UPSIDE-DOWN BUSINESS MODELS

 Am I Next? Upside-Down Business Models, Competition, Predatory Pricing

Efficiency not competition is often the biggest existential threat to companies with an upside-down business model.

The fight for business is about to get incredibly ugly as companies with upside-down business models realize a fundamental fact: efficiencies available to customers reduce the company's revenues, not the company's operating costs. 

Thus in a rush to preserve the income-generating ability of legacy capital assets, you will find companies turning to corrupt politicians to preserve whatever is left of their business and to overlook the confusing and dishonest predatory pricing that is often found in highly-regulated and tariffed industries.

Deception becomes the norm. 

One example can be found at Sparkletts where the initial offer of a free cooler (regular and cold water) has given way to an almost surreptitious rental cost to the customer. In the beginning, the company raised the price to $1 per month and explained it as imputed taxes demanded by "the government." Now, years later, the same cooler is costing the consumers $6 per month, and there is no pretense that this is a government-mandated tax. The same with the strangely-calculated "energy fees" to compensate for higher gasoline costs, but which never seem to shrink as the cost of fuel dramatically decline in an age of declining oil prices. Anything to overcome the fact that water has been commoditized, brands are becoming increasingly irrelevant, and lower-cost options are now becoming more available. 

Of course, just looking at the fees on some utility bills is almost an exercise in futility. Southern California Edison, when challenged over a single line item claimed that the item was a charge in anticipation of higher costs and was not a government-imposed fee.  One such mysterious fee is labeled the "Competition Transition Charge" and is defined as "a non-bypassable charge applicable to all existing and future SCE Bundled Service Customers, all Direct Access Customers, and all Departing Load Customers for recovery of SCE’s transition costs." 

In a second document, here is how the charge is explained...

"Once again, additional generation charges are listed in a column on the right underneath the extra delivery charges. Our example shows only a competition transition charge."

"Below this are your overall energy charges, which also boil down to a single item, franchise fees. The fees and the competition transition charge are just a reflection of the cost of business for your utility. By buying electricity from a utility, you are paying for all maintenance, repairs, special programs, and incentives, not to mention salaries and pensions. When any of those costs go up the utility just spreads the cost across its many thousands of clients, resulting in increased rates."

One might think that the utilities' costs would be bundled into the total cost of energy, but apparently, to avoid scaring the customer with a big number, they break the bill into smaller numbers, each when taken individually does not seem so onerous as the one big number.
So what does this have to do with real competition? Very little since most utilities are operated as monopolies and where the customer is faced with Hobson's choice: Pay the fee, accept the rules or do without. Pretty tough when you are speaking about the hard delivery of water or electricity. Not so much when you have choices of telephone or cable providers. 

it appears that home solar panels, LED lighting, and the increased efficiency of new buildings is taking a cut of their revenues without altering the cost structure. Some of this loss of income can be counterbalanced by the avoidance of CAPEX (Capital Expenditure) in building out additional capacity. You can see the very same thing happening in the water markets where drought-resistant landscaping and drip watering systems are reducing water usage and ultimately revenues. In these instances, efficiency is more damaging than the competition, if there is any in a monopolistic business.

So it is not uncommon to penalize customers for this efficiency with artificial tier-rates. The utility calculates, on some basis, what it believes is the efficient use of its resource and surcharges any overages. Unfortunately, most utilities do not make their revenue and operational statistics available to the public in a usable form so that we can know how much revenue is generated by so-called inefficient use. In some cases, utilities who have long-touted solar power are surcharging customers for administrative costs in attaching their solar installation to the grid. 

The takeaway ...

The takeaway is to look out for upside-down business models based on legacy assets and a revenue base that is being eroded by technological efficiencies on the consumer side like LED lighting and DRIP watering systems. Because the easiest way to compensate for declining revenues -- at least in the short term -- is to automate and to reduce costly personnel.