion, since the restaurant had a poor Google profile and was therefore considered not notable enough. After a lot of controversy and media coverage (which, ahem, increased the restaurant's notability), the entry was kept, but the episode prompted many questions about the adequacy of the editorial process.

As things stand, decisions whether to keep or delete articles are made after deliberations by Wikipedia's most ardent editors and administrators (the 1,000 or so most active Wikipedia contributors). Imagine you have just created a new entry, consisting of a few words. If a member of the Wikipedia elite believes that your submission fails to meet Wikipedia's notability criteria, it may be nominated for “speedy” deletion—in other words, removed right away—or “regular” deletion, which means the entry is removed after five days if nobody objects. (To avoid deletion or vandalism, many highly controversial articles, such as the entries on the Holocaust, Islam, terrorism or Mr Bush, can be “locked” to prevent editing or removal.)

If your article is selected for deletion, you may choose to contest the decision, in which case you may be asked to provide further information. There is also a higher authority with the ultimate power to rule in controversial cases: the Arbitration Committee, which settles disputes that the administrators cannot resolve.

Debates about the merits of articles often drag on for weeks, draining energy and taking up far more space than the entries themselves. Such deliberations involve volleys of arcane internal acronyms and references to obscure policies and guidelines, such as WP:APT (“Avoid Peacock Terms”—terms that merely promote the subject, without giving real information) and WP:MOSMAC (a set of guidelines for “Wikipedia articles discussing the Republic of Macedonia and the Province of Macedonia, Greece”). Covert alliances and intrigues are common. Sometimes editors resort to a practice called “sock puppetry”, in which one person creates lots of accounts and pretends to be several different people in a debate so as to create the illusion of support for a particular position.

The result is that novices can quickly get lost in Wikipedia's Kafkaesque bureaucracy. According to one estimate from 2006, entries about governance and editorial policies are one of the fastest-growing areas of the site and represent around one-quarter of its content. In some ways this is a sign of Wikipedia's maturity and importance: a project of this scale needs rules to govern how it works. But the proliferation of rules, and the fact that select Wikipedians have learnt how to handle them to win arguments, now represents a danger, says Andrew Lih, a former deletionist who is now an inclusionist, and who is writing a book about Wikipedia. The behaviour of Wikipedia's self-appointed deletionist guardians, who excise anything that does not meet their standards, justifying their actions with a blizzard of acronyms, is now known as “wiki-lawyering”.

Mr Lih and other inclusionists worry that this deters people from contributing to Wikipedia, and that the welcoming environment of Wikipedia's early days is giving way to hostility and infighting. There is already some evidence that the growth rate of Wikipedia's article-base is slowing. Unofficial data from October 2007 suggests that users' activity on the site is falling, when measured by the number of times an article is edited and the number of edits per month. The official figures have not been gathered and made public for almost a year, perhaps because they reveal some unpleasant truths about Wikipedia's health.

It may be that Wikipedians have already taken care of the “low-hanging fruit”, having compiled articles on the most obvious topics (though this could, again, be taken as evidence of Wikipedia's maturity). But there is a limit to how much information a group of predominantly non-specialist volunteers, armed with a search engine, can create and edit. Producing articles about specialist subjects such as Solidarity activists, as opposed to Pokémon characters, requires expert knowledge from contributors and editors. If the information is not available elsewhere on the web, its notability cannot be assessed using Google.

Illustration by Frazer Hudson

To create a new article on Wikipedia and be sure that it will survive, you need to be able to write a “deletionist-proof” entry and ensure that you have enough online backing (such as Google matches) to convince the increasingly picky Wikipedia people of its importance. This raises the threshold for writing articles so high that very few people actually do it. Many who are excited about contributing to the site end up on the “Missing Wikipedians” page: a constantly updated list of those who have decided to stop contributing. It serves as a reminder that frustration at having work removed prompts many people to abandon the project.

Google has recently announced its own entry into the field, in the form of an encyclopedia-like project called “Knol” that will allow anybody to create entries on topics of their choice, with a voting system that means the best rise to the top. Tellingly, this approach is based on individualism rather than collaboration (Google will share ad revenues with the authors). No doubt it will produce its own arguments and unexpected consequences. But even if it does not turn out to be the Wikipedia-killer that some people imagine, it may push Wikipedia to rethink its editorial stance.

Case history

In search of the perfect battery

Mar 6th 2008
From The Economist print edition

Energy technology: Researchers are desperate to find a modern-day philosopher's stone: the battery technology that will make electric cars practical. Here is a brief history of their quest

Getty Images

WHEN General Motors (GM) launched the EV1, a sleek electric vehicle, with much fanfare in 1996, it was supposed to herald a revolution: the start of the modern mass-production of electric cars. At the heart of the two-seater sat a massive 533kg lead-acid battery, providing the EV1 with a range of about 110km (70 miles). Many people who leased the car were enthusiastic, but its limited range, and the fact that it took many hours to recharge, among other reasons, convinced GM and other carmakers that had launched all-electric models to abandon their efforts a few years later.

Yet today about a dozen firms are once again developing all-electric or plug-in hybrid vehicles capable of running on batteries for short trips (and, in the case of plug-in hybrids, firing up an internal-combustion engine for longer trips). Toyota's popular Prius hybrid, by contrast, can travel less than a mile on battery power alone. Tesla Motors of San Carlos, California, recently delivered its first Roadster, an all-electric two-seater with a 450kg battery pack and a range of 350km (220 miles) between charges. And both Toyota and GM hope to start selling plug-in hybrids as soon as 2010.

So what has changed? Aside from growing concern about climate change and a surge in the oil price, the big difference is that battery technology is getting a lot better. Rechargeable lithium-ion batteries, which helped to make the mobile-phone revolution possible in the past decade, are now expected to power the increasing electrification of the car. “They are clearly the next step,” says Mary Ann Wright, the boss of Johnson Controls-Saft Advanced Power Solutions, a joint venture that recently opened a factory in France to produce lithium-ion batteries for hybrid vehicles.

According to Menahem Anderman, a consultant based in California who specialises in the automotive-battery market, more money is being spent on research into lithium-ion batteries than all other battery chemistries combined. A big market awaits the firms that manage to adapt lithium-ion batteries for cars. Between now and 2015, Dr Anderman estimates, the worldwide market for hybrid-vehicle batteries will more than triple, to $2.3 billion. Lithium-ion batteries, the first of which should appear in hybrid cars in 2009, could make up as much as half of that, he predicts.

