Disruptive business, the “free” business model and the electric car

Mar de Castilla @thefromthetree

One of my recent discoveries in the blog realm is a man named Bill Gurley. He is engaged in the investment business and has a blog called “Above the Crowd”. His last post tries to rationally explain the behavior of Google giving for free all its applications and even paying Godzilla, a foundation, to let it to provide you for free the Firefox browser.

The starting point is that, as Warren Buffet said, you should invest in dominant companies in markets where barriers to entry are very high and therefore, where the dominant firm is not to give up its position easily (“In business, I look for economic castles protected by unbreachable ‘moats’). And then he goes on to explain that Google’s strategy is aimed at increasing the entry barriers in the market where it is dominant: Internet advertising, shoring up its dominant position in the field of search engines as they are searches that allow you to sell ads to businesses.

In a previous post - 2009 - Gurley discussed the issue of sustainability of business where the firms give consumers something for free. Meddling in a discussion between Anderson and M. Gladwell, Gurley said that if a competitor can offer a product or service similar to yours and offer it for free and yet earn enough to stay in business, then you have a problem (if a disruptive competitor to offer dog product or service similar to yours for "free," and if they can make enough money to keep the lights on, then you likely have a problem). Moreover, the competitor may even be willing to pay consumers to use the product.

These posts suggest two things. The first is that the threat of "free" is even greater than that posed by Gurley. Since the competitor willing to give away the product or service can be a company or an individual acting non-profit, its income does not even need to be enough to "keep the lights on" to steal customers fom you. This explains why free products and services will be widespread on “average quality” level and it will only be charged for products or services of high quality. There are many people willing to work for free.

The second is that Google's strategy could be extended to many other areas. In particular, the development of electric cars. Electricity has a very remarkable drawback: it can not be stored (batteries are expensive). But sometimes, the marginal cost of producing it is practically zero (like software distribution). This applies to electricity produced by renewable sources such as wind or photovoltaics. In Spain, from time to time, we must stop the windmills because the network is unable to absorb the energy produced. That means that a lot of electricity is wasted or not even produced because there is no way to store it and can not be consumed immediately.

Business models for electric cars are of three types: hybrids, pure electric with a battery swap network and pure electric with a network of battery recharging points.

Well, someone has thought that it might be a good marketing tool to offer customers a place to recharge the car batteries for free, but things could go much further. At the end of the day, not charging for that electricity does not mean that producing it was costless (marginal cost of producing it was not close to zero), especially if the firm is taking the free-electricity from the network and the network took it from a natural gas generation plant. A smart grid could do the miracle. The car owner would receive a bill which would explain which refills are free because they took place when there was excess power in the network.

And, finally if you want to sell gasoline and stay in business or if you are a manufacturer of hybrid cars, it would be logical to charge the consumers at the pump station for gasoline and give them the electricity to recharge the batteries for free. Competition between hybrids and pure electric cars could be sustainable for a longer period of time justifying investment in both technologies by firms and car buyers.

PS 28/03 A powerful experimental battery that can be recharged completely in minutes