The New Economics of Manufacturing

Popped over to Turin this week to give a presentation at a seminar on the Future of Manufacturing.

A lot of the other presentations focused on the technology (3D Printers, Cyber-Physical Systems, Internet of Things), so I wanted to look at the broader economic picture. I drew some inspiration from a recent interview with the French writer Jacques Attali, who predicted the crisis in the music industry.

For Attali, music is not simply a reflection of culture, but a harbinger of change, an anticipatory abstraction of the shape of things to come. from a review of Attali's 1985 book Noise

Attali now says manufacturing will be hit by an identical crisis - this time caused by 3D printing. Apparently some spare parts have already started to appear on pirate websites. Thus instead of paying the manufacturer for a spare part, you might be able to download and print it yourself. Given that many manufacturers sell their products at low margin, in order to make money from spare parts and maintenance, this could seriously disrupt the economics of manufacturing.

By the way, making money from the consumable part of the product is a very old idea - business schools usually attribute the idea to Gillette's strategy of giving away the razors in order to sell the blades, although Randy Picker argues that the history of Gillette's innovation was a bit more complicated than the usual story.

There are two possible responses to this challenge. Firstly a shift from the cost of the fabrication to the cost of the materials. The materials used by 3D printers are very expensive compared with normal material. And secondly, designing the whole product to frustrate the use of generic spare parts.

We can see both of these tactics in the world of 2D printers. Printers for home use are really cheap, but the replacement ink cartridges cost almost as much as the printer. Printer ink is the most expensive liquid most people ever buy - much more expensive than good champagne. Or for that matter, human blood. (Not that I've ever needed to buy any, thank goodness.)

Which brings us to the second tactic. Yes you can refill ink cartridges or use generic replacements. But the printer can be equipped with software to detect and frustrate this, degrading its performance and efficiency when it detects a third party or refilled cartridge. As we discovered in the Volkswagen defeat device scandal, the embedded software in any product may be designed to serve the commercial interests of the manufacturer rather than the consumer.

Manufacturing is shifting away from products (including spare parts) and towards services. Instead of trying to sell you overpriced tyres, the car manufacturer must make sure that only its accredited partners have the software to balance the wheels properly. In other words, not just architecting the product or even the process, but architecting the whole ecosystem.

And of course, music the harbinger. Famous popstars used to do free concerts in order to sell more albums. Now they might as well give away the albums in order to sell more concert tickets.

But we've been here before. Attali makes the point that when musicians in the 18th Century - like the composer Handel - started selling tickets for concerts, rather than seeking royal patronage, they were breaking new economic ground. They were signalling the end of feudalism and the beginning of a new order of capitalism.

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Related Posts

Tethering (August 2004)
Defeating the Device Paradigm (October 2015)
Weaving in Three Dimensions (November 2015)
Right to Repair (March 2017)


Other Sources 

T.W. Adorno, A Social Critique of Radio Music (Kenyon Review, Spring 1945. Reprinted in Kenyon Review New Series, Vol 18 3/4, Summer/Autumn 1996) pp 229-235

Azeem Azhar, Trade, globalisation and 3-d printers (Exponential View, 4 October 2019)

Alex Hudson, Is digital piracy possible on any object? (BBC Click, 9 December 2013)

Randy Picker, Gillette’s Strange History with the Razor and Blade Strategy (HBR Sept 2010)

Sam York, The pop star and the prophet (BBC News Magazine, 17 September 2015)

The New Economics of Manufacturing from Richard Veryard

Shuffle 2

In his Case Study: Soundflavor, Lane Becker of Adaptive Path writes:

'Have you ever been listening to your own music playing on shuffle and said, “Wow, I didn’t know I owned this song?” Or heard a song and said, “I wish I had more songs just like this one?” Or realized that your music ran out an hour ago and you’ve been listening to nothing but air, and yet you’re still wearing your headphones? These are the problems that Soundflavor set out to address with its new application and website.'

Problems?

I have a lot of respect for the Adaptive Path guys, based on their previous writings, and I have no reason to doubt that they have done a good job in helping Soundflavor. And perhaps Soundflavor has identified a viable market opportunity.

