April 2008
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Rent Seeking is Crippling Building System Markets

Rent seeking is defined as when an individual, organization, or firm seeks to make money by manipulating control of the economic environment rather than by making a profit through trade and production of value.

Toby Considine
Toby Considine
Systems Specialist,
Facility Services, University of North Carolina – Chapel Hill
The New Daedalus

Contributing Editor

It is unfortunate that much of this industry spends more efforts on account control than on innovation. Interoperability is difficult, so once a company gets its product onto a site, most customers make continued purchases from the same product line rather than face the difficulties of integration. Year after year, we see un-innovative non-interoperable systems marketed by companies facing shrinking margins..

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In economic circles, this mode of marketing is known as rent seeking. Rent seeking is defined as when an individual, organization, or firm seeks to make money by manipulating control of the economic environment rather than by making a profit through trade and production of value. The first entrant into any market leverages that first comer position to deny others entrance. The term comes from the real estate markets, where control of fixed resources is everything. “Location! Location! Location!” is the cry.

In modern use of the term, rent-seeking is more often associated with government regulation than with real property. Rent seeking extracts uncompensated value from others without making any contribution to productivity, such as by gaining control of land and other pre-existing natural resource. Rent seeking works best when there is a limited pool of a resource. The rent seeking company seeks to artificially limit the market; in regulated utilities, this can be by imposing burdensome regulations or other government decisions. Cartels are another way to protect a market from new entrants, one whose recognized harm to society is reflected in law.

I am more and more coming to view the standards wars in building systems as motivated by little more than rent seeking. The poor adherence to interoperability, never challenged by the trade associations and committees that make the standards, including BACnet, LON, and soon oBIX, are accepted because rent seeking is the only way these organizations compete.

Rent seeking imposes costs on the participants that they often do not recognize. Most economic activities increase the overall wealth of society. In markets that are driven by rent seeking, competition to attain the dominant position becomes more important than creating value. Market participants are spending resources, in both the controls world and in the regulated utilities, more to keep others away than to innovate.

Society clearly is better off if asset creation is the norm. Any healthy market will have a balance between rent seeking and asset creation. Some rent seeking is necessary to drive innovation, as rent seeking may allow the inventor to cash out and do something else. When a market is regulated and has significant barriers to entry, rent seeking predominates. On the largest scale, the society in which rent seeking predominates becomes poorer over time. Society’s assets are expended on quarrels over who gets what — while no new assets are created.

Among the most impoverished are the organizations that commit to rent seeking. Because rent seeking works, it becomes the focus of the organization. This corrupts all decision making processes in the corporation, and creates an aversion to innovations that may change the terms of the rent. A technology company that fails to innovate, that refuses to eat its young, is dooming itself to a slow and cash-starved decline.

Walking around the floor of AHR in New York, I saw innovation coming from Asian companies breaking into the North American market. I saw self-tuning systems more akin to the car controls that automatically adjust suspension and carburetion based on how I drive than they did to old-line DDC systems offered by the large market players. In the booths of the old-line players, people talked to me of market and reliable partners, rather than of value and innovation, and of interoperability.

This is an oft-told tale in technology. For example, rent seeking so consumed IBM in the 1980s that they lost dominant control of the entire computer industry. IBM made OS/2 v1 16 bit to preserve the “no one gets fired for buying IBM” mantra that was their source of rent – and so lost the operating system market. They sold long-term depreciation of 286-based PS/2s, and in doing so, forgot to sell value rather than cost.

[an error occurred while processing this directive] Power companies have also fallen under the siren-song of rent seeking and preservation, corrupted by the public utilities commissions. Politicians often like creating rents, because they encourage contributions from the rent seekers. There are few if any markets more regulated and limited than the power industry. Market extension by the utilities, into conservation and building operations, merely extends the rent seeking. The occasional sop to public sensibilities, such as subsidizing light bulbs at the local hardware chain, cover up the lack of quality, and of investment in innovation.

There are two ways to increase your wealth. You can create new value that people want, or you can by gain control over assets that already exist. Both strategies are rational for the individual to pursue. When wrestling over existing assets predominates in a market, resources are consumed in the fight, but no new assets are created, where assets could be new processes, or new goods, or new amenities.

The future of innovation in the world of capital assets, whether home or office or utility, is going to be based upon new interactions between, not within systems. These will require agile integrations between systems and partners. All of the domain skills that have existed to date within each system will still be required; these agile integration will eventually increase the pressure on performance.

Those who expect their partners to learn the uninteresting details of, say, loop tuning their systems merely to be able to integrate higher functions, will be poor partners. Building system details are only interesting to domain experts, and not at all to building owners.  As poor partners they will sell to their declining base. Those who embrace higher order informational interoperability, whose systems are able to share in agile integrations, will find new markets for what they do best.

The market for systems offering informational interoperability is immense.  In just one facet, utility companies face 800 billion dollars in capital investments in distribution infrastructure alone if we do not choose new integration models. The 2025 mandate in EPACT 2007 can only be achieved by driving agile integrations of products from multiple disciplines into 60% of the homes and office in North America. There is a huge market in enabling the utilities to avoid this cost. This market and others will be won by those embracing integration approaches that do not require the grid operators to understand BACnet or LON. These integrations will based upon economic signals, rather than control signals, interfacing to services, not processes.

Controls companies can choose to fight over bones, or pay real honest attention to informational interoperability in standards. I know who reads my blog, and who contacts me. Status quo is not a real option in a flat world.


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