Posts filed under ‘Consumer’
Pricey Bits
It’s been quite awhile since I’ve found time to write an essay, but today I just couldn’t resist.
Back in March, I predicted two things were going to happen in publishing:
- The prices of e-books would rise, approaching that of physical books. At least for best-sellers and popular authors.
- The prices of e-book readers would continue to drop, perhaps even through the use of subsidies.
This morning, the Wall Street Journal had a front-page article saying pretty much the same thing. While the average e-book price has dropped, the pricing of major best sellers has been creeping up, and even exceeds that of hardcovers in a few cases.
The 5-year old inside me is saying, “Nyah, nyah, told you so!”
True, this may not actually be the best thing for publishers, because the wholesale pricing model that has allowed retail prices to behave this way in many cases lowers revenue for them. Remember, however, that production costs are basically zero. And publishers are achieving two things they want–expanding the e-book ecosystem, and maintaining a measure of market control, avoiding the Amazonification of e-book prices.
However, as I wrote earlier, the main enabler of this phenomenon is the inelasticity of demand for popular books. Unlike in the beginning, e-books now offer more advantages over paper books: bookmarking, definition lookups, sharing, storage, etc. They are, in fact, a different animal.
Moreover, once people have a reader like the Kindle or Nook, they really don’t have anywhere else to go. Unless they want to return to lugging heavy hardcovers around, they have to pay the going rate for the e-books they want. Bits may cost less than atoms, but that doesn’t mean they have to be priced lower.
Yes, the prices of of many less-popular e-books continue to be lower than the paper version. And yes, people will inevitably begin to sample lesser known and/or self-published authors in an attempt to save money. Both of these are good things, in my view.
The second part of the thesis is also coming true. With Nook and Kindle in fierce competition, and tablets going mainstream, prices for e-readers are getting lower all the time. Only $79 for a basic Kindle these days, though that is an ad-subsidized version. Low reader prices drives greater adoption, which expands the e-book market, which puts more people in the position of paying high prices for lower cost editions of bestsellers.
Some mornings I just really love reading the Journal. But not on my Kindle. At $15 per month, the electronic version from Amazon is more expensive than the print+online subscription price I pay.
Sure is a strange world. Who’d have thought we’d be paying more for bits than atoms?
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Lawyers and TVs and Tubes, Oh My!
The business models surrounding video delivery to consumers are sure evolving rapidly, aren’t they? And in sometimes surprising ways.
Time Warner Cable (TWC) has been sued by Viacom (VIA) over an iPad app it recently released. The app allows TWC subscribers to watch live TV on their iPads within their own home, effectively turning the iPad into a TV. It streams channels wirelessly to the iPad, typically from a router attached to the subscribers’ internet cable modem.
Cablevision (CVC) has released a similar app, although because it streams directly from the cable box (plus wireless adapter add-on), this one does not require cable subscribers also to be internet customers.
Broadcasters such as Viacom are claiming that TWC and Cablevision have “no iPad video streaming rights.” Time Warner Cable, for its part, insists it can send TV to any device in the home.
Meanwhile, ESPN (DIS) has taken another tack, releasing their own app that lets properly identified subscribers from Time Warner Cable, Verizon (VZ), or Bright House, to stream its live content to an iPad from any location. This is an example of the “TV Anywhere” initiative envisioned by the likes of TWC and Comcast (CMCSA) among many others.
And on another front, startup company Zediva is being sued by all 6 major movie studios over its service that “rents” DVDs to consumers and then streams them over the internet. Each customer has exclusive use of a DVD disc and a DVD player. Again, the studios are claiming copyright infringement, calling Zediva’s business model a “gimmick”. All Zediva is really doing is putting a DVD into a player, pressing play, and then sending the customer the output signal directly. They just happen to be using the internet instead of a wire.
[Next, I imagine, it will be illegal for me to stand outside my neighbor's house and watch a DVD on his TV through the window.]
Logically, Zediva and the cable providers seem to be on reasonably solid ground. Legally, who knows?