Compared with other types of rechargeable-battery chemistry, the lithium-ion approach has many advantages. Besides being light, it does not suffer from any memory effect, which is the loss in capacity when a battery is recharged without being fully depleted. Once in mass production, large-scale lithium-ion technology is expected to become cheaper than its closest rival, the nickel-metal-hydride battery, which is found in the Prius and most other hybrid cars.

Still, the success of the lithium-ion battery is not assured. Its biggest weakness is probably its tendency to become unstable if it is overheated, overcharged or punctured. In 2006 Sony, a Japanese electronics giant, had to recall several million laptop batteries because of a manufacturing defect that caused some batteries to burst into flames. A faulty car battery which contains many times more stored energy could trigger a huge explosion—something no car company could afford. Performance, durability and tight costs for cars are also much more stringent than for small electronic devices. So the quest is under way for the refinements and improvements that will bring lithium-ion batteries up to scratch—and lead to their presence in millions of cars.

Alessandro Volta, an Italian physicist, invented the first battery in 1800. Since then a lot of new types have been developed, though all are based on the same principle: they exploit chemical reactions between different materials to store and deliver electrical energy.

Back to battery basics

A battery is made up of one or more cells. Each cell consists of a negative electrode and a positive electrode kept apart by a separator soaked in a conductive electrolyte that allows ions, but not electrons, to travel between them. When a battery is connected to a load, a chemical reaction begins. As positively charged ions travel from the negative to the positive electrode through the electrolyte, a proportional number of negatively charged electrons must make the same journey through an external circuit, resulting in an electric current that does useful work.

“Compared with computer chips, battery technology has improved very slowly over the years.”

Some batteries are based on an underlying chemical reaction that can be reversed. Such rechargeable batteries have an advantage, because they can be restored to their charged state by reversing the direction of the current flow that occurred during discharging. They can thus be reused hundreds or thousands of times. According to Joe Iorillo, an analyst at the Freedonia Group, rechargeable batteries make up almost two-thirds of the world's $56 billion battery market. Four different chemical reactions dominate the industry—each of which has pros and cons when it comes to utility, durability, cost, safety and performance.

The first rechargeable battery, the lead-acid battery, was invented in 1859 by Gaston Planté, a French physicist. The electrification of Europe and America in the late 19th century sparked the use of storage batteries for telegraphy, portable electric-lighting systems and back-up power. But the biggest market was probably electric cars. At the turn of the century battery-powered vehicles were a common sight on city streets, because they were quiet and did not emit any noxious fumes. But electric cars could not compete on range. In 1912 the electric self-starter, which replaced cranking by hand, meant that cars with internal-combustion engines left electric cars in the dust.

Nickel-cadmium cells came along around 1900 and were used in situations where more power was needed. As with lead-acid batteries, nickel-cadmium cells had a tendency to produce gases while in use, especially when being overcharged. In the late 1940s Georg Neumann, a German engineer, succeeded in fine-tuning the battery's chemistry to avoid this problem, making a sealed version possible. It started to become more widely available in the 1960s, powering devices such as electric razors and toothbrushes.

For most of the 20th century lead-acid and nickel-cadmium cells dominated the rechargeable-battery market, and both are still in use today. Although they cannot store as much energy for a given weight or volume as newer technologies, they can be extremely cost-effective. Small lead-acid battery packs provide short bursts of power to starter motors in virtually all cars; they are also used in large back-up power systems, and make up about half of the worldwide rechargeable-battery market. Nickel-cadmium batteries are used to provide emergency back-up power on planes and trains.

Time to change the batteries

In the past two decades two new rechargeable-battery types made their commercial debuts. Storing about twice as much energy as a lead-acid battery for a given weight, the nickel-metal-hydride battery appeared on the market in 1989. For much of the 1990s it was the battery of choice for powering portable electronic devices, displacing nickel-cadmium batteries in many applications. Toyota picked nickel-metal-hydride batteries for the new hybrid petrol-electric car it launched in 1997, the Prius.

Nickel-metal-hydride batteries evolved from the nickel-hydrogen batteries used to power satellites. Such batteries are expensive and bulky, since they require high-pressure hydrogen-storage tanks, but they offer high energy-density and last a long time, which makes them well suited for use in space. Nickel-metal-hydride batteries emerged as researchers looked for ways to store hydrogen in a more convenient form: within a hydrogen-absorbing metal alloy. Eventually Stanford Ovshinsky, an American inventor, and his company, now known as ECD Ovonics, succeeded in creating metal-hydride alloys with a disordered structure that improved performance.

Adapting the nickel-metal-hydride battery to the automotive environment was no small feat, since the way batteries have to work in hybrid cars is very different from the way they work in portable devices. Batteries in laptops and mobile phones are engineered to be discharged over the course of several hours or days, and they only need to last a couple of years. Hybrid-car batteries, on the other hand, are expected to work for eight to ten years and must endure hundreds of thousands of partial charge and discharge cycles as they absorb energy from regenerative braking or supply short bursts of power to aid in acceleration.

Lithium-ion batteries evolved from non-rechargeable lithium batteries, such as those used in watches and hearing aids. One reason lithium is particularly suitable for batteries is that it is the lightest metal, which means a lithium battery of a given weight can store more energy than one based on another metal (such as lead or nickel). Early rechargeable lithium batteries used pure lithium metal as the negative-electrode material, and an “intercalation” compound—a material with a lattice structure that could absorb lithium ions—as the positive electrode.

The problem with this design was that during recharging, the metallic lithium reformed unevenly at the negative electrode, creating spiky structures called “dendrites” that are unstable and reactive, and can pierce the separator and cause an explosion. So today's rechargeable lithium-ion batteries do not contain lithium in metallic form. Instead they use materials with lattice structures for both positive and negative electrodes. As the battery discharges, the lithium ions swim from the negative-electrode lattice to the positive one; during recharging, they swim back again. This to-and-fro approach is called a “rocking chair” design.

The first commercial lithium-ion battery, launched by Sony in 1991, was a rocking-chair design that used cobalt oxide for the positive electrode, and graphite (carbon) for the negative one. In the early 1990s, such batteries had an energy density of about 100 watt-hours per litre. Since then engineers have worked out ways to squeeze more than twice as much energy into a battery of the same size, in particular by reducing the width of the separator and increasing the amount of active electrode materials.

The high energy-density of lithium-ion batteries makes them the best technology for portable devices. According to Christophe Pillot of Avicenne Développement, a market-research firm based in Paris, they account for 70% of the $7 billion market for portable, rechargeable batteries. But not all lithium-ion batteries are alike. The host structures that accept lithium ions can be made using a variety of materials, explains Venkat Srinivasan, a scientist at America's Lawrence Berkeley National Laboratory. The combination of materials determines the characteristics of the battery, including its energy and power density, safety, longevity and cost. Because of this flexibility, researchers hope to develop new electrode materials that can increase the energy density of lithium-ion batteries by a factor of two or more in the future.

