Monday, September 3, 2007

Increasing Network Value III: Front-Loading

If connectivity value is defined by the aggregation across all connections of the expected net present value of transaction streams, that leads us to a third way of increasing that value. As discussed earlier, one way is to increase the value of each transaction, and a second way is to increase the rate of transactions.

A third way is to accelerate transactions into the present. Even with the same nominal value for each transaction, and even with the same average rate of transactions, front-loading increases the net present value by decreasing the time-based discount for each transaction.

When TiVo offers "lifetime subscriptions," they are not only solving a cash flow issue, but translating a stream of future cash payments from monthly subscriber fees into a single front-loaded payment. Just like with a lottery, where one can accept winnings as a lump-sum or monthly payments stretching out over 30 years, or a life annuity, there is a breakeven point which depends on the projected expectation of payments and interest rates. Depending on these assumptions, a front-end non-recurring charge can be equal to, more than, or less than a particular finite or infinite stream of payments.

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