Regardless, the notion that this has anything to do with distribution or copyrights is beside the point. What’s really being fought over is the ability to make money in new ways by using the Internet. Or as the late Senator Ted Stevens of Alaska laughingly called it, “a series of Tubes.” Time Warner Cable’s app does in fact use IP to move video around, though it is exclusively on its own cables. And while Zediva uses the open internet, there is precedent in the form of virtual circuits to think of that transmission channel as being private and dedicated.
In a way, these links are functionally no different than wires. Perhaps Senator Stevens was more right than his detractors thought. Companies are using the internet just as if it was a series of private pipes, or tubes. So why wouldn’t these distributors have the right to send video this way?
Because it interferes with the content owners and networks from getting two things they dearly want: (1) unfettered control over using the internet to sell content directly to consumers, and (2) ownership of customer information for marketing (read: monetization) purposes.
Every movie Zediva rents and shows is one that a studio can’t derive its own rental income from. When people watch Mad Men or Survivor from the dining room on an iPad, that’s one more episode that can’t be monetized through iTunes or Netflix (NFLX), or viewed on ad-supported Hulu.
What’s worse, when an iPad, smartphone, or netbook is used to view video streamed through a cable or satellite provider, the content sellers have no information about the end user. If they could sell or rent directly, they’d gain valuable demographic and other information that could be used for marketing purposes or monetized via ad networks.
They know that content is not king; the customer is king. Networks and studios would love to be able to eliminate the middle man if they could. And they don’t want to be beholden to Apple (AAPL), the way music publishers are now and magazine publishers are quickly becoming.
To own the customer is to be prepared for the day when consumers “cut the cord” on cable. And when they use tablets and smartphones instead of a
TV.
In 1993, Nicholas Negroponte (the founder of MIT’s Media Lab) made a prediction that became known as the “Negroponte Flip.” He said, in essence, that what was wired would become wireless, and vice-versa. When you consider that our phones are becoming wireless, and over-the-air TV is increasingly via cable or fiber, Negroponte seems to have nailed it. We have a similar flip occurring with centralized mainframe computing moving to distributed (PCs) and then back to centralized (the “Cloud”).
Could it be that just as we’ve reached the point where most TVs are flat, and no longer have tubes, we are moving to a time when the “tubes” are what’s important, and video is no longer watched on TVs?
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Tele Visions
What will a TV “app” look like in the future? How will interactivity between viewers, social networks, and advertisers evolve? Is the linear model of TV dead? Will people continue to pay for content? What’s the frequency, Kenneth?
A few weeks back I attended a TalkNYC event on TV Apps, social TV, and Interactivity. More recently, the Connecticut Digital Media group hosted a similar panel covering online video. Quite a diverse set of speakers representing interests that spanned the spectrum of content owners, creators, advertisers, and technologists. Because of the multiplicity of viewpoints it’s not clear anybody really had answers to any of the above questions. Frankly it’s just too early to say with any certainty how everything will turn out. However, that’s not stopping many companies, investors, and other stakeholders from trying.
Nor will it stop me from sticking my neck out.
Interactivity is not new. It just jumped networks.
People have watched TV together, talked about it, and read about it, nearly since the time when television sets replaced the family campfire (radio). Discussing the popular show of the day at school, or over the back fence, is a time-honored tradition. I’m not sure which was invented first, the TV or the office water cooler, but they seem to always have been linked.
The difference now is that this interactivity, this social connection about video, has gone online. That means it’s no longer geographically bound. And technology has allowed viewing habits and preferences to be accessed, measured, monitored, interrupted, shared, and influenced, in ways that nobody dreamed possible.
In effect, social interactivity over video is now at scale.
The interesting question is whether that scale has come at the cost of depth. Are we now more involved with our TV, or less? Are we more deeply connected with those we share it with, or are our relationships numerous but more shallow?
