For years, HS Dent has argued that most “discretionary” spending really isn’t all that discretionary.  The modern economy is organized around monthly payments, be they for the mortgage, the car, or even your son’s saxophone lessons.  These monthly commitments are not always easy to break, and breaking them can sometimes involve losing face.  It’s easy to forgo a restaurant meal and save money by eating at home.  But to actually take the proactive step of calling someone to cancel a membership or monthly plan…that can be hard.

At any rate, The Economist confirmed our points in a recent article: “The Triumph of the Monthly Bill”

No doubt reflecting what most readers have witnessed in their own lives, The Economist writes that throughout this recession,

As a rule, media products that are sold in shops—CDs, DVDs and magazines—have suffered… The kind of media for which people pay a monthly bill, in contrast, has not only held up better but has in some instances prospered through the downturn… “People would sooner unplug their refrigerators than their cable boxes,” says Craig Moffett, an analyst at Sanford Bernstein.

While the payment model has been durable in past recessions, we’re not so sure it will do as well this time.  Demographics are working against the model in two directions.  Baby Boomers, who would have never dreamed of cutting services in the past, are now downsizing their lives as they prepare for retirement.  And when you downsize, unused services tend to get cut.  (Changing addresses can often be the impetus that motivates you to make cuts.  For example, you may neglect to hook up a phone at your new home and opt instead to go “cell phone only” as we discussed in a prior post).

The other demographic challenge is that the large young and up-and-coming generation — the Echo Boomers — has become accustomed to getting things for free.  A newspaper home delivery subscription is simply unthinkable to them.  And some of the more tech savvy of the lot watch their favorite TV shows via Hulu or other internet sites, making cable TV redundant.  Even the internet bill itself is elusive to them:  a free Wifi signal is usually not far away, so why pay?

In “Talk is Cheap; Skype is Cheaper” we discuss yet another way to reduce the monthly payment.  Using Skype, iPhone users can route their voice calls through their data plans, thus allowing them to reduce their voice plan to the lowest possible level.

The key here is that, while the subscription model is not dead, it is far less robust than it used to be.  Changing demographics should continue to erode the model around the edges; the retention rate will not be as high as in years past, and it will be harder to attract new subscribers.  It’s not quite “dooms day,” but it certainly means that marketers will have to work harder to generate sales, and profit margins will almost certainly be lower.

Incidentally, an old associate of ours has created a blog dedicated to using the internet to streamline your life and reduce clutter.  In a lot of ways, his blog sums up succinctly many of the points we’re trying to make (check it out: “Electronically Obsessed”).  In a recent post, he profiled an Echo Boomer who had taken this neo-Spartan lifestyle to a new level, reducing his entire life “down to one suitcase and a single Blu-ray disk” (See post: “Moving to the Cloud.”)

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

In recent posts, we’ve pretty well beaten to death the topic of e-book readers like the Amazon Kindle, but this is a significant technology trend that stands to make major revolutionary changes to large segments of the economy, so we figure one more post won’t hurt.

The Financial Times reported today on the Kindle’s adoption by some forward-thinking American universities: “Electronic Books Kindle Learning at US Universities.”

As part of a pilot program, Amazon is making its Kindle DX (large screen) readers available to a hand full of universities at a deep discount, and the universities are in turn making them available to students in certain programs for free.  Read the rest of this entry »

“The new way of reading books arrived hesitantly. It exploited a novel technology, reflected changing public habits of consumption and radically altered the distribution and economics of the traditional publishing industry.”

Am I talking about the Amazon Kindle again?   Actually, no.  Read on:

The paperback represented an intimidating revolution to the 1930s book industry. It took high literature to a far wider audience. But established publishers disdained it, fearing it would cheapen the industry and drive down profits. It might not have been – as its ancestor the pamphlet novel was in the 1840s – assailed as a threat to the “eyesight of a rising generation”, yet the reaction had much else in common with how the emergence of the electronic book is now being regarded.

The more things change, the more they stay the same.   I often hear from fellow readers that e-books don’t “feel” the same as real, physical books, that they don’t “smell” the same.  There is some truth to this.  Even among books, stately leather-bound volumes have a different feel and smell than pulp paperbacks, yet there is a market for both.  The most likely outcome with the e-book is that it carves out a rather large chunk of market shares (possibly close to 100% for school text books and certain reference books) but that it doesn’t fully replace the traditional book.  For infrequent or impulsive readers (say, someone at the airport suffering through a layover), a cheap, disposable paperback makes a lot more sense than an expensive electronic reader.

At any rate, the e-book is certainly making its presence felt, shaking the foundations of an industry that hasn’t changed much in 500 years.  The Financial Times article quoted above is one of the best we’ve read so far: “Brought to Book.”

“Book publishing is moving from a slow-moving, localised, opaque, oligopolistic and often highly uncommercial world to an open, global, highly liquid and highly commoditised world,” the FT quotes Benedict Evans of Enders Analysis.  “This is not a shift that we would immediately associate with higher profits for incumbents.”