But, I mean to say, problems? Is it a problem to be wowed by something you forgot you owned, and is it a problem to be so engrossed in what you are doing that you fail to notice that the background music has stopped? Is it a problem if you prefer to listen to music that is homogeneous (because you like all the songs to sound just like the first one) and bland (because you don't notice when it stops)? Am I bothered?

And whose problem is it? Perhaps the music industry wants to persuade you to buy new material, instead of listening to the old stuff over and over. Perhaps it makes things easier for them if they can predict what you will buy based on what you already like. So perhaps they like to encourage people to have predictable and conservative musical tastes, and they might like to encourage services and devices that reinforce this tendency.

In a service-oriented world, we always need to ask two things.

• Whose problem is it - for whom could a new service create value?
• And who is going to pay - what is the funding mechanism?

So who is going to pay for Soundflavor? Should the consumer pay, or should the music industry fund such ventures? There is of course a third option - the delivery of homogeneous music to listeners with conservative tastes could be funded by advertising. This is called a radio station.

 

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Some earlier posts about services and devices for recorded music:

• Shuffle (June 2005)
  
• Controlling Content (August 2005)
• Intrusion and Immersion (November 2005)
• Lessons from Zune (September 2006)
  

Lessons from Zune

"Microsoft launches the Zune" reports Engadget this week.

There has been some discussion on the Internet (Kirk Biglione, Cory Doctorow, Bob Wyman, plus discussion on Digg) about the main feature apparently intended to differentiate the Zune from the iPod - the wireless share-with-a-friend feature.

• Is this feature compatible with copyright law, or with a Creative Commons licence?
• Is this feature compatible with a reasonably broad range of use-contexts?

Zune Insider (and Microsoft employee) Cesar Menendez reveals the thinking behind the design of this feature.

' "I made a song. I own it. How come, when I wirelessly send it to a girl I want to impress, the song has 3 days/3 plays?" Good question. There currently isn't a way to sniff out what you are sending, so we wrap it all up in DRM. We can’t tell if you are sending a song from a known band or your own home recording so we default to the safety of encoding. And besides, she'll come see you three days later. . .'

Now I certainly don't want to join in the criticism of Microsoft based on one unguarded remark by a Microsoft employee, and I don't know whether the final Zune will work exactly as Cesar describes. What I do want to talk about here is the importance of differentiated behaviour.

What Microsoft's critics are demanding is that the copying/sharing function of the Zune ought to be differentiated according to several factors, including

• the original source (e.g. is this my own band recorded via old-fashioned microphones and mixed on my own computer, is it copied from a CD or downloaded from the internet)
• the presence of some copyright or creative commons licence
• the intentions of the copyright owner or licence-holder

What Cesar seems to be saying is that trusted information is not available to support this differentiation. Okay, something may be wrapped with a creative commons licence, but how do we know this can be trusted. Okay, you may have recorded this with your own microphone, but that doesn't prove you own the copyright. (Has your college lecturer given you permission to distribute his lectures?)

So why is this Microsoft's problem? If Microsoft has come up with a solution that suits most of the people most of the time, then everyone else can go hang. After all, it's not as if they got much better from Apple or Sony. (The Sony MiniDisc contained an early copy-prevention mechanism called SCMS, making the consumer-grade devices largely unsuitable for amateur music producers.)

Maybe it isn't Microsoft's problem. But there remains a significant value-deficit in some use-contexts. There might be a niche opportunity for some specialist provider, but this would presumably require some degree of interoperability. (Can the Zune receive material from third-party devices, or only from other Zunes?)

On this blog, and elsewhere, I have consistently supported differentiated (context-aware) services. I believe that differentiation is the right way (in an increasingly complex world) to deliver the greatest value to the greatest number of users, and I see loosely-coupled service architectures as the right way to configure differentiated services, to balance the (economic) needs of the provider with the (increasingly diverse) needs of the consumer.

In situations like these, differentiated service requires rich, reliable and ubiquitous data. In other words, network-centric.

Meanwhile, I take some comfort from Cesar's word "currently". There currently isn't a way - but let's hope they are working towards a sufficiently robust ontology, with decent (not just supplier-centric) trust, to support a fair degree of differentiation.

