In an odd move, Delta Air Lines Inc. (DAL.N) will buy a Pennsylvania oil refinery from ConocoPhillips for $150 million. In a throwback to the 1920s Ford Motor company vertical integration strategy, Delta says that the first ever purchase of a refinery by an airline will allow it to cut $300 million annually from jet fuel costs. Delta said production at the refinery, along with other agreements to exchange refined products for jet fuel, will provide up to 80 percent of its fuel needs in the United States.

The refinery purchase is for a shuttered 185,000 barrel-per-day refinery in Pennsylvania. While Delta will still remain subject to fluctuating crude oil costs, the facility will enable Delta to save on the cost of refining a barrel of jet fuel, which is currently more than $2 billion a year for Delta and has been rising due to U.S. refinery shutdowns, said Delta Chief Executive Richard Anderson.

"What we're tackling here today is the jet crack spread, which you cannot hedge in the marketplace effectively," Anderson told reporters during a phone briefing. "It's the fastest single growing cost in our book of expense at Delta."

Unfortunately for Delta, this plant was shuttered for a reason- poor access to cheap crude. Now Delta is saddled with a multi-million dollar asset locked into a geographical handicap. Other handicaps for Delta include running a functionally and managerially disparate business unit, EPA headaches, and additional union with which to negotiate.

In the accounting department and on paper, this deal makes sense. Attack the excessive processing cost for jet fuel. However, why stop there? Perhaps Delta should buy an old GE engine plant or an ex-Boeing airframe facility? Think of all the money they could save on airframe and engine purchases. Better yet, attack the biggest cost - people. Vertical integration into robotics could eliminate the biggest cost of all, flight attendants and pilots.

In case you cannot tell, I don’t like this version of the vertical integration business model. Oil refining is a far cry from running an airline. Airlines are already a pretty tough business to run without additional headaches. Frankly, if Delta wants to control rising oil costs and/or participate in oil profits, why not invest in the oil in the ground? By controlling the raw product, Delta would have more upside potential with no more headaches than a refinery. This type of investment could be done much more passively than running a refinery. The only scenario where investing in oil in the ground would be a worse idea is if oil prices fell drastically, which is not likely. If this were to happen, the profit from refining jet fuel would stay fairly constant while the profits from oil drilling would plummet. Probably the best move is for Delta to leave the oil business to the oil people and focus on innovation in the airline arena.

What’s the bottom line? I think this one falls under “Everyone thinks they know how to run a restaurant because they know how to eat.” Just because you buy lots of fuel does not mean you know how to make it.

If you are like most people, you think that drivers who zip around the city in shiny, red sports cars are the ones who pay the most for car insurance. You may also think that older adults pay more for life insurance, and people with preexisting health conditions pay more for health coverage. This may be true, but not always. There are many different factors that affect how much you pay for your various types of insurance. While getting quotes from InsuranceQuotes.org is definitely a helpful way to estimate your costs, also consider these important factors as you try to gauge your expenses:

Your Coverage Limits or Benefits:

With some types of insurance, such as homeowner's insurance and car insurance, you select the type of coverages you want as well as the amount or limit of those coverages. With other types of insurance, such as life insurance, you are paying for certain benefits. In some cases, you may be required to purchase certain coverages. For instance, many states require drivers to purchase a minimum liability insurance policy, although many drivers choose to purchase additional coverage beyond the minimum requirements. Other types of coverage, like life insurance, are optional and purchased at your discretion. The amount of coverage you choose to buy will directly affect the price you pay for car insurance. So that driver zipping around town in his red sports car may be paying less in insurance than you if he chose to purchase the minimum coverage amounts required and you chose to purchase a policy that provided for more complete protection.

Your Deductible:

Another factor affecting the cost of insurance is the deductible. Many types of insurance, such as car insurance and homeowner's insurance, require you to pay a deductible each time you file a claim. The bottom line is the higher deductible amount you select, the lower your premium will be. Many people opt for a deductible that is easy for them to pay for at a moment's notice, as you never know when you will need to file an insurance claim. However, by taking steps to increase your savings account balance, you may feel comfortable with a policy that has a higher deductible amount.