Hooked on lithium

The batteries commonly used in today's mobile phones and laptops still use cobalt oxide as the positive electrode. Such batteries are also starting to appear in cars, such as Tesla's Roadster. But since cobalt oxide is so reactive and costly, most experts deem it unsuitable for widespread use in hybrid or electric vehicles.

So researchers are trying other approaches. Some firms, such as Compact Power, based in Troy, Michigan, are developing batteries in which the cobalt is replaced by manganese, a material that is less expensive and more stable at high temperatures. Unfortunately, batteries with manganese-based electrodes store slightly less energy than cobalt-based ones, and also tend to have a shorter life, as manganese starts to dissolve into the electrolyte. But blending manganese with other elements, such as nickel and cobalt, can reduce these problems, says Michael Thackeray, a senior scientist at America's Argonne National Laboratory who holds several patents in this area.

In 1997 John Goodenough and his colleagues at the University of Texas published a paper in which they suggested using a new material for the positive electrode: iron phosphate. It promised to be cheaper, safer and more environmentally friendly than cobalt oxide. There were just two problems: it had a lower energy-density than cobalt oxide and suffered from low conductivity, limiting the rate at which energy could be delivered and stored by the battery. So when Yet-Ming Chiang of the Massachusetts Institute of Technology and his colleagues published a paper in 2002 in which they claimed to have dramatically boosted the material's conductivity by doping it with aluminium, niobium and zirconium, other researchers were impressed—though the exact mechanism that causes the increase in performance has since become the subject of a heated debate.

Dr Chiang's team published another paper in 2004 in which they described a way to increase performance further. Using iron-phosphate particles less than 100 nanometres across—about 100 times smaller than usual—increases the surface area of the electrode and improves the battery's ability to store and deliver energy. But again, the exact mechanism involved is somewhat controversial.

The iron-phosphate technology is being commercialised by several companies, including A123 Systems, co-founded by Dr Chiang, and Phostech Lithium, a Canadian firm that has been granted exclusive rights to manufacture and sell the material based on Dr Goodenough's patents. At the moment the two rivals are competing in the market, but their fate may be decided in court, since they are fighting a patent-infringement battle.

The quest for the perfect battery

Johnson Controls and Saft, which launched a joint venture in 2006, are taking a different approach, in which the positive electrode is made using a nickel-cobalt-aluminium-oxide. John Searle, the company's boss, says batteries made using its approach can last about 15 years. In 2007 Saft announced that Daimler had selected its batteries for use in a hybrid Mercedes saloon, due to go on sale in 2009. Other materials being investigated for use in future lithium-ion batteries include tin alloys and silicon.

CorbisLook, no exhaust pipe

At this point, it is hard to say which lithium-ion variation will prevail. Toyota, which is pursuing its own battery development with Matsushita, will not say which chemistry it favours. GM is also hedging its bets. The company is testing battery packs from both A123 Systems and Compact Power for the Chevy Volt (pictured), a forthcoming plug-in hybrid that will have an all-electric range of 40 miles and a small internal-combustion engine to recharge its battery when necessary. To ensure that the Volt's battery can always supply enough power and meet its targeted 10-year life-span, it will be kept between 30% and 80% charged at all times, says Roland Matthe of GM's energy-storage systems group.

GM hopes to start mass-production of the Volt in late 2010. That is ambitious, since the Volt's viability is dependent on the availability of a suitable battery technology. “It's either going to be a tremendous victory, or a terrible defeat,” says James George, a battery expert based in New Hampshire who has followed the industry for 45 years.

“We've still got a long way to go in terms of getting the ultimate battery,” says Dr Thackeray. Compared with computer chips, which have doubled in performance roughly every two years for decades, batteries have improved very slowly over their 200-year history. But high oil prices and concern over climate change mean there is now more of an incentive than ever for researchers to join the quest for better battery technologies. “It's going to be a journey”, says Ms Wright, “where we're going to be using the gas engine less and less.”

Double, oil and trouble

May 23rd 2008
From Economist.com

The price of oil is beyond $130 a barrel. Where will it stop?

AFP/Shutterstock

THE price of oil may soon hit $200 a barrel—or so, at any rate, believes Shokri Ghanem, Libya’s oil minister. A few years ago such a prediction would have seemed absurd. But the price has doubled in the past year and has risen by 40% this year alone. It touched yet another record, of over $135 a barrel (before dipping slightly) on Thursday 22nd May. So more spectacular increases seem all too plausible.

The immediate trigger for the latest jump seems to have been an unexpected fall in American oil inventories. But stocks, although falling, are not particularly low: in America, they are only slightly below the average of the past five years. Supplies of petrol and other refined fuels are actually a little above average. And since demand for oil and petrol are falling in America, lower stocks are not as much of a worry as they might normally be.

Mr Ghanem’s explanation for this curious state of affairs is to blame speculators, who are investing ever more enthusiastically in oil futures. Many others share his view. Joe Lieberman, an American senator, points out that the value of investment funds that aim to track the price of oil and other raw materials has risen from $13 billion to $260 billion over the past five years. He blames these “index speculators”, for a big part of the commodity-price increases. He and his colleagues in the Senate are so worried that they are contemplating measures to curb the traders’ exuberance.

Yet few bankers agree that speculation has much to do with price rises. For one thing, indexed funds do not actually buy any physical oil, since it is bulky and expensive to store. Instead they buy contracts for future delivery, a few months hence. When the delivery date approaches, they sell their contract to someone who actually needs the oil right away, and then invest the proceeds in more futures. So far from holding oil back from the market, they tend to be big sellers of oil for immediate delivery.

That is important because it means that there is no hoarding, typically a prerequisite for a speculative bubble. Indeed, as discussed, America’s stocks and those of most other countries are at normal levels. If the indexed funds were indeed pushing the price of oil beyond the level justified by supply and demand, then they would be having trouble selling their futures contracts at such high prices before they matured. But there is no sign of that. In fact, until recently, oil for immediate delivery was more expensive than futures contracts.

Economic theory suggests that the future price is simply traders’ best guess of the shape of things to come. And traders seem to be very worried about the future. They recently pushed up the price of oil to be delivered at the end of 2016 to over $145 a barrel.

