The world of computing is undergoing a major shift.  Consider this fact:  The newly released Windows 7 is Microsoft’s first operating system to come with fewer features.

Yes, you read that right.  Windows is actually getting slimmer.  And the primary reason for this is the rise of internet-based “cloud computing.”  Let’s see what the Economist has to say on the matter (”Clash of the Clouds“):

Windows 7 is not just a sizeable step for Microsoft. It is also likely to mark the end of one era in information technology and the start of another. Much of computing will no longer be done on personal computers in homes and offices, but in the “cloud”: huge data centres housing vast storage systems and hundreds of thousands of servers, the powerful machines that dish up data over the internet. Web-based e-mail, social networking and online games are all examples of what are increasingly called cloud services, and are accessible through browsers, smart-phones or other “client” devices. Because so many services can be downloaded or are available online, Windows 7 is Microsoft’s first operating system to come with fewer features.

Any of you readers who get this blog post delivered to a Hotmail, Gmail, or Yahoo! e-mail address already know a thing or two about the Cloud.  Though a Microsoft Outlook-based e-mail server may be what you use at work, you no doubt appreciate the convenience of a personal e-mail account that can be accessed from any web browser anywhere in the world.

For now, most applications remain on desk tops (we tried Google Docs, Google’s online office solution, and it was horrid).  But this will likely change.  Google’s office solution will no doubt get better in the years to come, and Microsoft is moving to get its flagship Office suite available in the cloud on a subscription basis.

Furthermore, there are economies of scale that can be exploited.  As the Economist writes, “Why should every company or university set up and maintain its own mail server when Google or Microsoft can do it more efficiently?  Companies are already happy to rely on utilities to provide electrical power, after all.  Cloud computing will do the same for computing power.”

The beneficial result should be cheaper computing and higher productivity.  And a nasty recession with deflationary forces putting pressure on profits give companies every incentive to accelerate this process.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

We’ve commented before about Netflix and its business model.  We’re not a big fan of Netflix’s core business model, and we think it has only a few more years left it in at most.  In the age of fast downloads, it simply does not make sense to mail DVDs back and forth.  (Netflix also has an on-demand movie download service, which has promise.)

At any rate, while Netflix’s original business model is well on its way to obsolescence for digital media like movies, it may yet have potential for “old economy” industries.  The New York Times had an article about two young Harvard MBA graduates who started a “Netflix type” web business that rents designer dresses: “Haute Couture, Available Through the Netflix Model.”

This is an interesting idea.  It has long been possible to rent high-end women’s dresses for events (and men’s tuxedos too, of course).  But there has never been an online mail-order site for it.  The Times writes,

Rent the Runway is a recession-era twist on the Internet rent-by-mail model, which has been used for things like textbooks and video games in addition to movies. Unlike those utilitarian items, however, the dresses offer a touch of Cinderella — on a budget….

Rent the Runway is betting that its shop-by-Web convenience and the appeal of its top-quality fashions will persuade women across the country to rent a dress for a special occasion without trying it on beforehand.

It will be interesting to see if this business prospers.  It’s difficult to buy (or rent) clothes without trying them on.  This is hard enough for a standard pair of jeans, let alone tailored clothing.  Fashion is also a notoriously fickle industry.

At any rate, we’re not so much interested in this particular business as in the larger trend it could represent.  Recessions are a time of vicious creative destruction in which old business models are destroyed and new ones created.  It would be ironic if Netflix’s core business failed yet inspired copycats that revolutionized other industries.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy

This is a quick follow-up to a prior post, “Another One Bites the Dust: Readers Digest In Bankruptcy.”  It now appears that Fortune Magazine has come under severe financial distress.

Consider this recent headline: “Fortune Magazine To Sharply Cut Publishing Frequency.”

First Portfolio, the business magazine launched just two years ago by publishing giant Conde Nast, folded. Then, the largest business magazine in America, BusinessWeek, was sold by its parent company, McGraw-Hill (MHP), to Bloomberg for as little as $3 million plus its subscription liabilities. Now, Fortune, started by Time, Inc. founder Henry Luce, will cut its publishing frequency from 25 times a year to 18 times. According to several media reports, Time, Inc. will also cut several hundred jobs. Time, Inc. is part of media giant Time Warner (TWX).

Fortune will probably never recover.  The magazine is victim to a changing economy in which its primary moneymaker — print advertising — is simply not as lucrative as it used to be.  Plus, the internet has provided a barrage of new competition, much of it available for free or at a very low cost.  And, perhaps more importantly, you can’t e-mail, re-post, or Twitter a hard-copy article like you can an online article.  If Fortune plays its cards right, it could perhaps retain its prestige as a premier financial website.  But it it doesn’t make some substantial changes, it will be on the fast road to irrelevance.

Charles Sizemore, CFA
Co-author of the recently-published Boom or Bust: Understanding and Profiting from a Changing Consumer Economy