Lower profits will push more marginal publishers out of the business.  But what will happen to the authors who would then not have a publisher to bring their work to market?  Might there be a new surge in self publishing?  Perhaps.  The whole process promises to be exciting to watch.

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

We’ve written about the Amazon Kindle in prior posts, specifically on it power as a disruptive technology to revolutionize the centuries-old industry of book publishing.  (We use the Amazon Kindle by name by personal choice, but competing e-book readers such as Sony’s are certainly part of the revolution too.)

Now, we read in the New York Times that the revolution is coming to the public library (see “Off the Shelf, Onto the Laptop, Libraries Turn to Digital Books“).

Thus far, libraries have barely gotten their feet wet.  But the changing economics of the industry make us believe that e-books will quickly become a large percentage of new purchases.  In explaining the model, the Times writes,

Most digital books in libraries are treated like printed ones: only one borrower can check out an e-book at a time, and for popular titles, patrons must wait in line just as they do for physical books. After two to three weeks, the e-book automatically expires from a reader’s account.Some librarians suggest that because digital books never wear out, take up no shelf space and could, in theory, be read by multiple people at the same time, the purchasing model for e-books should be different than it is for print…

But some publishers worry that the convenience of borrowing books electronically could ultimately cut into sales of print editions.

Publishers are right to worry.  They saw what happened to the music recording industry, and they shudder to think that it can happen to them too.  But like it or not, it will happen, in some form or another.

The competitive forces of capitalism — made all the sharper by the deepest and longest recession since the Great Depression — will continually lower prices for consumers when not restricted.   The delivery of intellectual property via electronic means — be it software, music, or a book — is virtually free, as is reproduction of the material.  It’s also “greener” and better for the environment, requiring less physical plant, storage space, and fuel.  The price savings here represent “good deflation,” the innovation-driven kind that makes our society as a whole richer.  (This is not to be confused with “bad deflation,” which is due to falling final demand.)

Piracy is a problem, but not an insurmountable one.  Microsoft manages to remain profitable despite widespread piracy of its software, and it mitigates this with product keys.  Apple experimented with digital rights management to avoid MP3 piracy, though this has been less successful.

Authors, like musicians, may have to find a new business model.  Perhaps they could generate revenues through consulting services the same way that musicians do concert tours?  It’s hard to say exactly how this will all play out.  Authors (alas, ourselves included) may find book publishing less lucrative in the future, though we believe most of the pain will be felt not by the authors but by the middlemen that are increasingly becoming obsolete.

It’s hard to know what direction the industry will go and who will be left standing once the dust settles.  But that is the beauty of a revolution — it will be fun to watch!

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

The Financial Times had an interesting story this morning  on broadband connectivity and how it relates to economic competitiveness (see “Leaders Look to Future in Broadband Race“).  The FT writes,

South Korea, Sweden, Bulgaria and the Netherlands all share a common attribute. As do China, Saudi Arabia, Brazil, Indonesia and South Africa.

The first set of countries are all described as “ready for tomorrow” in a recent study of broadband quality, placing them in the vanguard of countries prepared to take advantage of high-speed digital connections and the applications that run on them.

The second set are found to be “below today’s applications threshold” – meaning that businesses and citizens in these countries are unable even to take full advantage of current web-based opportunities.

Where is the US? In a second tier, along with Germany and Hong Kong – all “comfortably enjoying today’s applications”. Read the rest of this entry »

We’ve written before about how new technologies like mobile phones and, more recently, Skype are transforming the telecommunications industry and bringing the continued existence of the fixed-line phone company into question. (Click here for prior posts).

Today, we read that Skype is also poised to wreak havoc on the current mobile phone revenue model: “AT&T Risks Losing Voice to Skype.”

Bowing to pressure from consumers, AT&T has decided to allow its mobile subscribers to use internet phone applications like Skype on the iPhone.  This has the potential to dramatically lower the costs of voice calls — and also lower AT&T’s revenues as a result.

In virtually all voice plans, consumers must pay more in order to get more minutes.  But in current iPhone data plans, consumers have unlimited data usage.  This means that iPhone users can shift most or all of their voice usage to Skype — which counts as data — and lower their phone bills substantially.

In Thursday’s Wall Street Journal, Martin Peers writes:

While AT&T doesn’t let iPhone customers sign up for data-only plans, customers could downshift from an unlimited voice-minute plan to the lowest tier of minutes. Then they could use Internet services for free or very cheap calls, taking advantage of the unlimited nature of AT&T’s data plans.J.P. Morgan analyst Mike McCormack estimates that voice accounts for $50-$60 of the roughly $95 in monthly revenue generated from the average iPhone user. He estimates that if an average user drops to the cheapest $39.99 voice plan, AT&T would lose between 20% and 33% of voice revenue.

This transformation will not happen overnight.  Skype is a great service, but voice quality can vary at times.  Plus, it can be harder to use for less tech-savvy consumers.  Still, there is no question that this will crimp the phone carriers’ ability to raise rates over time, as rising rates would convince a greater percentage of users to take the plunge and switch to Skype.