They seem to be motivated by the sobering realities of supply and demand, rather than reckless speculation. The output of several big oil exporters, such as Russia, Mexico and Venezuela, is declining. Yet none of those countries allows foreign investors unfettered access to develop new fields or increase production from existing ones. Many of the most promising areas for exploration, including Saudi Arabia, Iraq and Iran, are in effect off-limits to Western oil firms. Worse, the cost of developing new fields is rising almost as fast as the oil price. Cambridge Energy Research Associates, a consulting firm, believes it has more than doubled since 2000.

All this means that global oil production is growing only slowly. Global demand, meanwhile, continues to rise, thanks to an ever-increasing thirst for oil in fast-growing developing countries such as China and India. Their increased consumption is more than compensating for falling demand for oil in rich countries. In other words, the investors that Messrs Lieberman and Ghanem accuse of unfounded speculation may instead have concluded that the world will be short of oil for some time to come. Instead of hectoring speculators, perhaps Mr Lieberman should be hounding Mr Ghanem and the leaders of other oil-rich countries to allow foreign oil firms more access.

Why Zappos Pays New Employees to Quit—And You Should Too

Why Zappos Pays New Employees to Quit—And You Should Too

Posted by Bill Taylor on May 19, 2008 10:06 AM

I spend a lot of time visiting with companies and figuring out what ideas they represent and what lessons we can learn from them. I usually leave these visits underwhelmed. There are plenty of companies with a hot product, a hip style, or a fast-rising stock price that are, essentially, one-trick ponies—they deliver great short-term results, but they don’t stand for anything big or important for the long term.

Every so often, though, I spend time with a company that is so original in its strategy, so determined in its execution, and so transparent in its thinking, that it makes my head spin. Zappos is one of those companies. Two weeks ago, I paid a visit to Zappos headquarters in Henderson, Nevada, just outside Las Vegas, and spent time with CEO Tony Hsieh and his colleagues. I could write a whole series of posts (and just might) about what I learned from this incredible operation. But I want to focus this post on one small practice that offers big lessons for leaders who are serious about changing the game in their field—and filling their organization with people who are just as committed as they are.

First, some background. As most of you know, Zappos sells shoes—lots of them—over the Internet. The company expects to generate sales of more than $1 billion this year, up from just $70 million five years ago. Part of the reason for Zappos’s meteoric success is that it got the economics and operations right. It offers customers a huge selection—four million pairs of shoes (and other items, such as handbags and apparel) in a warehouse in Kentucky next to a UPS hub. (If Imelda Marcos visited that warehouse she'd likely have a coronary on the spot.) It also offers free delivery and free returns—if you don’t like the shoes, you box them up and send them back to Zappos for no charge.

So the value proposition is a winner. But it’s the emotional connection that seals the deal. This company is fanatical about great service—not just satisfying customers, but amazing them. The company promises free, four-day delivery. That’s pretty good. But most of the time it delivers next-day service, a surprise that leaves a lasting impression on customers: “You said four days, but I got them the next morning.”

Zappos has also mastered the art of telephone service—a black hole for most Internet retailers. Zappos publishes its 1-800 number on every single page of the site—and its smart and entertaining call-center employees are free to do whatever it takes to make you happy. There are no scripts, no time limits on calls, no robotic behavior, and plenty of legendary stories about Zappos and its customers.

This is a company that’s bursting with personality, to the point where a huge number of its 1,600 employees are power users of Twitter so that their friends, colleagues, and customers know what they’re up to at any moment in time. But here’s what’s really interesting. It’s a hard job, answering phones and talking to customers for hours at a time. So when Zappos hires new employees, it provides a four-week training period that immerses them in the company’s strategy, culture, and obsession with customers. People get paid their full salary during this period.

After a week or so in this immersive experience, though, it’s time for what Zappos calls “The Offer.” The fast-growing company, which works hard to recruit people to join, says to its newest employees: “If you quit today, we will pay you for the amount of time you’ve worked, plus we will offer you a $1,000 bonus.” Zappos actually bribes its new employees to quit!

Why? Because if you’re willing to take the company up on the offer, you obviously don’t have the sense of commitment they are looking for. It’s hard to describe the level of energy in the Zappos culture—which means, by definition, it’s not for everybody. Zappos wants to learn if there’s a bad fit between what makes the organization tick and what makes individual employees tick—and it’s willing to pay to learn sooner rather than later. (About ten percent of new call-center employees take the money and run.)

Indeed, CEO Tony Hsieh and his colleagues keep raising the size of the quit-now bonus. It started at $100, went to $500, and may well go higher than $1,000 as the company gets bigger (and it becomes even more difficult to maintain the all-important culture and obsession with customers.)

It’s a small practice with big implications: Companies don’t engage emotionally with their customers—people do. If you want to create a memorable company, you have to fill your company with memorable people. How are you making sure that you’re filling your organization with the right people? And how much are you willing to pay to find out?

The Microsoft vs Google Endgame

The Microsoft vs Google Endgame

Posted by Umair Haque on May 19, 2008 10:26 AM

Today, something really interesting happened. Both Google and Microsoft are poised to make fairly dramatic strategic moves. But the moves they're poised to make are polar, extreme opposites: the contrast between them couldn't be sharper or starker.

So let's do exactly that: contrast them, to bring to life many of the issues we've been discussing.

According to an interesting rumour making the rounds: Microsoft is to acquire Yahoo's search business as well as Facebook, and lock both down, to better take on Google. And Google is letting third parties access one of its most valuable assets: it's ad network.

What's really going on here? Microsoft is poised to shift from open to closed. Google is already making exactly the opposite move: shifting from closed to open.

Here's what ex-Microsoftie Robert Scoble has to say about Microsoft's potential moves:

“…These two moves would change everything and totally explain why Facebook is working overtime to keep Google from importing anything.

Google is locked out of the Web that soon will be owned by Microsoft. We will never get an open Web back if these two deals happen.

This has created HUGE value for Microsoft and has handed Steve Ballmer an Internet strategy which brings Microsoft from last place to first in less than a week.”

So have the geeks in Redmond suddenly outsmarted everyone again - simply by going back to extend, embrace, and exterminate? Will value really be created, and power Microsoft back to the top?

Now, buying Yahoo's search business is just a grab for market share in online advertising. It's the second part of the rumour that's more interesting.

What happens if Microsoft buys Facebook and keeps it closed? Not much – because, as I’ve pointed out recently, there are tremendous structural pressures for openness.

