Structural Decentralization

An officially backed market platform could underpin a sizable slice of GDP in any region. Ensuring its operators cannot exert undue control over that swath of economic activity demands ownership is split between a core operating consortium and independent franchisees, each running a market serving one of thousands of sectors. This federation of operators keeps "POEMs" (Public Official E-Markets) cohesive and innovative.

BACKGROUND: The Dangers of Concentration

Online markets are more vulnerable to centralized control than purely physical public infrastructure. Their structures, rules, processes, and data outputs can be influenced with hard-to-detect nuance. Manipulation may be driven by commercial priorities, ideology, short-term operational imperatives or just conformist groupthink within management.

Distorting activity to benefit operators is a routine aspect of business models for today's vertical e-markets. Antitrust efforts attempt to resolve this. The concession enabling POEMs needs structural protections against concentrated power to keep the system of markets focused on public service.

Options for mandating diversified control could include:

A ban on concentration: The concession might bar any bidding consortium in which more than, perhaps, 25% of ownership was held by one entity.

Stakeholder representation: German law forces mitbestimmung (co-determination); corporations above a given size must have a supervisory board with at least 33% of seats held by elected employees. A POEMs concession could compel its operators to do the same with market users.

Official oversight: A government body, akin to the US Nuclear Regulatory Commission, might comb through POEMs' in search of abuses of neutrality.

Public ownership: This model is proposed for constraining AI companies; a chunk of the shares is held by a body representing the public interest.

Compulsory feedback loops: Operators could be obliged to publicly respond to communications from users asserting improper influence over market activity.

These measures could curb abuse. But there is a wider goal for decentralization; unleashing dynamism. To maximize effectiveness, POEMs (Public Official E-Markets) must respond to users' evolving needs in sectors are disparate as, to take just a few examples, rental of horses, sale of pre-owned eyewear, hire of medical secretaries by the hour, capacity in commercial fish hatcheries, math tutoring and printing capacity. No monolithic organization, however strong its oversight, could unlock such multifaceted potential across a region.

1) Franchising: McDonalds as Archetype

McDonald’s Hamburgers used franchising to achieve consistent operating standards while expanding rapidly across the US. The corporation evolved a thoughtful rulebook that allows compliant entrepreneurs to purchase the right to operate an outlet serving a given area. Their model ensures a replicable brand experience married with local drive and innovation. It provides learning for POEMs.

Customers intuit that a McDonald’s anywhere will be predictable, clean, and understandably priced. Likewise for POEMs; users likely won’t care how the system’s operating entities are structured. But, if franchising works, they should feel dynamism-within-consistency across any sector they chose to enter.

A POEMs concession might include these stipulations:

Limited functions at the core: A winning consortium is permitted only to run the kernel of POEMs' operations. That comprises (a) the servers (b) basic functionality such as registration, logins, verification and so on (c) ancillary functionality common across types of trading like payment transfers, dispute resolution tools, returns or substitutions. It cannot operate parts of the system where any sum of money is transfered from a buyer to a seller. That must be run by a franchisee.

A toolkit for front-ends: Each McDonald's premises has its own floorplan, building permit, access and delivery constraints and other factors. But the franchisee's operation in each case is constructed from standardized machinery, workflows, signage, countertops, point-of-sale materials and so on. A POEMs' consortium can likewise develop modularized components for screen displays, buyer/seller matching mechanisms and other parts of a marketplace that sit on top of the system's core.

Franchisee independence: Franchisees must comply with a transparent rulebook that keeps POEMs' consistent, it is imposed by the winning consortium. But each franchisee buys in knowing what is required and must not be dependent on the consortium for financing.

Central alignment: The consortium can update functionality, processes and other aspects of POEMs. It can buyout and transfer an underperforming franchise. But franchisees have rights embedded in the concession.

Delineation of franchises: McDonalds' operators typically purchase sole rights to a defined geography. POEMs' franchisees buy a part of the system's directory of all possible sectors which is then theirs uniquely to exploit. So, an aspiring franchisee might buy "Commercial laundry services" or "Roofers".