Some earlier posts about services and devices for recorded music:

• Shuffle (June 2005)
  
• Controlling Content (August 2005)
• Intrusion and Immersion (November 2005)

 

Anti-Interoperability

To judge from the way we’re treated by a wide range of service providers, we’re all cheats, money-launderers, pirates, terrorists and ticket touts, until proved otherwise. We are no longer allowed to swap music or airline tickets, and we have to show endless paperwork before we can open a bank account, or visit certain public buildings. 

It wasn’t always thus. Not so long ago, it was possible to lend records to your friends, or sell your unwanted ticket to a stranger. (Let me declare an interest here – that’s how I met my wife.) It was possible to deposit money in a bank account, and then take it out again, without ever having to produce your gas bill or your mother’s maiden name. 

Technologies such as SOA are supposed to enhance interoperability. But some service providers are using technologies such as DRM to impede interoperability and extract rent.

• Bill de hÓra calls this non-interoperability by design.
• See also James Governor's declaration of digital independence.

Although DRM is the issue that gets everyone worked up, it’s just one example of a much broader phenomenon. Here are a couple more examples that have only just appeared in my newsreader:

• Adam Shostack on The Remittor and The Money Launderer
• Peter Merholz asking Does Anyone *Like* Renting a Car?

What’s going on, and how long are service providers going to be able to get away with this attitude? 

(This isn't just a rhetorical question. In the asymmetric design blog, we are going to be exploring some practical answers.)

Controlling Content

Some discussion from DevHawk and Scoble around owning/renting music. 

One problem I experience around rental is the anxiety of non-ownership. 

• What if the content provider wants to charge a much higher rental for my favourite content?
  

• Do I have to pay content providers whenever I upgrade media?
  

• What if the content provider restricts the media on which this content is available? (For example, forcing me to use a more expensive or less flexible format.)
  

• What if the content provider forces me to upgrade to a new version when I prefer the old version? (For example, I understand that Mike Oldfield regrets the haste with which the original version of Tubular Bells was produced, and would probably prefer us all to listen to the new perfectly engineered version. For my part, I prefer the original version.)
  

Scoble comments that most music isn't worth owning. Of course that's true. Some people like to listen to the same rubbish over and over, while others prefer a constant stream of new material (within a predefined genre). There are loads of radio stations that can satisfy both sets of people. (See my previous post on Shuffle). 

Of course, these risks don't only apply to music. I have lost track of several large repositories of useful material on the Internet. Have they been renamed/relocated, merged into something else, disappeared behind a subscription barrier, or taken down altogether? Perhaps I should have kept copies of some of the papers? 

Conversely, there is some content I'd prefer not to manage. Lots of fiction isn't worth reading more than once, so why do I keep so many novels? 

These are important questions in a service economy - the control and governance of the service and its content. Service dependencies in business dependencies; so service reliability/durability has an important bearing upon business risk. In some contexts, we may need some kind of service/content escrow to protect the consumer. 

Shuffle

In his blog Not Bad for a Cubicle, Chandler Howell analyses How does the music industry not get it?, arguing that piracy is a natural consumer response to the service-oriented strategy of the music industry.

• The recording industry [... has adopted] a self-destructive strategy of eschewing the long-term development of artists, preferring instead the quick buck of one-hit wonders ... If an artist is only going to have one CD worth buying and that one CD only has one or two songs worth listening to, then “schoolyard copying” is going to have a material impact on sales of that CD.

• There’s no point in paying for a CD because the consumer has been trained by the music industry itself to not value that CD. Recorded music has become a disposable commodity.

There are several complex issues here.

The one I want to focus on here is not the morality of piracy and DRM but on the structural changes that emerge from the conflicts of interest between different parties on the supply side - composers, performers, recording industry, music distribution channels/technologies (e.g. radio broadcast, iTunes/iPod). Among other things, these conflicts of interest have had an effect on the different granularity with which recorded music is supposed to be consumed.

Whole CD versus single song? 3-minute song versus extended medley? Concept album versus collection of greatest hits?

