A deep look inside Apple Pay’s matchmaker economics – Richard Schmalensee and David S. Evans

MIT Sloan Professor Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

From Harvard Business Review

Standing on stage on September 9, 2014 at Apple’s Worldwide Developer’s Conference (WWDC), Tim Cook announced, “We’ve created an entirely new payment process, and we called it Apple Pay.” Cook displayed a video of a woman who held her iPhone 6, the company’s upcoming upgrade, near a payment terminal.  She paid in the blink of any eye. “That’s it,” Cook said, exclaiming twice over “just how fast and just how easy” the new payment method was. An Apple press release claimed the new service would “transform mobile payments.”

Read More »

The best retailers combine bricks and clicks — Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

From Harvard Business Review

Retail profits are plummeting. Stores are closing. Malls are emptying. The depressing stories just keep coming. Reading the Macy’s, Nordstrom, and Target earnings announcements is about as uplifting as a tour of an intensive care unit. The Internet is apparently taking down yet another industry. Brick and mortar stores seem to be going the way of the yellow pages. Sure enough, the Census Bureau just released data showing that online retail sales surged 15.2 percent between the first quarter of 2015 and the first quarter of 2016.

But before you dump all of your retail stocks, there are more facts you should consider. Looking only at that 15.2 percent “surge” would be misleading. It was an increase was on a small base of 6.9 percent. Even when a tiny number grows by a large percentage terms, it is often still tiny.

More than 20 years after the internet was opened to commerce, the Census Bureau tells us that brick and mortar sales accounted for 92.3 percent of retail sales in the first quarter of 2016. Their data show that only 0.8 percent of retail sales shifted from offline to online between the beginning of 2015 and 2016.

So, despite all the talk about drone deliveries to your doorstep, all the retail execs expressing angst over consumers going online, and even a Presidential candidate exclaiming that Amazon has a “huge antitrust problem,” the Census data suggest that physical retail is thriving. Of course, the shuttered stores, depressed execs, and tanking stocks suggest otherwise. What’s the real story?

Read More »

Some of the most successful platforms are ones you’ve never heard of — David S. Evans and Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

From Harvard Business Review

When most of us think of multisided platforms, the ones that come to mind are those, like Apple and Facebook, that make heaps of money. Or unicorns like Uber that, if cap tables mean anything, someday will. Of course, anyone who really knows the history of platforms may recall the many that aspired to make gobs of money but never did and quickly died (think of the many B2B exchanges that never made it to the other side of dot-com bust). And don’t forget your brother-in-law’s great platform idea, which will make you both rich if only you would invest your life savings in his startup.

What’s amazing, though, is that there are many platforms that have created massive value, but have never made a profit, and don’t even strive to make money — on purpose.

Most likely, you have of one of the worldwide champs in this category in your wallet. MasterCard and Visa didn’t make, or even look, for profits for decades. MasterCard started as a not-for-profit membership association, in 1966, and Visa did the same, in 1971. Both associations managed their brands and ran the clearing and settlement systems for banks that issued cards or helped merchants accept cards. These card networks were allowed to charge their members just enough to cover cost and provide working capital. (For more on this, read Dee Hock’s book about starting up the Visa network.)

Read More »

Pricing solar so it doesn’t raise everyone’s energy rates — Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

MIT Sloan Professor Richard Schmalensee

From The Boston Globe

Despite its recent growth, solar power remains an expensive energy alternative and accounts for only a small percentage of electricity generation in Massachusetts. If the state is going to make sharp reductions in carbon emissions as well as enjoy healthy economic growth, solar generation will have to be greatly expanded. But given the already high cost of electricity in Massachusetts, it is critical to obtain solar power as cost-effectively as possible to ensure that all consumers benefit.

In a recent study, an MIT team that I led presented a set of policy changes to make solar more affordable. The study shows that because of current policies, we are paying a good deal more for solar electricity than we need to. Residential solar systems are significantly more expensive per unit of capacity than utility-scale systems — about 70 percent more expensive on a levelized-cost basis. In addition, high levels of residential solar penetration often require substantial investments in distribution systems.

Residential solar continues to grow robustly, nonetheless, in large part because it is more heavily subsidized than utility-scale solar. The main federal subsidy, the investment tax credit, has just been extended for an additional five years. Since the amount of the tax credit is directly proportional to system cost, residential systems, which are more expensive on a per-unit of capacity basis, receive larger tax credits per unit of capacity than megawatt-scale, utility systems. This translates into a higher subsidy per kilowatt-hour of residential solar electricity, paid by taxpayers.

Read More »