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136. Max Hillebrand on Free Software Entrepreneurship with Bitcoin

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Entrepreneurs are developing a new world of innovative business models far from regulated markets, crony capitalism, and corporate control. It’s a new world of cyber security, free software, value-for-value exchange, integrated with bitcoin. Max Hillebrand operates in this new world, and he shares both his vision and his expertise on the Economics For Business podcast.

Key Takeaways and Actionable Insights

The praxeology of cyberspace.

Praxeology is timeless, with equal application in this era of cyberspace and the internet as in any other era. Individuals are in a state of unease, and they can perceive a better future in which their unease is relieved. They allocate resources to achieve that end.

Those resources can be scarce or non-scarce. Non-scarce goods are non-rivalrous; I can share them with you and not give them up for myself. Information goods are non-scarce. They are patterns of words and symbols that can be shared. This is the world of free software.

It’s also the world of cyber security. Cryptography is just a math formula. If I wish to express myself freely to one other person or a small group of people, I can enable my non-scarce expression for only that small group, giving them the private key to decrypt the message.

The value of free software: scratch your own itch.

A growing cadre and movement of internet entrepreneurs is engaged in the preparation and distribution of free software. Free doesn’t mean it’s not valuable. New technologies and new free software are created to solve customer problems more efficiently and more effectively. One of the beautiful attributes of free software is that it is open to user contribution — anyone who can read the software can change the software and publish those changes, so that future users can enjoy an even better experience. Everyone in the free software community — producers and consumers — is incentivized to ensure that the tools that they all use are running at their best.

This is sometimes referred to as the “scratch your own itch” ethos. The creators of the software are also the users of the software. Customers know the problems that they want to have solved, and give the ultimate feedback of fixing it themselves.

Free software in business.

Producers of free software create the highest quality technology tools. Entrepreneurs looking for the best technology have an incentive to seek out these producers and their products. There is no lack of demand. How do the producers get paid for their development efforts?

One way is via a service exchange. Users of free software often like to add customization, personalization and locally specific integration features to free software that they use. Producers can be contracted and compensated for these customization services. Red Hat followed this business model of servicing Linux users all the way to a $US34 billion valuation in an acquisition transaction with IBM.

Value-for-value exchange: a new business model?

The second way to get revenue from free software production is via donations — users recognize the value of the experience of using the product and voluntarily send payment to the producer, even though no “price” was asked.

This emergent concept of voluntary payments made for freely distributed valuable content and products is beginning to bloom into a new form of exchange, which has been given the name of the value-for-value (VFV) model. It’s especially prevalent on the blockchain and on bitcoin networks.

Take a freely distributed podcast as an example. The producer can put a Bitcoin lightning network public key in the RSS feed and listeners can voluntarily send any amount of bitcoin back for every minute they are listening to the podcast. This happens automatically in the background when the listener hits Play and stops when he or she hits Pause or Stop. One-time payments can be made as well, if preferred. Payment can be boosted if the listener here’s something they deem especially valuable to them and wish to extend an extra reward. It’s the ultimate market feedback mechanism.

Bitcoin as free software

Bitcoin is another tool of cyberspace, engineered and designed to solve the problem of money. Many innovators over time have made attempts to create digital money to make internet transactions fast, infinitely cheap, stable and private. But none of the attempt, until bitcoin, were able to solve the problem of verification of transactions and enforcement of rules without a trusted third party. Bitcoin solves the important problems, not just of verification but of “who verifies?”

Verification is always and ultimately human. Bitcoin entrains entrepreneurs who download the bitcoin software and confirm they are running the agreed monetary rules on their own hardware. When another entrepreneur connects and asks for rules-based verifications of valid transactions, bitcoin merchants on the network are running the software and checking the transactions of others. They are entrepreneurs producing verification according to established and agreed rules. It’s an entrepreneurial merchant network.

Get paid in bitcoin, hold bitcoin, invest with bitcoin.

Max emphasizes 3 aspects of the bitcoin enabled life that can insulate and protect entrepreneurs from the inflationary fiat future.