Where You Live:

Where you live plays a major role in determining many different types of insurance rates. For example, car insurance rates are determined in part by a review of demographic information in your zip code. Factors such as the average age of drivers and the vehicle-related crime statistics are reviewed. Many insurance companies review demographic information based on your zip code. So if you are considering moving in the future, take time to get insurance quotes based on your new zip code before you finalize where you will live. Sometimes living in a neighboring zip code yields far more affordable insurance rates.

If you are like many people, you pay a lot of money on insurance premiums for your various types of coverages each month. As beneficial as your insurance coverage can be, nobody wants to pay more for coverage than they need to. Consider how these factors may be affecting your current rates. By making a few changes to your policies, you may be able to find insurance that is more affordable for you.

Internet radio giant Pandora Media is the world's largest Internet and mobile radio service. In June 2011, the company went public at $16 per share. Quickly after the IPO, investors drove the stock down, concerned about Pandora's ability to generate profits and fend off the competition.

The Pandora Business Model

The primary concern many have with the Pandora business model is that the company cannot become sustainably profitable due to the fact that the more music its users listen to, the more it must pay out in royalties. In essence, the two metrics rise in synchronicity.

Pandora has done what many Internet companies can't- make money. Pandora posted a profit of $1.044 million in the year-ago period (on a GAAP basis, however, the company lost money due to the conversion of preferred stock). If it is true that Pandora's revenues & expenses, rise and fall together, then how can Pandora ever generate high net income? If Pandora can increase revenue per user, net income can rise as well.

Therein lies the key to Pandora's future success. Pandora's ad-based model has both more risks and more opportunities than traditional radio advertising. Old fashioned radio stations buy advertising and then play that advertising to all their customers simultaneously, hoping that the station's ad buys were a wise investment. Pandora, on the other hand, buys its ads in a more targeted manner than traditional radio, due to the tremendous amount of data it has accumulated on its customers' listening habits. Potentially, a person's musical interests can translate into their consumer tastes. As such, can Pandora target its ads in a much more precise manner, and charge higher prices as a result?

We could assume that Pandora can wait for ad rates to increase, and when that occurs, the profits will come flowing. Alas, it is not that simple. Pandora's future is predicated on mobile usage, not desktop. And as such, its future income will be determined by how much it can extract for mobile advertising. And that is going to be the main challenge for Pandora going forward. Currently, Morgan Stanley estimates that Pandora brings in about $20 of mobile revenue for each hour of listening. That same report estimates that Pandora will not be able to offset its royalty payments with mobile ad sales by 2016.

Pandora should be able to successfully navigate the transition to a mobile-based world. Currently, 70% of Pandora's usage comes from mobile, and the company has inked several partnerships to expand its reach, including deals with Acura, Kia, and Audiovox. The company had two billion one hundred million listener hours in the third quarter of 2012, and that number is continuing to soar.

Financials

Pandora, like many newly public technology companies, is not yet profitable, and for now, attracts investors with soaring revenue growth. As of the last quarter (Q3 2012), revenue grew 99% year-over-year, and the company posted revenue growth of over 114% for the first 9 months of 2011. Below is an overview of Pandora's most recently available financial data. The next quarterly earnings release should occur some time in March. As a reminder, Pandora's fiscal year does not align with the calendar.

Pandora Financials

Pandora is not only steadily increasing revenue, it is also signing up more and more paying subscribers, with subscription revenues soaring by more than 80% in the last quarter. Pandora is making itself a service that is both engaging and useful to its customers.

Pandora is effectively operating near or above break even. Unlike other high-flying Internet companies, constant rounds of new funding should not be needed to sustain the business.

Business Model Outlook

What does the future hold for Pandora? Let's examine both the positive and negative case.

Positive Case for the Pandora Business Model

• Rapidly increasing subscriber base and usage
• Increasing revenue per customer
• Riding the Internet trend
• A better alternative to watching music videos on YouTube, so lots of market share to steal
• Just beginning to get penetration in automobiles
• Developing a potentially valuable data set
• The Holy Grail- Move to a traditional interruption-based advertising model (I bet listeners would tolerate a few commercials)

Negative Case for the Pandora Business Model

• Direct relationship between usage and cost without a corresponding advertisement revenue increase
• Is it just a cool Internet toy at the peak of trend?
• As users get savvy about the service, usage per user will increase without increased ad revenue
• Relatively low barrier to entry- As Pandora attempts to increase revenues, users become annoyed and matriculate to a knock-off service
• It's still a play in the unprofitable music business
• One word- Apple

Do you believe the Pandora model will work well long term? Why or why not?