Unfortunately for Steve Ballmer, this ain’t your grandpa’s "platform war”. It’s the reverse: only openness can maximize the value of network effects in this space, because there are no hard technological switching costs creating lock-in. For example, yesterday, it was massively costly to recode applications across operating systems, or for consumers to switch all their applications to a new platform – but that’s distinctly not true on the www: in fact, much of the point of the www is to vaporize those tired, obsolete scale economics and switching costs.

That’s why it’s a (massive) fallacy to argue that any value has been “created”. Value might be created when connected consumers can share and trade preference information or applications across social nets. But value is actually foregone if Microsoft acquires a closed Facebook, because opportunities for consumers, developers, and advertisers alike to meaningfully interact are destroyed. That’s what evil really means: coercing others into accepting value destruction.

If that doesn't make sense, read this killer post from Jeff Jarvis, expanding last week's discussion.

Unfortunately for them, and luckily for the rest of us, given these economics, Mark Zuckerberg and Steve Ballmer’s hare-brained scheme for world domination isn’t even serious evil - it’s less Scaramanga than it is Gargamel: born to lose, and destined to fail.

Contrast that with Google's shift to openness - can you see how it unlocks value for everyone? That's why Microsoft's move is a textbook example of how not to think strategically at the edge. It's yet another example why Google is in a class of its own - across the economy - when it comes to next-generation strategy. Google opening up its ad networks is strategic greatness at work.

What Microsoft really needs to do is take a lesson from Google's book, instead of staying trapped in its own fading past. Redmond must understand that yesterday's games of domination and control are obsolete - and that it has to rethink them. How could it do that?

By following many of the principles we've been discussing here - open beats closed, listening beats talking, good beats evil - Microsoft could learn how to play new kinds of games, that lead to new sources of advantage.

Or hell might freeze over: it's just not in Microsoft's command, control, coerce, and crush DNA to be able to make those radical decisions in the first place. Advantage, today, isn't in how you play the game, but what games you can play to begin with: it's in your DNA.

That's my take - but, as always here, your perspectives are probably richer than mine – so fire away in the comments and let's kickstart a discussion.

How to Sell Services More Profitably

Product companies often try to differentiate themselves by offering ancillary services. Many struggle to make money at it.

by Werner Reinartz and Wolfgang Ulaga

Manufacturers frequently believe that adding value in the form of services will provide a competitive advantage after their products start to become commodities. When the strategy works, the payoffs are impressive, and a company may even discover that its new service business makes more money than its products. But for every success story, at least five cautionary tales remind us that manufacturing companies will most likely struggle to turn a profit from their service businesses.

Why Services?

Even the best stumble. Consider one large technology firm we studied—a world leader in medical equipment, IT, automotive equipment, and transportation systems. Back in 2003 the company’s €5 billion IT business unit realized that the limited product-related services it offered, such as installation and training, generated twice the 3% to 4% net margins it earned on its increasingly commoditized product offerings. The unit decided, therefore, to invest heavily in developing its service capabilities for large clients. Managers estimated that such customized services would soon generate margins of 15%.

The estimate proved very wide of the mark, and the unit recorded a negative net profit margin of more than 10% in 2005. The venture was a serious loss-maker, costing the group around €260 million in 2005 alone. The losses stemmed from several distinct causes: First, the company found that the back-office production of complex services was much more difficult than expected. Each client’s requirements were highly customized, which meant that little learning and knowledge could be leveraged across cases. Second, the salespeople were used to selling products with basic service contracts attached, and their traditional contacts at target firms were too low in the hierarchy to make decisions about multimillion-euro solutions contracts. Third, much of the knowledge around the service production had to be sourced externally—which proved time- and resource-intensive. The board member responsible for services was frank about the mistakes: “We wanted too much too soon, and we simply weren’t ready for it.”

Over the past three years we have investigated how manufacturers in business markets can develop profitable services. We conducted in-depth studies of 20 industrial companies operating in a broad variety of product markets, including adhesives, automotive coatings and glass, bearings, cables and cabling systems, energy generation and distribution, onboard electronics for civilian and military aircraft, printing presses, and specialty chemicals. Every firm was among the top three in its industry, and the managers we interviewed were all key decision makers, frequently executive board members. Throughout the process we interviewed multiple people in different business units and country organizations. We went on to have discussions with more than 500 B2B managers in a series of executive workshops; these complemented the insights from our interviews.

As our research process unfolded, we uncovered a wide variation in revenues and profits from service offerings. One group of companies derived up to half of their sales from services, and margins up to eight times those on product sales. A second group reported a very different experience: Although those companies had made significant investments in the development of services, customers proved unwilling to pay, revenues were low, and the companies barely broke even. Comparing the two groups, we were able to identify clear differences in the ways they had developed their service businesses.

Like the technology company in our example (which has since turned itself around in this respect), companies unsuccessful at developing service businesses have tried to transform themselves too quickly. Successful firms begin slowly, identifying and charging for simple services they already perform and using those to build enthusiasm for adding more-complex ones. They then standardize their delivery processes to be as efficient as their manufacturing ones. As their services become more complex, they ensure that their sales force capabilities keep pace. Finally, management switches its focus from the company’s processes and structures to the nature of customers’ problems, the opportunities that customers’ processes afford for inserting new services, and the new capabilities needed to deliver those services. (See the exhibit “The Path to Profits in Industrial Services.”) Let’s take a closer look at those four steps.

The Path to Profits in Industrial Services

1: Recognize That You Are Already a Service Company

Many product companies are in the business of delivering services; they just haven’t realized it yet. These companies are missing out on the revenues they could generate simply by charging for what they already do. The first step in expanding a service capability is to make both the company’s managers and its customers aware of the value provided by existing services.

Take the pharmaceuticals giant Merck. In one of the company’s product categories, its French subsidiary had a long-standing tradition of including delivery in its product price for customers. Because specialty chemicals are high in value but low in volume, Merck had never questioned its responsibility to assume transportation and insurance costs, which represent a tiny fraction of the amount invoiced. And because no shipping costs were itemized, customers were unaware of the value Merck provided. A few years ago the company put this tradition to a test: Managers randomly selected 100 customers and changed the terms of delivery from “shipping and insurance paid” to “ex works,” though the bottom line barely changed. Ninety percent of those customers readily paid the additional charges, seemingly without noticing. Of the 10% that recognized the change, only half insisted on returning to the prior terms of payment. Merck re-established the original terms for those customers—but it had succeeded in managing the transition from “free to fee” for the other 95%. Once the new billing terms had been rolled out to the entire customer base in France, Merck’s profitability in this product category improved significantly, even though the cost to customers was minor.