Get paid in bitcoin

To get paid in bitcoin means to have a “censorship resistant” method of receiving payment from customers. People who do not have access to a bank account can become entrepreneurs. People whose bank accounts might get shut down can remain entrepreneurs. Anyone who fears for the future of the fiat system can insulate themselves against future payment system uncertainty.

Hold cash reserves in bitcoin

Saving should mean holding an asset without counterparty risk. Bitcoin serves that purpose — it’s counterparty risk-free money. Holding a reserve without counterparty risk frees the individual to make a trade with an entrepreneur at any time in the future. There I no risk of inflation. Your saving can’t be diluted.

Denominate your contracts in bitcoin

When more and more entrepreneurs denominate their contracts in bitcoin, a stable monetary asset that cannot be inflated, the detrimental cycles identified by Austrian Business Cycle Theory can be eliminated. This is the exciting long term prospect of bitcoin.

It may be a long path, and it will take time and courage to complete the journey, but it is possible. There are entrepreneurs today (Max is one) who get paid exclusively in bitcoin and hold their cash reserve in bitcoin.

Additional Resources

Max’s website: TowardsLiberty.com

Some examples of free software tools:

Professor Mohammad Keyhani’s Entrepreneur Tools: Visit The Site

Cryptoeconomics: Fundamental Principles of Bitcoin by Eric Voskuil: Buy It On Amazon

116. Alan Payne on a Fascinating History of Competing Business Models

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We can gain useful insights by winding business models back in time to see how they emerged and evolved. In the case of competing business models, we can analyze the different outcomes and perhaps assign some cause and effect analysis to interpret why one model variant performed better than another. How do we do that? Through the technique of entrepreneurial business history.

Alan Payne conducts just such a historical business model re-enactment in his excellent book, Built To Fail: The Inside Story of Blockbuster’s Inevitable Bust. It’s the dynamic story of two competing business models in one industry, a comparison of outcomes, and the resulting emergence of a new, third model.

Download The Episode Resource Consumer Value vs. Shareholder Value Models – Download

Key Takeaways & Actionable Insights

Business models are discovered by experimenting entrepreneurs.

The video cassette recorder (VCR) and playback device was a technological emergence in the 1970s. Movie studios saw the opportunity for new sales but worried about diverting revenues from the theater channel and therefore priced movies-on-cassette quite high from a consumer perspective (about $65). The experience of viewing movies at home was valuable to consumers but the exchange value was not aligned with the price. A few enterprising entrepreneurs discovered the rental option (don’t buy the cassette, rent it, and return it). The unit rental price emerged at around $3. The video rental business was born. Individual rental stores were profitable and some of the entrepreneurs started to open multiple stores and build small chains.

Capital-advantaged shareholder value-focused owners recognize emergent business models that are scalable.

Alan Payne’s story of business model evolution in the video rental industry describes a great leap in industry growth led by another kind of entrepreneur. Wayne Huizenga was an entrepreneur experienced in a certain kind of growth model. He had built Waste Management, a Fortune 500 company, from a one truck garbage collection route, largely through acquisition and subsequent expansion of local operators. He knew how to finance and run high growth expansion of a templated operating system. He bought Blockbuster for $18.5 million and sold it nine years later for $8.4 billion. That’s a huge amount of shareholder value generation.

Under Huizenga, the consumer value experience did not get better. It was frozen. We know that consumer experience is dynamic, not static; Huizenga’s Blockbuster let more and more consumers into a static experience (through geographical expansion) but was not generating new value for those or any other consumers.

More consumer-oriented businesses evolve more responsive business models.

In Alan’s story, HEB Grocery was a different kind of entrepreneurial business that approached consumer value in a different way. Alan describes the company as “obsessed with being the best” at meeting the ever-changing preferences of food shoppers. An effective grocery retailer must be highly responsive to changing consumer needs and adept at providing selection and value at low cost, with operational excellence in inventory management and customer service.