Angry Birds Space just broke a new record becoming the first app to hit 50,000,000 downloads in only 35 days, two weeks better than Draw Something, the previous record-holder.  Across all platforms, Angry Birds boasts over 700 million downloads.

With the Angry Birds business model officially a craze, publisher Rovio is monetizing everything from plush dolls, candy, toys, and even a potential movie.

Better yet, the market capitalization for privately-held Rovio is rumored to be several billion dollars.  Not bad for a six year old company founded by three twenty-something’s from Finland.

Here’s the question of the day: Is the Rovio business model innovative?  On the one hand, Angry Birds has grown into far more than a game and Rovio’s revenues are growing exponentially.  Until now, mobile game companies have not successfully crossed the chasm into mainstream products.  The traditional model for non-console games has been a freemium business model where upgraded users pay for additional features or goodies.  Monetizing the 5% of users willing to upgrade is a decent model since the product has low cost.  However, Rovio has created a model where most revenues are generated by peripheral items.  This would indicate a very different business model than most game developers.

However, Rovio’s business model seems awfully similar to a toy company, Marvel comics, or Disney’s business model.  These companies create powerful characters or brands and then license those brands to toy, apparel, cereal, and numerous other companies.  The only difference between these traditional business model’s and Rovio’s is that the old school business modelers get paid to create the brand and then leverage it into other areas instead of give it away.  Here are some additional examples:

• Barbie dolls:  Licensed for 50 years to movies, party favors, apparel, and more
• SpongeBob: Licensed for toys, apparel, party favors, giant mascot dolls, and more
• Internet sensation Fred.  Started as the annoying high-pitched giggler on YouTube.  Leveraged his internet fame to a Nickelodeon show and more
• Sports stars: License name for shoes, Wheaties, apparel, public appearances
• Star Wars: the mother of all licensors sold rights to everything but the kitchen sink
• Harry Potter/Twilight/Hunger Games: books are a double threat because they first make money on the book business model then shift into the movie model for addition profit.

So, is the Rovio business model innovative?  The answer probably lies somewhere between Rovio’s business model being nothing new and Rovio’s business model being completely innovative.  The real lesson is most likely that a powerful brand can be leveraged in astounding fashion.  Additionally, the growth of mobile communications is creating branding and business model opportunities for more than just bits and bytes.  For those of us in the brick and mortar world, this axiom can be flipped- our brick and mortar assets can probably be leveraged into the digital world just like Angry Birds moved from digital to brick and mortar.

What lessons can be learned from the Angry Birds business model?  Do you think the model is innovative?

Entrepreneurs are the best people in the world. They are ever-hopeful and optimistic. They believe there is a solution to every problem; and they are usually right. However, this same optimism tends to lead entrepreneurs to believe that all business problems can be solved with more sales. Many times, this is simply not the case.

Let's examine some typical scenarios that entrepreneurs believe require more sales.

Scenario #1: Perpetually underfunded

In this scenario business is usually good and the company is typically growing. However, the company is always broke. The business owner or entrepreneur is constantly scouring for additional financing sources. In many instances the issue is not lack of funding its lack of margin. Selling more and more product at too low a margin creates ever-increasing strain on the business model. The way out of this problem is not by selling more it's by selling for more margin.

Scenario #2: Can't find any good help

This scenario is a cousin of scenario number one. Why can't a business find good help? There are only a handful of reasons: quality people do not have the desire to work for the business because of some unattractive feature, the boss interviews and recruits so poorly that competitors be him or her out for the best people, or, most likely, the company under pays for the position. The company under pays because it has to. The company has to underpay because the funds simply aren't available to pay fair market value for talented people. The funds are not available because the products are sold at too low a margin.

Scenario #3: Salespeople need to sell better

Many entrepreneurs believe the additional sales they need can be created by a harder working or higher performing sales force. Many times, it's not the shortcomings of the sales force that are the issue is the shortcomings of the business model or the offering. The proverbial sell ice to Eskimos plan rarely works. Trying to get more sales when the real issue is product marketability only wastes time and money. In this case there's no point in chasing more sales when it's simply too difficult to get them.