Switching services from free to fee clarifies the value of the assets involved for both managers and customers. The French gas provider Air Liquide also took this tack. The company had traditionally purchased millions of cylinders in which to transport small quantities of gas to industrial customers. It charged customers only for the gas delivered, supplying the cylinders free. Consequently, customers took no special notice of how many cylinders they had accumulated, and the company was stuck with considerable floating inventory. Starting in the mid-1990s, however, Air Liquide charged a small rental fee of €5 to €7 per cylinder per month. Not only did this turn a profit drain into a profit engine, generating several hundred million euros a year in fees, but it created customer awareness. Once the gas cylinders had a price tag, customers wanted to optimize their inventories. As a result, Air Liquide was able to sharply reduce its floating inventory, transferring cylinders from customers that didn’t need them to customers that did.

Large companies can uncover profitable existing service offerings simply by comparing billing practices across their operating units. We found that at Nexans, the world’s leading cable manufacturer, subsidiaries in some countries were charging customers a fee for cable drums, whereas in other countries they were not. Nexans holds large inventories of high-voltage cable in order to ensure rapid delivery; applying the fee across the whole company represented a significant opportunity to recoup its investment in working capital.

Smart companies will put a senior executive in charge of looking at practices in other business lines to uncover hidden services. He or she can then start crafting a forward-looking strategy for services on the backs of early wins. By giving the process an owner early on, companies can ensure that their service initiatives are not just opportunistic ideas developed by individual business units but part of a strategy to capture best practices and roll them out across the organization. Schneider Electric, a French electrical-equipment company, chose this route. Early in its move toward services it created a strategic deployment and services division whose executive vice president was charged with auditing existing services across the organization and then creating a coherent strategy for offering new services. An executive board member with 20 years of experience in the company was named to the post.

2: Industrialize the Back Office

Manufacturers are accustomed to stable and controllable production processes. But when they venture into value-added services, they may find front-office service customization turning into a delivery-costs nightmare. Unless they can prevent this, their service margins will suffer. One of the managers we interviewed explained, “To earn money in services, you need to industrialize the back office. Companies like GE and IBM really are process freaks.”

The German printing-equipment maker Heidelberger Druckmaschinen (Heidelberg) has experienced a back-office dynamic that can occur when manufacturing companies move into services. In France its customers currently choose one of two ways to maintain their printing equipment: pay-as-you-go, in which case Heidelberg sends an invoice for parts and labor each time a field technician responds to a customer’s call; or a full-service contract, in which case customers have access to a help desk, remote monitoring, and preventive maintenance. The trouble is that full-service customers call for assistance twice as often as pay-as-you-go customers. And because those customers have no reason to monitor costs, Heidelberg’s field technicians replace spare parts on their printing presses much more readily, make on-site visits to them much more frequently, and are likelier to schedule those visits poorly or to forget essential equipment, necessitating yet more visits. (The technicians, for their part, tend to assume that all costs are covered by the hefty full-service fee.) All this erodes Heidelberg’s margins on the full-service contracts, making them less profitable than pay-as-you-go.

There are three ways companies can prevent delivery costs from eating up their service-offering margins. First, they can build flexible service platforms that meet customers’ varying needs while relying on common delivery processes, much as good manufacturers create distinct product models based on standard product platforms. One of our interviewees explained, “We offer six different types of maintenance contracts. Eighty percent of customers fit into one of these boxes. The customer can look at these offers and see which of them best matches his situation.”

Second, the successful firms in our study continually monitored the costs of their processes to identify profit drains. Air Liquide appointed an executive with specific responsibility for trying to standardize services in the organization. Backed by top management and supported by an internal task force, this executive taught managers and frontline employees in operational units how to systematically take costs out of service production and delivery processes while making sure that customers still got what they expected. For example, Air Liquide regularly mailed gas-consumption reports to its customers. But when the standardization team reviewed this practice, they found that some customers made no use of the information. By discontinuing that part of the service package for those customers, Air Liquide was able to reduce its costs to serve selected customers while maintaining the perceived value of the service provided.

Third, successful companies are quick to exploit process innovations made possible by new technologies. The Swedish bearings manufacturer SKF helps customers extend the service life of their equipment by enabling off-site access to an electronic monitoring tool via a secure internet browser. Vibration-analysis data, for instance, can alert a customer early about potential machine failure. Such smart services allow the company to perform first-level maintenance without deploying field technicians for on-site visits.

3: Create a Service-Savvy Sales Force

As long as a company considers services to be an add-on to existing products, its sales force—with some training, of course—will probably be able to handle both product and service sales. But if companies are to move away from straightforward product-related services into more complex customer solutions, managers must take a new look at sales management strategies. Services require longer sales cycles, and the sales process is often more complex and strategic, meaning that decisions are made high up in the customer’s hierarchy.

Failure to recognize this challenge got Heidelberg into trouble. In the early 2000s the company started offering its customers remote monitoring of their printing presses—to be sold as an add-on, because the service could save customers many hours of expensive machine downtime. On average, one hour of downtime in a print shop can cost several hundred euros; given that the lead time for delivering spare parts to a customer’s site is typically 24 hours, a single breakdown may cost thousands. Heidelberg priced its new offering significantly below this amount, but customers did not bite. The problem was that although the company’s sales force and field technicians were well equipped to promote standard service contracts, they weren’t up to explaining more complex customer solutions—largely because they were accustomed to discussing terms with people in procurement (who tend to focus on cost per part or per service) or people in charge of in-house maintenance (who might view a service offering as a threat to their jobs). What Heidelberg needed was a sales force that felt comfortable talking to production managers—people who would see the implications of the new service for the total cost picture.

Product salespeople are often actively inimical to change, as Air Liquide quickly discovered when it started offering services. Top salespeople argued that margins from the firm’s traditional product business were already high enough and that the company still had room for growth in its existing product markets. Services were labor-intensive, would tie up considerable financial resources, and could harm product sales if the company failed to deliver on its promises.

The successful manufacturers we studied all took pains to retrain their sales forces. In a major overhaul of its sales organization, Schneider Electric switched the focus of its salespeople from cost-plus pricing to value-based pricing when promoting its services. This involved educating them about how their customers’ managers justified decisions internally, so that the salespeople could help the managers they dealt with take more responsibility for shaping decisions. But even after extensive training, companies may find that they have little choice but to fire and hire; a few in our study replaced 80% of their existing sales forces. Even those that managed to retain a significant proportion of their people still needed some specialized newcomers. Air Liquide hired several agri-food engineers to develop sales expertise for services in food-processing industries across Europe. The French forklift manufacturer Fenwick recruited specialists at the corporate level and in each of its regional sales offices to promote services attached to tri-directional forklift trucks. A good place to find this talent internally is among service-support staff members.

