I came across two pieces of news today, one that made me optimistic about the future and one that made me see red with rage.  We’ll start with the good news:  Skype announced that it will be launching an initial public offering.  It’s shares will be traded on the Nasdaq.

Long-suffering readers have had to endure my pontifications on the virtues of Skype for years now. (Click here to view past posts on Skype.)  More than just a product, I view Skype as an embodiment of the creative destruction process.  Skype has lowered the cost of international calls to free in many cases and significantly cut costs in others.  This is painful for legacy telecom companies, but it is a boon to the consumer and to globalization itself.

Skype is already the biggest carrier of international  calls, and the initial public offering will only help it to expand.  This is great news.  (My only residual gripe is that I cannot use Skype on my AT&T Blackberry; currently, only Verizon customers have this privilege…not that I am bitter…)

Now for the bad news:  in an act of technophobia and luddism that is almost shocking, the Obama Administration’s Justice Department has threatened legal action against several American universities.  Their alleged crime?  Trying to help their students save money by offering their textbooks in electronic format on the Amazon Kindle rather than in hard copy!

The Justice Department’s  stated rationale is that e-readers discriminate against the blind, thus depriving blind students of their civil rights under the Americans With Disabilities Act.  (See article.)

I try to keep my blog posts apolitical; my beat is the financial markets, not Washington DC.  But the cynic in me can’t help but wonder if Obama’s Justice Department has ulterior motives.   Much like the original Luddites attempted to derail the Industrial Revolution by destroying factory equipment–all in an attempt to save obsolete craftsman jobs–could it be that the Obama Administration is retarding the Information Revolution as a way of paying back its supporters in academia?  Professors and college bookstores alike make a lot of money gouging their students with expensive text books.  Amazon’s ebooks cut into those fat margin, much to the benefit of the students that the universities are ostensibly there to educate.

It’s hard to believe that a move this heavy handed could really be about helping the blind. Surely, liberal-minded universities could find other ways to help their vision-impaired students.

At any rate, this just goes to show that every economic revolution has reactionary forces that try to hold it back.  In the end, new technology will win.  Obama’s Justice Department’s idiotic moves will be no more effective that King Canute’s attempts to command the tides.  EBooks will persevere.  Amazon, Apple and other sellers will make their products accessible to the vision impaired, or whatever disadvantaged group Obama’s Justice Department decides to champion next week.  It will make the products more expensive for the rest of us, of course.  But the end result will be falling costs and a wider spread of information.

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

Sometimes you just have to stop and think about how far technology has come in just the last few years.  I’m writing this article from a ranch in rural Peru, and from a wireless connection at that.  Outside of the day lost in transportation getting here, I’ve been able to hit the ground running with no real loss in productivity.

But what impresses me is not simply how easy it is to work from the road today but how cheap it is too.  I can be reachable 24 hours per day (unless on an airplane) for next to nothing in fees, and I pay no roaming.
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

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

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

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 »

We saw several articles today that related to recent posts.  We though we’d share:

On September 9, we wrote “Ferrari sales not too shabby, all things considered.”  Today, on page 17 of the Financial Times, we read that “Ferrari has seen the legendary waiting lists for some of its models shorten from an average of 20 months to 15 or 16 months during the downturn… However, the brand has weathered the crisis better than most.”

At the margin, some wealthy (or formerly wealthy) people are cutting back on extravagance, like a new Ferrari.  But we continue to see more weakness in the more mainstream luxury brands like Mercedes and BMW. Read the rest of this entry »

700,000 Americans abandon their traditional landline phones every month, according to the Economist, and roughly 25% of all Americans are “cell phone only.”

We’ve written in these pages before about how technological and demographic changes are fundamentally altering sleepy old industries like newspapers and college text books.  The revolution in telephony, however, is a much bigger deal involving much larger companies and a lot more money.

Like many revolutions, this one is being led by the young.  The chart below makes a vivid point: younger Americans in their 20s and 30s, who generally tend to be highly mobile (bordering on nomadic) have shunned the traditional home phone en masse, opting to use their mobile phones exclusively. In 2008, more than 40% of the “just out of college” age cohort chose not to bother with a home line, and the number has risen every year.

It’s not hard to understand why.  When you move every 6-months, transferring your home phone service can be a cumbersome drag in an era in which Americans are used to instant service.   It’s also uneconomical for a young single person to pay for both home and mobile service, especially considering that young people spend comparatively little time at home.  (Plus, an iPhone is so much cooler than a home phone, dude.) Read the rest of this entry »

Technology has always been a great disruptor of the existing status quo, and it’s not always pretty.  The Industrial Revolution led to massive displacement of business owners, workers, and tradesmen with pre-industrial skills or inferior products that were no longer in demand.  Likewise, more recent technologies, such as Internet file sharing, have absolutely decimated the recording industry and may soon wreak havoc on the movie industry.   Mobile phones have destroyed the traditional fixed-line telecom business.  And now we see that VOIP (voice-over-Internet protocol) may soon wreck the mobile phone industry.

As we read in Brad Stone’s article today’s New York Times, “Skype, the Web Phone Giant, Bring Cheap Calls to Cellular.”

Stone writes, “Skype, the Internet calling service that has more than 400 million users around the world, is aggressively moving onto mobile phones….  The idea of bringing Skype to mobile phones has always been viewed by cellular operators as potentially threatening.  It opens up the possibility that people will use their data plans to make calls using Skype instead of the more expensive and profitable voice minutes on the carriers’ cellular networks.”

The mobile operators are right to be scared; they of all people should know.  Mobile phones have put regular long-distance call plans into what is almost certainly terminal decline. Read the rest of this entry »

Recessions are a time for “trimming the fat” in family and corporate budgets.  Companies eliminate nonessential projects and reduce their headcounts.  Families reevaluate their monthly expenses and atttempt to cut out redundant bills and services they no longer use.  This happens even during boom times, but recessions have a way of accelerating the process.  For example, the falling cost of mobile phone communication has led millions of Americans to cancel their traditional landline or simply neglect to set one up after moving to a new address.

Newer, cheaper internet alternatives, such as Skype and Yahoo Voice, are also gradually peeling away customers.  Though we have not seen updated statistics, we would assume that this trend has accelerated during the housing crisis and recession.

Likewise, traditional print media have been losing ground to free alternatives on the internet and to news aggregators and RSS feeds.  Many people who continue to get hard copy paper subscriptions of their local paper do so more out of inertia than anything else. Read the rest of this entry »