The Luddite Tax

26 Feb

Like most of my peers, I spend a good deal of my time looking for innovative companies that are not only pursuing big, attractive markets, but that also possess those critical, ‘holy grail’  elements that can enable those companies to erect barriers and garner sufficient runway to achieve the scale they need to become dominant, market leading companies. This trail is well-trodden and never-ending.

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In recent weeks, however, I have noticed an interesting trend emerging in the business models of some in my current batch of startup company prospects. As yet, I have not heard anyone on my side of the desk come up with a pithy, clever term for this business model structure, so I am just (temporarily) calling it the Luddite Tax approach. It is by no means a “new” way to generate revenue from customers — heck, the government has been doing this for years — but it is beginning to gain in popularity and acceptance as a bona fide business model strategy. I find it clever, timely and quite powerful when done properly.

Unlike other approaches, the idea is not to “impose” a cost on a consumer or to ever “force” one to convert. Indeed, the notion is very much to give something away for free (or at very little cost) at the initial stages. Like the concept of Network Effects, the point is to build traffic first and foremost. The comeuppance is that eventually that tidal way of traffic creates a self-sustaining and self-fulfilling gravitational pull that brings aboard all users into a pay scheme. Sound familiar? It is. The Luddite Tax is in evidence in a number of everyday situations. You probably do it already in your daily commute if you are a FastTrak customer.

FastTrak is actually a great example. To the uninitiated, FastTrak is a program whereby residents sign up for an account with their local municipality to receive a “transponder”, a plastic device the approximate size of a garage door opener. The transponder is mounted to a vehicle and a signal is transmitted between the transponder and a receiver placed on a toll bridge or other toll-taking infrastructure for the purpose of collecting a toll. The toll is collected by either debiting the customer’s bank account or by having an account set up with the municipality where funds are deposited in advance and periodically replenished. Having a transponder permits the driver to use dedicated FastTrak Only lanes — which are unmanned toll booth lanes where one can drive through at up to 25 miles an hour — thereby saving time during peak commute hours by avoiding the typical manned booth lanes often clogged with drivers handing over their dollar bills the old fashioned way. As an added incentive, municipalities often charge a slightly lower toll fee to a transponder user than for one paying cash. [However, don’t expect this discount to last. See why below.] 

Everybody wins, right? The municipality gets traffic moving faster and saves costs on having to retain toll takers for the toll booths. Transponder users get to fly by toll booths and save commute time. The planet benefits from there being fewer vehicles clogging roadways burning fuel as they sit in long toll booth lines. 

The catch is that the government is careful to never force anyone to become a FastTrak user. Indeed, they do not need to. People who wish to pay tolls in cash can always elect to do that – probably forever as there will always be tourists, etc whose vehicles are not (and needn’t be) transponder equipped. They will need to pay in cash.

The rest of us have a decision to make: We can be one of the “I don’t want Big Brother in my car”contingent and refuse to be joiners. That will guarantee us many hours of sitting in overheating cars each morning (and sometimes each afternoon) rummaging for loose change in our glove boxes. Sure, we can say we are “bucking the system”, but at a cost that soon becomes pretty unbearable, particularly each time a Lexus whizzes by us in the next lane over on its merry way through a FastTrak lane.

Municipalities, therefore, are enforcing a kind of compliance by letting the “old system” become so unbearable that, in time, virtually all drivers with the exception of once-in-a-great-while drivers, tourists, and hard-core “off the grid”-type anti-government activists will yield and get a FastTrak. This is the municipalities’ design all along, but they choose to reach their goal by letting a “reverse Network Effect” do the work for them. That reverse Network Effect is that as users gravitate to a new, pay system, the old system becomes increasingly chaotic, outmoded, inefficient, and downright painful. While it’s not quite the “upgrade or perish” business model of many software applications, it is decidedly a “migrate or wallow” business model of sorts. You won’t perish if you stick with the old system; you’ll just sometimes wish you did.

Another example of this — only now emerging — is around the burgeoning area of “smart” thermostats.  California recently added a regulation, temporarily sidelined, that would have mandated all new construction to have installed a communicating thermostat that could receive messages from the utility companies. The core purpose of this is for the power companies to better manage power usage and requirements in the event of power emergencies like those that afflicted California in the summer of 2001. [Clearly, it is only a matter of time before these communicating thermostats will be remotely adjustable by users — “Honey, I forgot to lower the heat before we left on vacation! Let’s do it from my laptop or cell phone!” — and before they will be able to communicate with other smart devices in your homes.]

Predictably, privacy advocates threw a fit insisting that this was a thinly veiled attempt by the state to take over your thermostat. The dust hasn’t settled on this, but it is already appearing that there will be an element of Luddite Tax in the model that will ultimately emerge in this initiative. Existing structures will be grandfathered. As such, homeowners will not be required to upgrade their thermostats with the the new, smart communicating devices. However, as communicating thermostats become ubiquitous, having an “old school” thermostat that is not remotely adjustable by either the homeowner or the power company will become inefficient, costly, and perhaps dangerous.

Tech companies thinking of pursuing this kind of approach would do well to closely examine some of the ways government agencies are embracing the Luddite Tax model to get apathetic citizens to adopt new ways of interacting with government. Believe it or not, startups can learn a lot from watching government work. Wait a second! – Looking to local government for innovative ideas?? In my years in the technology and venture environment, I truly never thought I would ever find a rationale for saying that…

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