2) What Franchisees do

Like the core consortium, POEMs' franchisees are forbidden to sell, buy or invest through the market they oversee. Each is motivated to grow activity in that sector, but can only do so by enticing others to trade.

Take, as an example, the franchisee running POEMs’ market for "Laboratory rental". That person starts with the benefits of official backing for POEMs. So, government operations across forensics, food safety, pathology, and academia buying or selling lab. capacity, must use POEMs absent better value elsewhere.

From that starting point, an ambitious franchisee will want to:

Understand transactions in the sector: What mechanisms will best lubricate trading: Auctioning of lab. time? Requests for quotes? 3D displays of lab. benches based on sellers' inputs? What problems can derail lab. rental bookings and need processes to avert or manage? Are there compliance issues such as licenses for dangerous equipment? POEMs’ suite of display, transaction and ancillary tools can meet all these needs in standardized ways.

Research current market dynamics: Over-supply? Uncertain demand? Poor quality? No pricing data? POEMs is going to apply its core tools to every sector, doing much to solve any of these. But a communications plan, perhaps selling benefits of by-the-day or hourly lab. hire could widen activity.

Prioritize further prospects: Food companies, pharmaceuticals suppliers, medical facilities, researchers and testing bodies would be a starting point.

Raise POEMs’ profile with prospects: Speaking at conferences, advertising or seeking coverage in trade publications and meetings with industry leaders might all push the possibilities of on-demand laboratory space.

Map reliance on supporting sectors: POEMs supports "chain transactions"; seamless purchases combining resources from across multiple sectors. What dovetailing into other markets could be most usefully facilitated for lab. rental? Transport of samples from operating theatres to testing facilities, for example, is a specialized part of the courier market. Could POEMs' displays help lab. owners enter fast-track instructions for getting a package to the scientist’s bench? Might franchisee collaboration seamlessly make that a feature of POEM’s market for delivery of medical materials?

Seek new sources of supply or demand: Might there be a market for home-laboratory facilities traded between amateur scientists? Could high-school science classrooms grow the market? Are back-of-a-van portable labs a viable sub-sector to be promoted ? POEMs' Granular Transaction Formula incentivizes franchisees to constantly unearth new small resources.

There should be support at the core to help with growth. It is likely the consortium will have departments liaising with organizations such as universities across each institution’s varied range of activities that could touch POEMs’. A franchisee might bid for a share of the consortium’s national advertising budget by building a business case for promotion to laboratory managers specifically.

3) Sharing of Income

POEMs generates revenue from a fixed percentage markup on each transaction it enables. Operators' income from this in any sector is then shared between the consortium and the sector's franchisee. The formula in each case is at the discretion of the consortium, but operating any front-end themselves is banned. They have to attract a franchisee for any sector they wish to monetize.

There are two factors which could logically be used to apportion revenue between a consortium and a franchisee:

Payment: The franchisee is charged a fee, likely annually, by the consortium.

Revenue percentage: Income from the markup on each transaction is split between the consortium and the franchisee according to an agreed formula which the system administers.

To foster transparency and like-for-like comparisons it makes sense for one of these parameters to be uniform and the other a variable that reflects the value of each franchise. For illustration, this briefing will assume every franchisee pays a yearly $50,000 to the consortium. But they negotiate their revenue percentage based on anticipated commercial value of their virtual territory.

So, a market that is specialized with limited growth potential such as “Handmade greetings cards” might only find a franchisee if that person retains 90% of the system’s mark-up on transactions. Only 10% goes to the consortium, but as they have already have the toolkit and a vibrant market in bespoke greetings cards might bolster activity in adjacent sectors (purchasing of presents for example) or adoption by other artisans, it is a reasonable deal. In contrast, a sector like “Overnight accommodation” clearly has enormous room for growth. The consortium may find a qualified franchisee who will buy it for only 7.5% of the revenue generated.

4) Allocating Franchises: Continued Atomization

The consortium advertises for franchisees, approves them based on transparent criteria and processes, then trains them (as McDonald's do at Hamburger University). This creates a pool of ready-to-go franchisees competing for a part of POEMs' virtual territory.

