Sunday, May 4, 2008


One of the problems in being innovative — creating a business that never existed before — is that there’s no way to know if there’s a big enough market. We tend to think of these businesses as technology based, but charging $3 for a cup of coffee or $1 for a bottle of filtered tap water were certainly businesses that required a leap of faith.

Market research will only tell you so much — what people say they want, but not what they’ll do. Cost reduction or substitution plays to business are the safest best, since they tend to make analytical rather than emotional decisions, and saving money is always a driver. So PCs making computers affordable, or faxes instead of FedEx® (and e-mail instead of faxes) were a no-brainer.

Getting people — particularly cheap Americans — to pay more is much tougher. It’s even tougher if you want people to pay for something they’re used to getting for free. The risks are magnified if it’s an infrastructure play, where you have to build the infrastructure and coverage up front to realize a single dime of revenue.

Of course, sometimes these barriers to entry are just what you need to make a killing. It worked out well for the Baby Bells, GTE and the radio common carriers that got AMPS licenses back in the 1980s. It particularly worked out well for Craig McCaw (who made billions off Cellular One) and even his spurned wife Wendy, who grossed $460 million in the largest divorce settlement in US history (Heather Mills, take note).

All of which is a very long-winded way to express my consolations for the owners of Clear, the biometric security-enabled express lane for airports. I can see how it seemed like a good idea at the time: post-9/11 waits have gotten longer, biometrics can improve identification reliability, and it’s a big market.

The risks were there — the up front infrastructure spending, the franchise fees to the airports and/or the FAA. There’s a limit to future labor saving — every station has two employees, perhaps to prevent collusion or to allow for bio breaks.

So Thursday morning when I spent 20 minutes at morning rush hour waiting to clear the long security lines at SJC, I didn’t see anyone walk up to Clear. Not one. Clear has been here almost a year, so it’s not as though they’re still in ramp up mode.

Instead, Americans are cheap. Just as I pay a skycap when I’m at risk of missing my flight, I'd pay $2-3 per trip to use the service, while some might pay $5 or $10. But none of us would pay at 3 p.m. in the afternoon when there are no lines. However, both as a pricing decision (all you can eat) and to cover up-front screening costs, their pricing model is a $100 annual subscription. (No free trials here).

It’s not clear (all pun intended) whether the problem is market size (of people willing to pay anything) or the revenue model (no ala carte pricing). It’s also not clear if (ala Iridium and Globalstar) they have a graceful fallback position short of bankruptcy. But if they can’t find significant paying customers in tech-wealthy Silicon Valley, they are not long for this world.

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