HEB decided they could offer video rental service in-store and brought their grocery operations skills to bear on designing a consumer-preferred experience. They tested different value propositions – Alan called their stores laboratories for the video rental experience – and let the consumer decide which were the best. They experimented with inventory (number of movies available), the in-store selection of new releases versus classics, different pricing schemes for different movies, different return dates for different products, and offering snacks alongside movies, among other variations. The result was a differently-tuned business model, one that built a more satisfied and loyal user base and generated more revenue and more profit per store than Blockbuster.

Business models are tools for economic exploration and advancement, so long as there is managerial and organizational flexibility to learn and improve.

When Alan Payne went to work for Blockbuster as an executive to run a panel of franchised stores, he transferred the learnings from the HEB video rental business model. He demonstrated that the model could be applied successfully in this new environment, achieving similar levels of growth, profitability and consumer satisfaction and loyalty in his panel of stores.

The issue for Blockbuster was not business model transferability, but the managerial, organizational and decision-making environment into which it was transferred. Blockbuster was a top-down hierarchy in which knowledge flowed one way — from the top of the hierarchy to the stores in the form of commands. When there was learning at the store level about new and better ways to organize, to manage, to operate, to please consumers and to make profit, it was impossible to transmit it upwards and share it. Blockbuster lost money and entered bankruptcy even while a significant number of stores in Alan’s franchised panel were operating profitably and were growing.

Alan eventually raised the money to buy the franchised stores from Blockbuster and operate them independently, which he did successfully and profitably for over 20 years. Blockbuster never was able to learn any of his techniques, nor modify its business model to the more successful version that was in plain sight.

Sometimes, an outsider from the industry comes along to seize the opportunity of the next business model evolution.

Alan makes it clear that technological change did not kill Blockbuster or the video rental model. When DVDs were introduced to (eventually) replace video cassettes, Alan’s franchised stores thrived by offering both side-by-side and thus appealing to two sets of consumers in one store.

Netflix was able to anticipate a future in which the digital data stored on DVDs became streaming data downloaded at home by consumers. This was not so much an act of prescience as one of exploration. The next new video-at-home experience began to emerge and Netflix captured much of the consumer value.

There is more value to be captured today because the consumer finds new experiential benefits in streaming, and the accompanying data analytics deliver insights that a consumer-centric firm like Netflix can utilize to further improve the experience. The same opportunity would have been available to Blockbuster, but their lack of business model agility and their failure to build learning channels from the consumer back to the corporation meant that they could not take it.

Additional Resources

Built To Fail: The Inside Story of Blockbuster’s Inevitable Bust: Buy it on Amazon

“Consumer Value vs. Shareholder Value Models” (PDF): Download PDF

What Is A Business Model? It’s Not What You’ve Been Told.

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What is a business model? It’s a question asked frequently on Google Search, so there must be doubt in businesspeople’s minds.

The reason for the uncertainty is clear. The term business model sounds like a thing – a completed canvas, a written document, a spreadsheet with macros. But it’s not a thing, it’s a lived experience, for both business executives and their customers.

The Austrian Business Model

In a recent edition of the Economics For Entrepreneurs podcast with Dr. Per Bylund of Oklahoma State University, we described a very different kind of business model framework we called the Austrian Business Model, based on principles of Austrian economics. It’s a recipe for business success. We chose the term “recipe” purposefully, to communicate these features:

  • A recipe is a non-linear process: there are inputs and outputs, there are many different sub-processes progressing at different rates designed to integrate at critical points, and subject to adjustment by the operator as new information is revealed (“the oven’s on fire!”; or, “this tastes like it needs more salt”).
  • A recipe is dynamic. All parts of it are in motion all the time – assembling, combining, mixing, cooking.
  • A recipe is adaptive. If the chef does not have all the ingredients at hand, he or she may substitute or leave out some elements. If a guest does not like some ingredient, the chef might work around it. New methods of cooking may lead to a better outcome with the same ingredients. There is learning from experience about what techniques work best.

Like a recipe, a business model is also a non-linear process, dynamic, always in motion, adaptive and improved with experience and learning. And, like a recipe, it unites multiple lived experiences. There is the chef’s lived experience, operating the recipe this time, as well as applying accumulated experience from previous times, and perhaps the inherited experience of family members from past time. And there is the lived experience of the recipient who tastes the output, in the context of a dinner party or a family meal. An experience is always shared.