Once approved, a franchisee might be matched to a sector through four mechanisms:

Capacity analysis: On day one, POEMs' user interface is simply a directory of sectors spanning all anticipated activity across the base of the jurisdiction’s economy. Sellers of any resource can post an advert allowing buyers to contact them. This creates initial activity which POEMs is not permitted to monetize. Its software combs these crude markets seeking sectors that have reached enough volume to merit launch of an end-to-end marketplace and lists them to the pool of approved candidates.

Bidding: Waiting franchisees can submit the percentage of revenue for which they would buy any sector listed through the process above.

Business case submission: Approved franchisees with no sector allocated might be given a means to propose a currently low-volume sector be monetized early because they see a path to significant revenue generation. They quote the percentage cut of sector revenue they would need to retain.

Resale: The consortium will be incentivized to offer an aftermarket for sale of all or parts of already allocated franchises between approved franchisees.

Negotiation between consortium and franchisees would determine the extent of any franchise. For example, granting the entire "Plumbing services" section in the directory might transfer too much value to one franchisee unless the consortium had failed to attract a deep enough pool of candidates. A bid just for "Household boiler repairs" within that section could be more likely to succeed. The consortium will balance immediate value of a franchisee's upfront payment with their likely capacity to generate ongoing revenue from the sector.

5) Curbing Sector Power: Splitting Franchises

Even with mandatory franchising, parts of POEMs could become undesirably centralized over time. A person running "Overnight accommodation" for example could shape the prospects of so many hotels, guest houses and room renters. To counter this, a ceiling could be set on earnings from transaction income. Once it is reached, part of the sector must be sold to a new franchisee. Crucially there must be no limit on their income from selling parts of a franchise.

To make this tangible, assume the cap on each franchisee's income from their cut of the markup on transactions, after any mandatory payments are covered, is $200,000 a year (adjusted for inflation). At launch, the consortium divide their directory of initial sectors into a list of franchises. In defining the scope of each they are aiming for around enough potential to reach $200K in earnings for the franchisee within perhaps 12 months.

Once a franchisee exceeds $200K in their share of revenue over any 12-month period, the excess is automatically diverted from them to the system’s surplus fund. This is their motivation to split as activity grows.

An example of splitting:

On day one of POEMs, Dan has purchased the franchise for “Commercial drivers” by paying his $50,000 and agreeing to 5% as his share of each transaction mark-up in this huge sector. He immediately starts outreaching to goods haulers, bus operators, limousine companies, and others who hire licensed vehicle operators.

Dan’s sales outreach is successful and within a 18 months he is earning $3.5K a week from his cut of operators' markup on each transaction. He needs to split his franchise before those earnings reach $200K over a year. He decides to focus on heavy vehicle drivers and sells off the part of his franchise for car drivers (taxis, limousines). It’s on a trajectory to fast growth so a pre-approved franchisee pays him $500K for this exclusive territory within POEMs. That franchisee pays the consortium $50K and also gets 5% of operators' revenue.

Now Dan has three categories of drivers to focus on: passenger vehicles, trucks, and agricultural. Doubling down on the trucking industry, bus/coach operators, and farmers' bodies he is soon again in danger of passing $200K in earnings from even the new reduced franchise. So, he decides to retain Bus/Coach drivers and sell the rest of his spectrum. Able to show convincing growth potential, the sale nets him $1m from another waiting franchisee.

Again, he accelerates growth in passenger vehicle drivers and must let part of the market go. He sees the most potential in minibus drivers and sells the rest of his sector (bus and coach operators) for $1.5m as it becomes clear how useful POEMs is becoming for short term hire of drivers.

When minibus drivers' activity deepens to the point he must split, he might chose to focus on specialized minibus drivers; those qualified to operate vehicles with lifts for the disabled or amphibious tourist craft or drivers who double as tourist guides and so on. If even that small sector grows to the point where 5% of operators' income exceeds $200K, the logical next split might be geographic: Dan retaining the south and selling the north.