Scenario #4: Back to the past

All successful product and service offerings eventually get outdated. Some entrepreneurs continue to ride these dying horses rather than find a new ride. More sales of a downward trending product is probably the wrong business model. Innovation is clearly what's needed not more sales. Once an innovative product offering is created, more sales would be wonderful. In the meantime, putting organizational effort into additional selling only puts off the necessary innovation.

Do any of these hit home?  If so, the solution is simple- stop working on the symptoms and start working on the real problem.  Creating powerful innovation of your business model can act as a magic wand to rid these lesser issues.

Have you ever thought you had business issue A and found issue B to be the real culprit?

As I found myself engrossed in Ken Burns’ well told Prohibition story, I noticed an underlying business model theme.  Back in the 1800’s beer companies effectively controlled the retail distribution of beer.  The brewery business model of the time was to offer free everything: signage, tables, chairs, even rent in some cases, in exchange for exclusive distribution.  The saloon would only sell one brand of beer and the brewery would have a fully-controlled retail channel.

The business model worked so well that some Americans viewed saloons as society’s primary issue.  From there, the Dry Movement was started which eventually lead to prohibition.  Of course, with prohibition, most breweries went out of business.  Getting your product outlawed is typically not good for your business model.

So how does this affect today’s business owner?  The obvious answer is that too much control over the channel or a monopoly can backfire.  Just ask Microsoft if too much control over the market can be a bad thing.  The corollary for most small business owners is: too much of a good thing can destroy your business.

For most SMBs, this good thing might be a proven sales technique, relying on a proven lead generation process like the Yellow Pages, putting too much trust in a long-term employee, or any other methodology that has worked extremely well up until now.   We get spoiled by success.  Just like the breweries, our success can be the cause of massive failure.

Many large companies have fallen victim to this- Kodak, IBM, Best Buy, and Blockbuster.  All of these companies had market dominance only to see it be disrupted or erode.  To date, only IBM has successfully evolved from a dying market to a new growth market.

What is the solution?  As difficult as it is to be impartial, take an objective look at your successful operations, systems, people, and processes.  Which of these processes may be due for disruption or change?  Playing devil’s advocate, which proven process is the most likely to become a problem?

It seems that many entrepreneurs have crawled into their caves to wait out the recession.  For many of them, the battle cries have become:

• If in doubt, don’t spend
• Just ride it out
• Change is dangerous, one small mistake might break the camel’s back

This general attitude of intense risk aversion leads to abysmal business model innovation.  Many businesses only innovate when they are on death’s door- when there is no other option but to innovate.  For many small businesses, this innovation comes too late.

It takes years for powerful innovations to take hold and fundamentally change a business.  Take the success of the iPad.  It may have taken Apple two or three years to move from conception to sellable product.  However, the genesis of the iPad was in the late 1990s with the Newton.  The failed Newton lead to the successful iPad.  Great innovations take patience and time, something entrepreneurs tend to be short on.

Is it possible that business owners need to think more counter-intuitively?  Rather than passively riding out the recession, could slow economic times be the perfect time to innovate the business model?  I say “Yes.”  Other than finances being tight during a recession, all other factors are favorable to experiment with your business model during tough times.

Why do college enrollments go up during a recession?  Since there are fewer job opportunities, people figure, “I wasn’t going to get a job anyway, so why not put the time to good use.”  Businesses should do the same thing.   Innovation and the corresponding initiatives are easier when sales are slower.  Yes, by innovating during tough times, the economic pain may be greater.  Yes, it may be more difficult to fund the innovations to your business model.  However, savvy entrepreneurs find a ways to innovate more during a downturn so they can “make more hay” when the economy turns.