Most of the successful companies we studied made some kind of distinction between product and service salespeople. At GE Medical Services, for example, product salespeople are “hunters,” expected to go out and get orders for new equipment. Service salespeople are called “farmers”; GE expects them to grow their relationships with customers and sell services over time. Splitting the sales force is not always a perfect solution, however. Xerox has been very successful in establishing a solutions business in which the focus is not on providing office equipment but, rather, on helping clients manage their document flow. The organization nevertheless continues to do considerable business the old way, by selling printers and copiers and slapping simple service contracts on them. The two units end up competing for midsize customers: Whichever unit is first to get a lead pursues the opportunity vigorously, not wanting the other to get involved—even if it might be more suitable from a companywide perspective.

It almost goes without saying that a move to services will fail unless salespeople are financially motivated to promote them instead of focusing solely on product sales. Such a shift is difficult when product revenues are much higher than service revenues. For example, if Air Liquide supplies €500,000 worth of gas to an individual customer, the related services may be invoiced at only a few thousand euros. If objectives for service and product sales are not properly coordinated, their sales forces may even compete. When Air Liquide started to promote inventory management services to assist customers in optimizing the number of gas cylinders they had on hand, the company’s product sales force resisted out of fear of losing its traditional revenues. Management had to explain that although the new offering would indeed enable customers to reduce their on-site inventories, it would also help to lock in customers over the long run and to grow Air Liquide’s share of their purchasing overall. To reduce conflict between the two sales forces, Air Liquide created a double credit system: For each closed deal, product and service salespeople would get the same commission.

Finally, selling services requires that companies develop tools to document and communicate the value those services create for customers. These tools range from customer case studies and white papers to sophisticated simulation software. A good example is Documented Solutions, a tool developed by SKF over the past 15 years. Conceived by the company’s U.S. subsidiary, it helps SKF salespeople worldwide to identify and explain to customers how much they can save by using the company’s services. The tool is linked to a database that compares the best practices of SKF customers around the globe. It also allows customers to calculate their return on investment.

4: Focus on Customers’ Processes

Once manufacturers have learned how to sell and deliver services in a cost-efficient way, they can move toward addressing customers’ problems and processes holistically. This means shifting focus from their own processes, incentives, and structures to those of the customer.

Fenwick found a good way to do this: It installed data-collecting sensors and radio-frequency identification technology in its forklifts, to amass valuable information about how customers used its equipment. This knowledge became the basis for developing new service offerings, including access control and remote monitoring, asset management, a customer-specific intranet—Fenwick Online—and even a school for forklift drivers. Today 50% of the company’s €500 million in revenues comes from services developed over the past 15 years.

When manufacturers move beyond ancillary product-related services to complex offerings, they need to revisit the basis for their pricing and the way they measure success. Product-oriented companies typically focus on input-based indicators—hours of equipment use and numbers of units sold. As long as their services are discrete and productlike and performance risk is limited, that focus is entirely appropriate. In such cases, services are viewed as products in both the back and front offices—meaning that their input costs take center stage. But above that level they require companies to focus on problem solving from the customer’s perspective. When a company commits to solving a customer’s problem, it assumes a much higher risk: The goal is to achieve a certain output, and the degree to which it is achieved is the basis for compensation. This was true for all the successful companies we studied. Clearly, pricing then becomes much more complex. The French jet-engine maintenance company Snecma Services, for example, writes service contracts that guarantee air carriers a certain number of flight hours for their jet engines, however much servicing time that requires. Similarly, Hilti, headquartered in Liechtenstein, promotes an “all-round hassle-free” service package for the power tools it leases to the construction industry. The company’s customers don’t have to buy, say, a drill for their operations; they “pay by the hole” and are guaranteed a drill on the construction site.

Once executives have redefined the value proposition around solving customers’ problems, they may quickly discover a lack of the expertise required to tackle the processes involved. The Pittsburgh-based industrial-coatings specialist PPG offered to take over the paint shop in Fiat’s Torino automotive plant. Under the new deal, Fiat would pay PPG according to the number of cars flawlessly painted rather than the amount of industrial paint bought. PPG had to learn how painting robots function in order to control the outcome of its painting processes. Similarly, when SKF started developing services around its core product—bearings—the company studied how bearings might break down in its customers’ equipment and then acquired the know-how to help manage such breakdowns. Through internal development and acquisition over the past decade, SKF has become a world leader in condition monitoring, industrial sealing, lubrication systems, and vibration analysis.

• • •

Services can be a powerful way to lock in customers and increase their switching costs. As one manager at Air Liquide put it, “The more we enter into a customer’s business, the more the customer forgets how things are done.” At the same time, services represent an excellent route for acquiring new product business. Fenwick managers told us, “Whenever we can’t directly break into a customer account with a product, we’ll offer to provide services on a competitor’s product.” Finally, the relationship developed by providing services positions manufacturers to anticipate future business. But these considerable benefits can’t be achieved overnight. The four steps we’ve outlined will help to speed the process and boost companies’ profits.

Are You Ready for Global Turmoil?

Are You Ready for Global Turmoil?

Posted by Paul J. H. Schoemaker on April 25, 2008 11:36 AM

Recent headlines -- Citigroup’s layoffs, Iceland’s sudden downturn, worldwide food shortages, etc. -- suggest serious global turmoil is ahead. All companies, and multinationals in particular, should be prepared to withstand it.

Unfortunately, many are not. Traditional forecasting and budgeting systems produce linear projections insufficient for risky, uncertain times. What’s needed is scenario planning, where companies stress-test their strategies and processes against a wide range of future scenarios to identify their vulnerabilities. Thus informed, the companies can adjust them to be more responsive and resilient.

But scenario planning often takes a backseat to more immediate concerns: developing new products, fighting an aggressive competitor, meeting earnings targets. So when large-scale external events hit, their impact is seismic.

If your company hasn’t engaged in scenario planning, can you do anything to increase your resilience in the near term?

Yes. Flexibility is the key to dealing with turmoil. You don’t want to be overcommitted to one strategy or one supplier. If your company has stuck its neck way out, as some financial firms did by overbetting on subprime mortgages, then unwind your commitments or hedge your bets. If your company is highly reliant on suppliers into whose operations you have little visibility, get some solid backup options in place. Otherwise, your company could find itself in the unhappy company of Baxter International, Mattel, and numerous pet food companies.

If you have engaged in scenario planning, should recent events cause you to back and revise some of your assumptions?