Dan’s hard work has netted him millions of dollars. But his level of control at any time has remained commensurate with the scale of POEM's reach into the economy. If he underperforms, a waiting franchisee will likely offer to purchase his business and grow it themselves. If the driver market contracts, after autonomous vehicles are widely adopted perhaps, franchises can shrink smoothly: Dan can buy out adjoining franchisees, likely cheaply, as long as his earnings from transactions markups remain under $200K a year.

Splitting takes unknowables out of POEMs’ launch. Neither Dan or the core consortium could deduce the eventual value of the Drivers market up-front. So full purchase of the entire market could easily lead to an over or under bid. Either is potentially destabilizing; a franchisee underwater financially will be as demotivated as one who is effortlessly earning far more than anyone anticipated for minimal effort. Splitting of franchises ensures franchisees get increasingly specialized and responsive to their sector as markets grow.

6) New Franchises: Managing the Directory

POEMs' features a central taxonomy of all the sectors in which it offers to connect sellers to buyers. This directory can be seen as analogous to the categories of services within an old Yellow Pages directory or the sitemap for web bulletin boards like Craigslist or Gumtree. For franchising purposes, POEMs' directory is akin to McDonald's map of physical territory, to be carved up between franchisees.

Just as fast-food managers may decide a town previously allocated 5 franchises could, thanks to growing demand, support 8, POEMs' core consortium can add subdivisions, and therefore franchises, to the directory. This creates two broad cohorts of franchisee, aligned with traditional classifications of business people:

Entrepreneurial "hunters": These risk-takers enjoy breaking POEMs into new turf knowing they might not succeed and end up selling a franchise at a loss to another franchisee. To continue the example of splitting above, an entrepreneurial franchisee in waiting might approach Dan (the original franchisee) offering to buy out "Specialist Drivers" then develop depth in sub markets for the hours of people who pilot ambulances, cranes, carnival floats, hearses, livestock wagons and other vehicles requiring additional qualifications. If she fails to generate sufficient traction she might need to sell back to Dan for less than she paid to get the territory.

Steady "farmers": These people buy mature franchises then rely on customer service and solid management to maintain revenue. After years of exhilarating growth, Dan, the franchisee above, may opt to sell his remaining segment of the Drivers directory to a farmer.

7) Keeping Internal Power Balanced

Consortium managers must have freedom to enforce standards, including terminating an underperforming or noncompliant franchisee. However, the structures above should create incentives that minimize need to do so.

A franchisee who has failed to unlock the revenue a more entrepreneurial individual could achieve is likely to find approved franchisees currently lacking a territory offering lump-sum buyouts. Poorly conceived allocation of franchises could remedy over time as one franchisee offers to buy out parts of adjoining sectors to harmonize their territory.

Legislation must forbid abuse of franchisees. There are other balances between the two groups that shape a balance of power under the hood of POEMs:

Frontline knowledge: A capable franchisee will build networks, credibility and trust across the buyers and sellers they serve. Undermining that would be bad for the consortium, they cannot run the sector themselves.

Collaboratives: Franchisees can form associations as a counterweight to the consortium’s power. Franchisees will naturally be in “co-opetition” with adjoining franchisees; as three McDonald’s outlets in one town might draw business from each other, but unite in competing against Burger King.

Transparency: As with all POEMs’ operations; details of franchisees, their renumeration formula, and turnover is published, available to any user. Disputes between a franchisee and the consortium should be public.

Stipulated focus: Franchisees or consortium can sue each other for limiting income. To take a crude example, in POEMs' market for "Pharmacy services" either the franchisee or the consortium could wish to play down pregnancy termination for ideological reasons even if it were legal. If there is a joint conspiracy to do so, market distortion will have victims among users who also have rights under the concession. They can be challenged as a breach of operators' obligation to solely pursue growth in granular transactions.

Innovation: The concession may permit additional payments to a franchisee who invents new functionality for POEMs that the consortium wants to make available to other sectors. In McDonald's network, the Fillet-O-Fish sandwich was famously created by an Ohio franchisee fighting religious disapproval for meat eating on Fridays. Having such diverse grassroots exposure across POEMs' operators will create similar breakthroughs for which franchisees can gain if they see the opportunity before consortium managers.

NEXT: Neutrality, Transparency, Checks & Balances