How can you innovate despite the recession?  Here are some starting points:

• Focus on innovation, idea generation, and thinking activities which are free.  You may need to put the implementation on the back burner, but you can carve out your plan today.
• Consider quick trials rather than full-blown initiatives.  Typically, resources can be hodge-podged together from the existing cost structure for a trial rather than creating a new expense.
• Make small financial bets that won’t kill you.  Nearly everything is cheaper during a recession, so your money will go further.  Keep in mind that entrepreneurs are calculated risk takers.  You may not like betting on snake eyes.  However, if I give you 50/50 odds on it, you are chickening out if you don’t bet.  Curb your number of bets, but keep investing on the sure winners.
• Find somewhere else to cut.  I have seen many businesses cut payroll or other expenses to the bone only to be fully able to cut again if times get worse.  Do not sacrifice innovation for marginal expenses.  Innovation will fuel the future of your business, marginal expenses or employees will not.

Do you agree that entrepreneurs should innovate their business model more during a recession?

It’s looking more and more that Netflix is just the second coming of Blockbuster. Netflix's Internet video service furiously adding additional marquee titles as it braces for an even more competitive threats- this time from cable-TV provider Comcast.

In an effort to offer more exclusive material, Netflix secured the right to show "The Artist" plus other movies of Weinstein Co. prior to the films being released to leading pay-TV channels such as Showtime and HBO.

Ironically, the Netflix business model change came just a few hours after Comcast unveiled plans to undercut Netflix with a less expensive version of a stream service.  This service will stream to devices with high-speed Internet connections.  It’s $5/month to Comcast subscribers vs. $8/month for Netflix’ similar service.

Although it appears Netflix's library is more extensive, Comcast’s Streampix could be good enough for a significant portion of Netflix subscribers.  As Clayton Christensen professed in his landmark book The Innovator’s Solution, when markets become over-served, a good enough offering can become a disruptive innovation.

It may be too early for the on-demand video market to become over-served, but low-end competition from an entrenched, well-funded competitor is only bad news for Netflix’ business model.

Comcast, which is based in Philadelphia, will join two other large companies, Amazon.com Inc. and Wal-Mart Stores Inc., already offering video streaming services. Earlier this month, Verizon Communications Inc. announced that it is teaming up with Redbox's DVD rental-kiosk network to introduce an Internet video service later this year. The pricing for the Verizon-Redbox business model hasn't been disclosed.

Netflix, which is based in Los Gatos, Calif., also offers a DVD-by-mail rental service. But that has been losing millions of customers in recent months as the company has intensified its focus on the streaming business model.

Netflix CEO Reed Hastings has said that he views cable TV as his company's biggest worry. So far, Hastings has identified Time Warner Inc.'s HBO channel as Netflix's toughest competition, but that might change if cable providers such as Comcast can develop a compelling service.

By countering Netflix, Comcast hopes to hold on to customers, many of whom have been canceling their cable subscriptions to save money. Some of those former subscribers have been able to get their entertainment fixes from Netflix, whose Internet streaming service began this year with 21.7 million U.S. subscribers.

Comcast, by contrast, had 22.3 million video subscribers after losing 459,000 customers last year.

Based on the line-up included in Tuesday's announcement, Streampix will duplicate much of the videos already available on Netflix. The list of overlapping selections includes the past seasons of popular TV series such as "The Office" and "Lost" and older movies such as "Brokeback Mountain" and "The Big Lebowski."

Recently, Netflix has been trying to differentiate itself by buying the rights to many original series — a business model that has worked well for HBO and Showtime.

The licensing agreement with Weinstein marks another step in Netflix's push to hone its competitive edge.  Getting the streaming rights to quality programs such as "The Artist," which is nominated for 10 Academy Awards, also may help Netflix keep its subscribers happy as other popular selections disappear from the service's video library. Netflix will lose the rights to stream many movies from Walt Disney Co. and other studios when a three-year licensing deal with the Starz Entertainment channel expires next week.

The Weinstein agreement will give Netflix some movies within a year of their release in movie theaters. Besides "The Artist," the deal covers foreign-language movies, documentaries and other films in the Weinstein vault.

Do you think the Netflix business model is on track?

You may have noticed Ally Bank, Discover, Chase, and others promising a computer-free, and, in some cases, foreigner-free customer service experience.  Discover card is moving customer service to Utah.  Chase promises that you will get a person not a machine on the phone.

Let’s call this an attempt by the financial services industry to win customers with an improved customer service experience.  These changes dramatically increase the cost structure of the banks- human attendants vs. free machines and higher-paid U.S. workers vs. Indian or Pilipino.

