Two Plus Two Older Archives - an imperfect but worthwhile metaphor:)

Okay, suppose there's this big public pool of oil at First Street. You can set up shop by standing there with a dipper, and anyone who walks up with a cup, you'll dip some oil for him.

Next thing, there's about five people standing around with dippers. So you say okay, I can differentiate, I'll sell gas! So you build a refinery - a network of pipes and tanks and flames - extending your operation to Second Street. Anybody who needs gas walks up to your faucet on Second Street.

The original oil pool is low friction - anyone can access it - but your pipe leading to second street builds high-friction distance between you and this commodity. And there are high-cost barriers to entry. There may be no friction preventing the flow of oil from one dipper to the next, but there is huge friction from your faucet back to the common pool, and that is markup.

Problem is, pretty soon, all the crude oil dippers on First Street have built refineries extending to Second Street, and you're on a level playing field again. On the one hand, you can sell gas for a lot more than crude oil. But, on the other hand, you've all got a lot of overhead invested in refining equipment, just to create enough friction-distance to have what is now a non-unique output or commodity.

So, to try to cover the cost of your first block of refinery, you build another block, which is all it takes to turn your gasoline into jet fuel, which you sell on Third Street. But then, once the jet fuel gets commoditized, you have to extend your high-cost facility to Fourth Street, where you hope to realize a short-lived monopoly in Stage IV Crystalline.

By this time, you are giving away free-flowing gasoline to customers for a loss. Problem with that is, it has essentially the same effect as building a pipe running directly between your refinery and your competitor's refinery on First Street. So, in reality it makes no difference to you whether you pump oil to make gas, or you get gas from your customers who get it for free from their competitors. You grant a public pool of gas, available to everybody.

In other words, by the time you start using jet fuel as a loss leader, it's as if the "pool" now begins at Third Street. And your refinery equipment between Third and Fourth Street is making all your asymmetry and, therefore your profits. Since anything before Fourth Street is now free, any money you spend on manpower or refining equipment to collect it is pure loss, so you strip it down to bare bones.

You start trying to cut costs, by de-manning and streamlining the refinery before Third Street. Automated pipes are thinner than manned ones. What this means is that you have less and less pipe connecting you back to the pool, and you are basically starting with the free-flowing public jet fuel input at Third Street. And the only reason you deal in jet fuel, which is free, is 1) as a loss leader to sell Stage IV Crystalline, and 2) to give people - who happen to be a pipeline to your input or a source of free jet fuel - a reason to walk up.

Pretty soon you are up to 63rd Street, and you still have only a block of profit margin! Moreover, the supply of oil coming from the original pool is just a faint, distant trickle. Secret Formula 62 is a free commodity - everybody is walking around with it, sharing it like free love, and nobody pays for it - and you're selling Virtual Vapor 63X in exchange for cash.

The pool starts at 62nd Street, nobody is paying to keep it full, and by now it's so dry and thinned out that you have to hire this huge team of nuclear scientists just to extract something from it. You have about a thousand technical experts, and a single precious drop of Secret Formula 62 to work with, to try to manufacture some workable, marketable quantity of Virtual Vapor 63 X.

What you need to do is reclaim and reinvigorate your entire refinery going back to First Street, and shut off all the pipes running freely between your refinery and everyone else's at every block along the way. To do this, instead of giving away gas for free, and selling jet fuel for cash, you sell jet fuel in exchange for gas. You create a loop forcing your customers to come back to you. Instead of creating a charge for them to come to you for commoditized inputs, you create a cost for them going somewhere else.

And you have to pay for the inputs, which increases their supply, rather than trying to collect them - and to create a flow - by giving them away for free. Free goods always become scarce. And the other way to increase the pipe width going the whole way back to the pool is by automation, and techological upgrades . The selling of jet fuel for gas, and the collection of gas from clients - the creation of cornered inputs - all has to be automated.

So how do you do this? By purchasing asymmetric visibility and leaning rights, from your customers, in their most basic products, as far down their time axes as possible. You corner the inputs deep into the future, way out to the point of diminishing marginal returns - where the cost of their manufacturing unflexible inventory, and visibility into it, is greater than your advantage gained by cornering it. And the way you do this is not by using futures or options, but by trading in a new product called "Gestures."

So you reclaim the refinery going straight back to First Street - and even build walls out into the original pool(!) - by introducing an automated, low-overhead, "Marketplace of Gestures." This then pumps and feeds the inputs directly through to your labor-intensive expertise/service structure at 100th Street, for as cheap as possible, and doesn't do a thing to facilitate any of your competitors, or bleed off a single unpaid input, at a single block along the way.

Because when you give away loss leaders for free, it enables a boutique operator to come into the business whose refinery starts at 100th Street - while they're getting everything up to 99th Street from their customers for free. And you're giving it to their customers. You have to pay your customer to let you set up a wall around him, and you have to pay your customer to stand inside that wall, and you have to pay him to allow you to lean on him entirely and exclusively inside that wall.

In summary, you build computers, that collect supply-and-demand information like people, and pay customers to participate and have a single dance partner. You pay them to submit to friction, unless they choose to bask in exclusively in your proprietary flow. You build this paid, automated, private superhighway, right into your clients' backoffice systems if need be. You pay the way for private, exclusive leaning pipes straight through to your clients' clients if need be. This leaves everybody else high and dry!

Oh, and to prevent everybody else from reinvigorating their own compeletly vertical refineries extending the whole pay back to the original pool - and then competing with you there, fighting with you over the pool - you wall them out with 1) unique expertise, and 2) patented processes. Nobody else can build it!

Of course billing, and friction, pushes the crowd a block East or West, to neighboring free-flow refineries. Of course billing, and information extortion, creates friction between you and your clients. Of course input collection creates analog costs between you and your client. So instead of building the friction at the adjacency between you and your client - while their relationship with your compeitiro is free flowing - you create an automated, low-friction, high-bandwidth flow between you and your client, and build a wall between your client and you competitor.

Billing, friction, is borders. You can draw the borders anywhere you want. A payment is an anti-border. You pay them for information, and charge them for not granting you exclusive leaning rights. The absence of precise billing, this free-flow, these fuzzy relationships, these analog phone calls, these electronic free-for-alls, it's all the doom! It's death! Markets get more and more volatile, people go broke every week, no one wins!

Okay, that's enough for now...

eLROY