If there’s nothing to watch on TV, maybe we don’t care
I see this as a massive tradeoff, because in the end attention is a finite resource. Teens and tweens are increasingly watching TV while at the same time reaching out over social networks, looking up facts, tweeting about what they’re seeing, and controlling what they watch. (Even digital immigrants like me sometimes embrace this multitasking.)
On the one hand we’re more involved with each other, as we converse over our portable, miniaturized water coolers, make an online purchase of the purse some actress is carrying, and signal an advertiser we like the blue convertible more than the red. On the other hand, how much attention are we really paying to the TV show now?
Are we seeing a move from long-form content to short-form video just because we require time between clips to text each other about it?
And this doesn’t even address the move to content-on-demand. What will there be to talk about when nobody is watching the same thing at the same time? Are we then simply interacting with databases? Or will we instead find ways to queue up our shows in synchronization with our friends?
Does Interactive TV even require a TV?
Watching “lean back” media like television still tends to be a shared experience. Conversely, using a screen on a computing device has typically been a solitary activity. You might be communicating with others over a social net but you’re likely to be physically alone.
This disconnect might explain past failures at “interactive TV”, and seems likely to limit the amount that televisions themselves can become interactive, despite the claims of some that want to build apps and widgets right into the device. Or—heaven forbid—turn your TV into a large screen PC.
I certainly wouldn’t want someone in the room updating their Facebook profile on screen and interfering with my enjoyment of whatever I’m watching. Or expanding an app that eats up screen real estate.
This means the TV isn’t going to get very smart, despite manufacturers ramping up production of internet-connected sets. Oh, there will be some small, useful, unobtrusive apps or “bugs” that will get built in, but for the most part widgets will be D.O.A., and the TV itself will remain passive.
Interactivity will be a multi-device experience. And the smarts will be—as they already are—in the other gadgets.
Whether via a laptop, an iPad, a smartphone, or some combination resembling a remote control, such connected devices will allow viewers to interact with shows, products, celebrities, ads, and each other. We will “check in” to the shows we’re watching, vote on outcomes, rate shows, comment on what we’re seeing, buy items, and share everything.
We will control the horizontal. We will control the vertical.
More importantly, our external devices will allow us to efficiently find content we want to watch, and then control how it gets to our TVs or other viewing devices. And even move it between devices.
These last two interactions—filtering and directing video—represent the stickiest problems. It’s clear that consumers are increasingly demanding a migration from strict linear programming (TV shows on a set network and schedule each week) toward a video-on-demand world. And the ability to move their content to any device they want, often in the midst of watching it.
But how do we find anything? What replaces the filtering function the old style networks performed for us? To what extent is passive profiling by content providers and marketers, and active participation in social networks, going to keep us from sinking in a sea of video dreck?
Even if we find the things we really want to watch, will we be allowed to access and consume them the way we want?
T
here is a lot of experimentation going on in the marketplace around these questions. Set top boxes, iPad apps, content aggregation sites, changes in theatrical windows, new DVR functionality, smartphone integration, and more. Precious little standardization and no agreement on business models, though.
Because of conflicting corporate interests, differing technical approaches, content licensing agreements, regulatory quagmires, and general resistance to change, it will take years for common approaches and standardized technology to make them a reality for a majority of us.
But many are trying, and a few will succeed. It will happen. Because after all, we humans are interactive creatures. And we still want our MTV.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Kindling
Recently, blogger and journalist extraordinaire Dan Gillmor tweeted about how some publisher was selling an e-book at a higher price than the hardcover. Dan’s comment was that the publisher (Penquin in this case) just “didn’t get it.”
I think Dan’s wrong on this one.
True, an e-book should be priced lower than the hardcover. It’s certainly cheaper to produce. But cost doesn’t drive price, demand does. Cost simply determines how much profit there will be, if any.
People buy e-books (and e-book readers–more on that in a minute) for a lot of reasons. But most of them are related to convenience. The ability to download books, a large and growing selection, the ability to carry an entire library with you, low weight, getting a new book the day it debuts without fears it will be sold out. And yes, they’re almost always cheaper.
