This item has been sitting open on my desktop for a few days … I enjoy reading Jonathan Schwartz’s blog, and he recently had a post in which he discussed what it means to be a commodity. See also his post from July 2004 on commodification that he links therein.
Andrew Morton (of Linux kernel fame) gave a low energy speech in which he said “Operating systems are commodities, now we’re moving to commoditize the rest of the stack.” He made those statements as if to suggest “commodity” meant “no longer of value.” I don’t think Andrew understands commodity markets. Here are a few: oil, gas, financial services, telecommunications and electricity. Commodity markets are the biggest and highest value markets in the world – because they represent products and services for which there’s global, perpetual demand. They tend to be markets won or lost based on research and development (check out the largest R&D spenders in the world, they’re almost all serving commodity markets). Computing may be a commodity – computers, and their operating systems, are most certainly not.
What interests me about the way he discusses commodification in these two posts is how relevant they are to my conception of the electricity industry. It’s sadly common for people to characterize electricity as a commodity, because “it’s just electrons, and people don’t care about it as long as the lights come on when they flip the switch”. However, just like bandwidth, the homogeneous nature of electrons does not make electric power service a commodity. As Jonathan said in his July 2004 post:
Can you discriminate one company’s bandwidth from another? Pricing, yes. Bandwidth, no. Can you discriminate one company’s browser from another? Yup, especially recently. How about one company’s mobile handset? Linux distro? 4-way x86 server? Absolutely. They all make that bandwidth useful and interesting, but they’re highly differentiated technology products.
[warning: vast overgeneralization ahead] Engineers and so-called consumer advocates like to call electricity a commodity, because thinking of it as such serves their interests. Thinking of electricity as a commodity maintains the focus on the physical assets of a closed system that requires real-time balancing. It also provides the impetus for an argument that prices should stay low and stable, preferably through some top-down regulatory mechanism.
That’s what is potentially threatening about the more modern, more empowering view of electricity as highly differentiated technology products bundled with a commodity. Such a concept of electricity opens up the system to be the union of the physical assets, and the physical reality of their operation, with the human preferences and human cognition that creates value through the consumption of highly differentiated technology products. It also means that the value proposition to customers becomes much, much richer than price level and stability. It becomes “we want to sell you things you can do with this commodity”, not “we have a monopoly to sell you a commodity at a regulated price”.
So here’s my question to you: is electricity a commodity? I say no. Electrons are a commodity. Electricity is a highly differentiated technology service, if we would only let it happen.