Clearly, the logic behind these changes is that customers are fed up with machines and bad customer service and that fixing it will yield additional customers.  Will this happen? Let’s explore the potential options:

1. Financial institutions have continued to wring cost from the system to the point of excess.  By correcting the over-swung pendulum, customers will migrate to the innovative companies that are improving service.
2. Financial institutions removed service cost to benefit customers.  The cost of customer service exceeded the benefit perceived by the customer.  Customers may not like dealing with a machine or someone speaking Chinglish, but it beats increased fees.  If this is true, the increased customer service offered will have little effect as consumers vote with their wallet.  After all, the credit card will still work even if customer service stinks.
3. There may be a hybrid business model available.  Cheap, automated, and inexpensive customer service for one set of customers and more expensive service for others.  Airlines, banks, and retailers already do this for VIPs.  Perhaps a business model with another tier of quasi-VIPs could be created from customers willing to pay a bit more for better service.
4. Is there an opportunity to go in the opposite direction?  Could even less customer service provide an opportunity?  This is probably the least attractive option, but there are probably customers saying to themselves, “Why do I care about better customer service, I haven’t talked to anyone in twenty years?”  Could a bank use a business model that lowers the bar on customer service and find a niche?
5. Increase the Americanizing of the off-shore customer service.  Is the issue that Americans simply don’t like dealing with foreigners or that they cannot understand them.  If bank customer service was off-shored to the United Kingdom, would there be an issue?  One could make an argument that the significantly lower cost of operating offshore could justify American dialect, culture, and language classes.  Banks could heavily screen all employees and refuse to put anyone on the phone if they could not have an excellent understanding of U.S. language and culture. My instinct says that American’s issue is a language one, not a disdain of foreigners.

Which of these options do you think is best?  It will be interesting to see the outcome of these bank initiatives.  These institutions are doing all businesses a favor by helping us answer the question, “Will customers change vendors or pay more for better customer service.”

Do you think customers will pay more for better service from their bank?  Does this alter the banking business model?

I was surprised to see a plea for donations from Wikipedia.  The plea stated that if every user would donate only $5, Wikipedia could operate for a significant period with no additional donations needed.  I was under the impression that crowd sourcing and open sourcing were the business models of the future, so how could Wikipedia need funding so desperately?

The lesson from Wikipedia’s financial crisis is that open source is a good business model for some, not all.  If someone pitched you with a business plan to spend millions on bandwidth, programming, and servers but give everything away- would you invest?

The more disturbing issue is the psychological one: has getting digital products for free or near free on the internet changed our collective expectation of what is worthy of purchase?  Deeper yet, what should be free and what should cost.  Why will the consuming public pay for an iTunes download but not pay for the same song on YouTube?  Why does the consuming public have no issue paying $10 to see a movie in a theater, but have no qualms about pirating it from the internet?  Is it simply a matter of “it is worth what they MAKE you pay?”

In the past, common sense dictated that things that cost money to produce would not be free.  The internet has blurred this line.  Electrons, bandwidth, and storage are virtually free, so therefore, should the outputs of these be free?  Using the old logic that people, intellect, equipment and time have been spent to create the output- no, they should not be free.

However, the new rules dictate that these costs are perceived to be free and therefore the output should be free.  As Chris Anderson noted in his groundbreaking book, FREE: The Future of a Radical Price, any product or service that leverages a near-free cost structure should BE free.  Anderson backed up his point by giving away the digital version of the book on Audible.com.  However, he did charge for the hard-copy version.  As a somewhat tragic corollary to radical price theory, human psychology has blurred the line between no cost and no value.  Something free or no cost can still have value and cause people to pay for it.  Today, many people feel that free equates to no value and therefore no need to pay as well.  This lies at the root of the Wikipedia issue.

Clearly, Wikipedia has value and deserves payment in some form.  By the same token, it is clear that the consuming audience does not value Wikipedia enough to pay for it.  It is difficult to reconcile why an audience consuming valuable content on a regular basis would not pay?  By the same token, they are not paying currently. I believe the answer lies in the new human psychology that deems payment optional or unnecessarily for electronic goods.

What do you believe this means for Wikipedia?  Should Wikipedia shut down the site if funds cannot be raised?  Would shutting the site down help people donate or simply shift them to another site?