AT&T and others could simply raise the cost of their data plans. But as Peers rightly points out, “Charging more for data, which would be complicated by competitive pressure, might not make up fully for the lost voice revenue.”  Furthermore, if data usage were constrained, some amount of traffic would shift to free wi-fi networks (where available).

This is not to say that the mobile carriers will be going out of business any time soon.  But it will likely mean that their profit margins will be slimmer and the economics of the industry far less favorable.   Yet another example of a disruptive technology lowering costs for consumers and shaking the status quo of an industry.

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

Long-time readers are well aware that technology  boom-and-bust cycles are a significant branch of our research here at HS Dent (see prior post). We can see examples of it in virtually every technology product, and in recent years we’ve discussed it with respect to the mobile phone and personal computer markets.  Today, we’re going to go back in time two decades.

No American in their 30s (or parent of an American in their 30s) can forget the primary time waster of their youth — the Nintendo Entertainment System.  Of course, you probably have little recollection of its competitors and predecessors.  Do any of these ring a bell?

• Atari 2600
• Atari 5200
• Bally Astrocade
• ColecoVision
• Coleco Gemini
• Emerson Arcadia 2001
• Fairchild Channel F System II
• Magnavox Odyssey2
• Mattel Intellivision
• Sears Tele-Games
• Tandyvision
• Vectrex

No? That’s because none of them survived the massive deflationary shakeout that allowed the stronger Nintendo and Sega to emerge as the dominant players in the industry.

Wikipedia gives an interesting history of this “North American Video Game Crash of 1983“:

The North American video game crash of 1983…brought an abrupt end to what is considered the second generation of console video gaming in the English-speaking world.  It almost destroyed the then-fledgling industry and led to the bankruptcy of several companies producing home computers and video game consoles in North America….

There were several reasons for the crash, but the main cause was supersaturation of the market with dozens of consoles and hundreds of mostly low-quality games. Hundreds of games were in development for the 1983 release alone, and this overproduction resulted in a saturated market without the consumer interest it needed…

Sounds a little like the “dot com” boom of the late 1990s, which gave us such long-term winners as pets.com and homegrocer.com among many, MANY others.  Wikipedia continues,

…the US market was flooded with dozens of consoles, giving consumers far too many choices….  The release of so many new games in 1982 completely flooded the market and most stores did not have, or decided not to allocate, sufficient space to carry all the new games and consoles….

A massive industry shakeout resulted. Magnavox and Coleco abandoned the video game business entirely, and…most of the smaller software development houses supporting the Atari 2600 closed.

Additionally, the toy retailers which controlled consumer access to games had concluded that video games were a fad, that the fad was over, and that the shelf space should be reassigned to different products. This led to many retailers refusing to have anything to do with video games for several years.

Of course, video games were NOT just a passing fad.  They eventually grew into a wildly profitable entertainment industry once the creative destructive powers of capitalism shook out the weaker competitors.  Nintendo (and to a lesser extent, Sega) rose from the ashes and proceeded to dominate the industry for the next decade.

The lesson to be learned from this?  Recessions and industry consolidations are not the end of the world.  This is true of technology industries, but it is also true of “old economy” industries.  It is a crisis that GM filed for bankruptcy and emerged as a company with half the number of brands?  Not really.  It’s a tragedy on a personal level for some of the unionized workforce that is unlikely to ever again reap comparable above-market wages.  But across the economy, it is a net benefit over the long term.  When weaker competitors fail, the stronger ones then have the flexibility to pick up the pieces.  And life goes on.

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

The pages of this blog have been filled with comments about the Amazon Kindle, specifically its potential role as a disruptive technology that stands to revolutionize the centuries-old industry of book publishing (see most recent post).

Yesterday, a friend forwarded a interesting news story.  It appears that Amazon sold more copies of Da Vinci Code author Dan Brown’s new book in Kindle e-book format than in hardback in the first day of release. Read the rest of this entry »

It’s difficult to earn a buck in the entertainment media business these days.  File sharing and piracy  have decimated the record business and are starting to wreak havoc on the movie studios as well.  But perhaps most damaging to the industry is the change in mindset among younger consumers.  It’s rare to find anyone under the age of 35 who has any qualms with downloading music illegally.  Once used to getting it for free, the idea of paying for music seems absurd.

Among those who actually pay for their music downloads via sites like Apple’s iTunes (roughly 10%), most only buy one or two songs off of a given album.   The idea of paying $15-$20 for a full CD when you only like a track or two just seems so…old.

Perhaps this is why the record industry is having such a hard time letting go of the Baby Boomers.   Read the rest of this entry »

 HS Dent has been commenting on the saturation of the mobile phone market for a few years now.  At some point in the mid-2000s, cell phones crossed that threshold where they became a replacement commodity.  You already own one; your only reason to get a new one is to replace the one you have, either because your old one broke or because you simply like the bells and whistles on the new ones.   This is the main reason that mobile manufacturers are in an “arms race” of sorts with smart phones like the iPhone and Blackberry.   Read the rest of this entry »