Yes, but constant revision is standard best practice, even when the external changes are positive. After the Berlin Wall came down, Royal Dutch/Shell’s scenario experts recognized that their strategies would need to account for the emerging geo-political world order: a single superpower, the rise of China, and the opening of former Soviet countries for exploration.

Building resilience and adaptability is a multipronged effort:

• Use scenario planning to improve your organization’s insight and foresight about the future (Shell, Sprint and the World Bank excel at this).
• Devise adaptive strategies with sufficient flexibility to deal with the unexpected, including future-proofing your plans using real options thinking, which views strategic investments such as building a plant or investing in R&D as a test rather than a commitment. How future uncertainties play out determines whether scaling up or withdrawing is called for. BP has been strong at such optionality thinking, as has Google, which seeks to develop a broad portfolio of “Googlettes” that they view as call options on the future.
• Implement a dynamic monitoring system to track the external world in real time, as well as to gauge internal progress on executing strategies and plans. Such a system compensates for the human tendency to overreact to surface features, such as a spike in sales revenue or a drop in interest rates, and under-react to signs of deeper, more fundamental changes (P&G, IBM, and NASA have systems that do this well).
• Improve your organization’s agility in terms of structure, processes, and rewards to cope better with the unknown. For example, fabric maker WL Gore dispenses with formal titles to minimize bureaucracy and hierarchy. As a result, information flows freely and quickly across organizational boundaries to allow fast action. Microsoft’s structure in the mid-1990s allowed it to turn on a dime in response to Netscape’s download threat.
• Enhance your information and decision making procedures to remain vigilant, through external networks and by properly balancing traditional tools. Apple’s forays into music and telephony via its iPod and iPhone are the result of savvy market intelligence and decisive leadership by Steve Jobs and others that balances analytical tools with seasoned intuition. Eli Lilly and Deutsche Bank use internal prediction markets to ensure that all information, especially what is discussed informally around the water cooler, reaches senior leaders.
• Foster strong leadership at multiple levels in the organization to deal better with crises and other unexpected circumstances (GE and McKinsey excel here).

As Darwin observed, it is not the strongest or smartest who survive but those who are most adaptive to change.

Wednesday, May 21, 2008

Faster Wireless Networks

Sending descriptions of data could be more efficient than sending the data itself.

By Duncan Graham-Rowe

The role of computer networks would appear to be fairly straightforward: to ferry data from one point to another. But a novel wireless-network protocol developed for the U.S. military breaks with this tradition by sending not the data itself but rather a description of the data. In simulations, a network using the protocol was five times more efficient than a traditional network. Within the next year, the U.S. Defense Advanced Research Projects Agency (DARPA) will test the protocol in field trials at Fort A. P. Hill in Virginia.

The protocol is part of a project to create a new generation of mobile ad-hoc networks--self-configuring networks of mobile wireless nodes--that will enable faster and more reliable tactical communications between military personnel and vehicles, says Greg Lauer, section head for advanced network systems at BAE Systems in Burlington, MA, which helped develop the protocol for DARPA.

But the project also demonstrates the potential of a new and exciting field called network coding, says Muriel Médard, an associate professor of electrical engineering and computer science at MIT, who collaborated on the project with BAE Systems.

Network coding is a relatively young field, though there has been some interest in using it to make the Internet more efficient. Microsoft's peer-to-peer test bed Avalanche, for example, was designed to use network coding to deliver wide-scale on-demand TV and software patches without causing bottlenecks. But problems specific to mobile wireless networks are particularly amenable to solutions that use network coding.

In many ways, the analogy between the Internet and a superhighway is apt, Médard says. A lot of networks are built on a transportation model, with data traveling from address to address. "Data is transported very much like you would transport any other goods," says Médard. The trouble is that when you get a traffic jam, things grind to a halt.

"In a traditional network, you break information into packets and forward them between nodes," says Lauer. If a packet doesn't reach its destination, it will be sent and re-sent until its arrival is confirmed. But in some types of network, such as mobile wireless networks, there is a fairly high chance that the packets won't be received because of interference or limited bandwidth, or because a mobile node has wandered out of range or been destroyed. If nodes keep transmitting data until they receive confirmation, Lauer says, a bottleneck can result.

With network coding this is not an issue. "You take a group of packets and combine them," says Lauer. The result is a single packet that contains traces of information from each of the original packets. This hybrid packet is then sent to one or more additional nodes.

By itself, the hybrid packet just looks like gobbledegook, says Médard. But it includes a small amount of data that acts as a clue to its contents. A single packet won't normally contain enough clues to allow its data to be reconstructed. But as long as the destination node receives enough independent packets from enough different sources, it should be able to recover all the original data, Médard says.

Credit: DARPA

The advantage of this is not only that you are using less bandwidth to send information, and thus avoiding bottlenecks, but also that you don't have to keep track of which node sent what, says Médard.

Surprisingly, even the means of combining data into a single packet at the source node doesn't have to be shared. If the packets contain enough clues, the destination nodes can reconstruct the contents of packets that have been created randomly. You're not sending data, per se, says Lauer, you're sending pieces of algorithms for assembling data.

Network coding is an offshoot of a field called information theory, which has already been put to use in data-compression software. But it's only relatively recently that people have started looking at how network coding could be used to send data. "It turns out it can be extremely powerful," Médard says.

As part of a program funded by DARPA, BAE and MIT used network-coding principles to develop protocols that could be used to send information to multiple destinations. In a conventional network, each node would act like a router, steering specific information toward specific destinations. But in BAE and DARPA's network, all nodes broadcast all information to all other nodes.

In the DARPA simulations, where a tactical mobile network was emulated on an Ethernet network, the researchers experimented to see how much they could reduce the bandwidth of the network while maintaining the same standard of communication. The simulations involved all forms of military data, from voice and video streams to tactical data, and all kinds of conditions, such as interference and poor connectivity.

The researchers found that they could reduce the bandwidth to just one-fifth of that required by a conventional network, with no loss of quality. The upcoming field tests, on the other hand, will investigate whether the protocols can be used to send more data over existing radio networks than standard protocols can, says Lauer.

Network coding is an exciting new area that has attracted a lot of interest, says Christina Fragouli, an expert in network coding at the École Polytechnique Fédérale de Lausanne in Switzerland. And mobile wireless networks are precisely the kind of application that network coding can help with, she says. "It's a very difficult kind of network to deal with," she says, because of its intrinsic interference problems and limited bandwidth.

The protocols have also been tested on a standard Wi-Fi network as a way to stream video, and the results were very promising, says Médard. Further down the line, network coding could help perform security functions. "There are ways to tell if someone has messed around with your data," Médard says.