In fact, the focus on experience is critical in a business model. Its end result is a value experience – value perceived by a customer, sufficient to justify the price they’re willing to pay for anticipated value, sufficient to deliver value in the use experience, and sufficient to support an assessment of value after the fact, looking back on whether the experience met expectations.

The experience-centric business model

An experience-centric business model traverses four phases of value learning for the entrepreneur.

Understanding Value

The foundation of a business model is an understanding of value for a specific set of customers. There are conventional business models that talk of “creating value” – whether that is the economic value of returns on capital that are higher than the cost of that capital, or shareholder value in the form of higher stock prices, or even brand value and product/service value. But all of these routes to “value creation” are misdirections. Firms can’t create value. It is customers who create value through their experiences. Value is something customers experience after they have made the economic calculation to buy a product or service, used it, and then stepped back after usage and assessed the experience compare to their going-in expectation. Value is formed in the customer’s domain, and not by the producer.

That’s why economists refer to value as subjective. It’s a perception that varies with each individual customer, with changes in context, and with changes in time and circumstances. The task of the business model developer is to understand the subjective value preferences of a specific set of customers in a specific context at a specific time.

Value Facilitation

Producers can suggest to customers that they can help them bring about the value experience they seek. The word “help” is important. Operating a business model is not an exercise in “making things happen”, it’s the art of helping them to happen.

In the business literature, there is talk of the design process – designing experiences for customers based on listening to their feedback. That is all very  well-intentioned, but it doesn’t quite capture the art of value facilitation. Customers form value through cognitive, mental and emotional processes, consciously or unconsciously, interpreting interactions and information and constructing an interpreted and experienced reality within which their feelings of value are embedded. Value is formed in people’s life experiences and it’s not the role of the producer to act as designer.

Producers and marketers must ask, how does the customer live their life? What is the life context? What are the challenges the customer faces? These and many more questions prepare the producer to humbly request to fit in and contribute to the customer’s life. If invited in, there is the possibility of value facilitation.

Value Exchange

Your customer is going to undertake a complex subjective balancing of the value they perceive based on your proposition and their own willingness to pay, in the context of all their alternative choices and any historical experiences they have had, either with your proposition or others. You can try to understand their process, but you can’t direct it. For example, you can’t set pricing. The customer determines the price they are willing to pay, and the producer’s job is to discover that price, through testing. Therefore your revenue model must balance the price the customer decides upon, with the costs you choose to include in assembling your offering. Costs are never forced upon businesses – they are always chosen. In the Austrian business model, entrepreneurs buy as many inputs as possible on the market, where costs are known and are rendered efficient through competition, as opposed to keeping costs internal, where they can’t be known exactly and may be unstable or hard to control. Your margins are emergent from this equation of customer-chosen pricing minus entrepreneurially-chosen costs. Don’t try to set margins in advance.

The best metric to monitor is not margin or profit, but cash flow. Keep it positive, monitor it weekly, and adjust to its signals.

Value Agility

Once invited into the customer’s experience, the producer has an opening to act as the value facilitator-on-the-spot for the customer. As the customer lives the experience – operates the recipe – there will be questions, unexpected occurrences, errors to fix, context changes, and many more unanticipated twists and turns.

The entrepreneur’s business model secret at this stage is agility. Business models that talk about strategic pillars and similar unchanging elements risk failure in the light of customer volatility and change.

A key to success lies in good feedback loops. Your business model must prepare your firm to be dynamic in response to customer preference changes and all the new information coming to you from the market every second, minute and hour. If you don’t maintain dynamism, your business model will weaken and your grip on competitive advantage will loosen. Your value proposition must strengthen and improve continuously. Your model of customer preferences must be kept fresh. Your value facilitation must demonstrate continuous improvement at a faster rate than the customer’s value experience erodes.

Empathy, humility, adaptability, and agility. These are the components of the contemporary business model. There’s a framework you can use to shape these components for your own unique application of the model, in The Austrian Business Model video.