One of the consumer issues about moving from vinyl to CD was the apparent need to repurchase all your favourite music. But there was another important change, which altered the balance of power against the musician - the shuffle function. You no longer needed to listen to your favourite Beatles album in the fixed sequence provided by John, Paul, George H, Ringo and George M; you could break a coherent sequence of songs (often with carefully considered changes of key and mood) into a random series of fragments - every time a new experience.

(Why do we do this to music? I've never seen a shuffle function on a DVD player.)

With MP3 players, consumers can now hang a tiny juke-box around their necks, and listen to a constant shuffle of their favourite tunes. But why bother, when there are so many specialist digital radio stations that provide almost exactly the same service without the hassle of downloading and selecting the songs?

But some people are arguing that the internet restores the power of the musician, who can record and release a single song very quickly, without needing big record companies or fancy CD production. It is also technically possible to subscribe to vast quantities of live music from your favourite band. (Imagine having a virtual seat in every single concert in next year's tour.)

What are the general lessons of this for the service-based business?

• Technology can alter the preferred granularity of the basic service - how it's paid for, how it's delivered, how it's consumed, how it's combined into composite services.

• New business opportunities can be opened up by thinking about alternative levels of granularity.

• Flexible systems (both demand-side and supply-side) must be able to handle many different levels of granularity - preferably at the same time.

[Update] After I posted this, Chris Anderson made a similar point in the Long Tail blog, with a post called Shorter, Faster, Smaller, referring in turn to Seth Godin's Small is the New Big. Chris writes:

Note that this increased range of distribution options can allow for longer content, too, with the rise of TV shows on DVD (where you can watch much of a season at a single sitting) as a prime example. But the overall trend is toward shorter, faster, smaller everything. We're increasingly fine-slicing both the time we give media and the media itself.

Quite.

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Another update: The Anti-Shuffle Brigade [BBC News 18 January 2011]

See also Adorno's concept of Atomized Listening, part of his deeper critique of the commodification of music.

Labelling as Service

In the old days, when you bought a pie from a shop, or ate it in a canteen, you didn't really know what it contained. If there wasn't any beef or it tasted bad, you complained or took your custom elsewhere. If lots of people got ill after eating the pies, the place might be closed down. Otherwise, the recipe was private – if you asked for the recipe, you were politely told it was none of your business. In SOA speak, this is a form of encapsulation.

Nowadays, food products have to be labelled to death. I can demand to know where the beef was reared, whether the carrots were organically produced, and whether the pastry contains nuts. I want fair trade and dolphin-friendly. I want to know how much sugar, salt and hydrogenated fat, and does it contain enough food colour to make kids go berserk?

For food production, publishing this information adds to the suppliers' transaction costs in two ways: compliance and flexibility. If you claim something is organic, you may have to be inspected by the Soil Association or equivalent body. (The costs of proving you are operating organically are over and above those of operating organically.) If you identify your beef as Scottish, you can't switch to Irish beef without reprinting all the labels. Therefore suppliers generally try to get away with non-specific information, unless there is some marketing advantage in being specific. (E.g. you can charge more for organic.)

But there is a more general reluctance to provide information. With music CDs, the booklet often costs more to produce than the CD itself. Dan Hill complains about the paucity of music information (which he calls metadata) provided by iTunes. Bad MetaData Is Killing Music

This is a form of information asymmetry, which reflects an asymmetry of demand. Different consumers have different levels of information need, and suppliers like iTunes provide the minimum.

more on asymmetry
asymmetry@technorati

One way out is to separate the provision of information from the provision of the base service. We buy meat pies from one site, and pie recipes from another site. There are countless websites where we can get information about films or music, and these are logically separate from the websites where we can buy copies of these products, although of course there may be commercial links. This may be okay as long as there is some guarantee of version dependency – this pie was produced using this version of this pie recipe, this recording of this jazz piece was the version recorded in September 1957, with Joe Smith on drums.

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Additional Comment

There are issues of trust: is the information service pointing at legal or pirate versions, how do commercial interests influence the selection or sequence of information, who (if anyone) cares about the accuracy or timeliness of the information. Finally, there is the question of granularity/composition: if the user's notion of a whole service is the proper combination of information service with base service (neither having much value without the other), then the whole service (including its total cost and QoS) needs to be managed somehow.

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Update

Labelling as service 2 (October 20th, 2004)