We have an ongoing commentary on the budding e-book revolution, and specifically our love affair with the Amazon Kindle.  Any investment writer or analyst worth the ink that his words are written with ought to have an extensive library at his disposal.   The problem is that when you have 200-300 books and more white papers and article clipping than you know what to do with, you have too much of a good thing.  Searching for that one quote you need becomes difficult when you have stacks of books to look through, and you also have limited mobility.  Unless you like to travel in a moving van, your library can’t go with you.

Having an e-book reader solves these problems.   You can put your entire research library in a small briefcase, and you can use its search capabilities to find what you need in a hurry.   This is arguably the best technological innovation since the Internet itself.

Today, Apple jumped into the mix.  Looking to capitalize on the recent success of the iPhone and iPod, Steve Jobs just announced the iPad tablet PC, which can act as a book reader.   On this new concept the AP writes,

“Apple CEO Steve Jobs has unveiled the iPad, a tablet-style computer that resembles the iPhone, but larger…  The CEO says the iPad will also be better for reading books, playing games and watching video than either a laptop or a smart phone.”

Apple’s strategy in recent years has been a variation of “go big, or go home.”  We would expect that the company’s aggressive entry into the e-book market will accelerate the trends already underway, just as its introduction of the iPod made digital music mainstream for the average Joe or Jane.  With Apple, Sony, and Amazon.com leading the way, we believe that this revolution will have legs.

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

 Nokia announced on Thursday that it would be offering free GPS-based mapping software on all of its high-end smart phones in order to compete with the iPhone and Google Android phones.  Though I myself am a tightwad who refuses to pay more than $20 for a cell phone (I find that all the smart phone features waste my time and give me carpal tunnel and a sore neck.  I don’t even like text messaging.  Hate it, in fact.  And it will be a cold day in hell before I pay $300 for a phone that breaks the first time I drop in a parking lot or jump into a jacuzzi before remembering to take it out of the pocket of my swim trunks…not that I know that from experience, of course.), as a student of economic history I appreciate the pace of innovation in the telecommunications industry.  The iPhone is, for all intents and purposes, a computer that fits in your pocket (but preferably not your swim trunks pocket for the reasons discussed above), and competition from Nokia, Research in Motion, and the new generation of Android-based phones will insure that the pace of innovation stays quick.

It’s too bad that entertainment media, in contrast, is actually going retrograde.  Read the rest of this entry »

We have an ongoing commentary on the future of telecom, specifically the role that voice-over-internet services such as Skype will play in this evolution (see “Your Phone Company is Doomed” and “Talk is Cheap.  Skype is Cheaper.”

On B5 of today’s Wall Street Journal, we saw a news snippet by Sarmad Ali that is worth repeating here:

“The volume of international phone calling that is being handled by Skype continues to surge, with much of the gains coming at the expense of traditional telephone companies, according to new data.  The Internet phone service is expected to account for 12% of international phone calling in 2009, up from 8% a year earlier.”

Stop and think about that for a minute.  Given the massive volume of international phone calls, 12% of all international calls is a huge number.   Skype didn’t even exist until a few years ago, and already more than 1 in 10 international calls now involves the service.

Ali continues,

“Calls between Skype users, which is generally free, is growing even more quickly.  It is projected to rise 63% to 54 billion minuted in 2009.”

Skype has saved us a small fortune in recent years.  When my wife goes to Peru to visit her parents, she can call my mobile phone for free using our Skype subscription.  When I was living in Peru (see “Unconventional Medical Tourism“), I used Skype to stay in contact with the office in Florida.

Skype is a phenomenal service, and it and its competitors such as Magic Jack and Yahoo Voice will absolutely wreak havoc on the traditional fixed line telephone business in the years to come.  Creative destruction, meet the telecom industry.

Charles Sizemore, CFA

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

 We like “big picture” analysis here at HS Dent.  It’s very easy to get wrapped up in the noise of economic press releases and stock market prognostications and lose sight of the major themes that will shape the world in the decades ahead—and no theme is more important than demographic trends.

We were delighted to see Jack Goldstone write an article on demographics in the latest issue of Foreign Affairs: “The New Population Bomb” (Registration may be required to view entire article)

Goldstone outlines the major demographic shifts afoot–the aging of the developed world, the urbanization of the emerging market countries, and the relative shifts in population and economic clout between developed and developing world.  All of these are themes that HS Dent follows. Goldstone also arrives at many of the same conclusions as HS Dent.  The effects of these demographic changes will, Goldstone writes, “have a dramatic impact on economic growth, health care, and military strength in the developed world. The forces that fueled economic growth in industrialized countries during the second half of the twentieth century — increased productivity due to better education, the movement of women into the labor force, and innovations in technology — will all likely weaken in the coming decades.”

Goldstone continues,

College enrollment boomed after World War II, a trend that is not likely to recur in the twenty-first century; the extensive movement of women into the labor force also was a one-time social change; and the technological change of the time resulted from innovators who created new products and leading-edge consumers who were willing to try them out — two groups that are thinning out as the industrialized world’s population ages [This is consistent with HS Dent’s research into S-curves and market penetration - CLS]

Alas, there is more bad news:

Moreover, developed countries will be lucky to keep productivity growth at even that level; in many developed countries, productivity is more likely to decline as the population ages…. All this means that just as aging developed countries will have proportionally fewer workers, innovators, and consumerist young households, a large portion of those countries’ remaining economic growth will have to be diverted to pay for the medical bills and pensions of their growing elderly populations. Basic services, meanwhile, will be increasingly costly because fewer young workers will be available for strenuous and labor-intensive jobs. Unfortunately, policymakers seldom reckon with these potentially disruptive effects of otherwise welcome developments, such as higher life expectancy.

Goldstone has a good grasp of the demographic issues.  There are significant challenges in the years ahead, but there are also incredible opportunities.  The problem in the developed world (particularly parts of Europe and Japan) is that with a an aging and shrinking population, there is less aggregate demand.  Who, exactly, are you going to sell your products to when every year there are fewer people alive and able to buy?  Who are you going to sell your house to?

This has never happened in the industrial and post-industrial eras.  Never.  It is truly unprecedented.

But, within the shrinking pie, if you can figure out a way to gain a bigger piece of the pie, there are opportunities.  In Japan, for example, the robotics industry is booming.  Robot labor is partially filling a gap left by the aging and depopulation of the country.

The opportunities are out there.  You just have to look for them.

Charles Sizemore, CFA

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

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