Consumers have always been willing to pay for convenience.
If people really like e-books, why wouldn’t they pay more for the convenience? Now that they’ve shelled out good money for their Kindle (or Nook, or whatever) they’re sort of stuck, aren’t they? Are they really going to go back to buying hardcovers–and trashing their e-readers–just because the book price went up?
Let me get a show of hands. How many of you walked back into the bank to use a real teller once they started charging a few bucks to withdraw money from an ATM? Not many, I bet. Remember when there were hardly any commercials on cable TV, because you paid a subscriber fee for it? Did you cut the cord because ads started showing up? Nope.
Publishers aren’t stupid. They’re going to charge as much as the market will bear for an e-book. But they have to be deliberate in how they go about it. For this to work they need two things:
- Enough separate e-book outlets so they maintain a measure of pricing control (no iBook store to monopolize distribution), and
- Enough e-book readers on the market so they have a critical mass of customers.
It’ll happen gradually, but e-book prices will drift up. They may never exceed hardcover prices–perhaps they’ll end up somewhere between that point and retail paperbacks. Whatever the level, it’s clear publishers will be raising prices on more titles in the future–particularly popular authors and hot books.
Which brings me to my second point. If publishers and sellers require lots of e-book devices in the market to maximize profits from e-book sales, what do you think will happen to the price of e-readers?
If you answered “they’ll drop like a stone”, go to the head of the class. When you expect to make most of your money from the blades, why in the world would you charge people for razors?
Sure, e-readers might not actually become “free”. Perhaps they’ll be subsidized like cell phones by the operators whose networks are used to download the e-books. Sign up for AT&T service (NYSE:T) for 2 years, get a starter cell phone, and we’ll even throw in a Kindle. Or agree to buy 2 e-books a month from Barnes and Noble (NYSE:BKS) over the next year, and your Nook costs you nothing.
Consider this:
- The number of available e-readers has grown significantly
- You can already read e-books on other (multi-purpose) platforms like PCs or tablets
- Apple (NASDAQ: APPL) has sold more than 8 million iPads already, while Kindle sales are at best less than half that
- Entry-level e-readers have dropped dramatically in price since they premiered (though new ones with more features still command a premium).
E-reader prices will trend downward to the point where they’ll be as cheap as, well, firewood. And as that happens, e-book prices start to rise.
This all maximizes publisher profit . It also increases revenue for distributors like Amazon (NASDAQ: AMZN) and Barnes & Noble who provide the devices. They will more than make up the cost of e-readers with increased profit on e-book sales.
The real beauty of this strategy is that it effectively takes the cannibalization of physical book sales completely off the table.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
How Much For Your Data?
An interesting corollary to the idea of paying for attention, detailed in this morning’s Wall Street Journal (subscription required). In the latest article in its continuing series on Internet privacy and personal data, the WSJ mentions several companies that are helping consumers sell their personal data to marketing companies.
In particular, Allow, Ltd. , a London firm, is featured. Like others in this space they act as an intermediary on your behalf. First, they help you remove your information from marketing lists. Then second, they broker transactions between you and various marketing agencies. You fill out some personal information and also list purchases you are planning to make in the near future, and this forms the basis of one’s appeal to specific marketers.
For instance, let’s say you are in the market for a car, or a credit card, or refrigerator. By allowing a marketer who is selling one of those things to serve you appropriate ads, you might be worth as much as $10 to them, because of the tremendous specificity of the targeting. For their effort, Allow takes a 30% cut of your revenue.
Not too dissimilar to paying directly for one’s attention. Perhaps that will be the next step in the evolution of online privacy and data mining. In any event, the rest of the article provides a nice overview of how this space is evolving, and is worth a look.
Would you sell your personal data for a few extra bucks?
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Pay Attention
Today it was announced in the Wall Street Journal (among other places) that Mozilla, the makers of the popular Firefox browser, were planning to add an opt out function to give users a “do not track” option on their personal data.
[In my view, Firefox is the iPhone of browsers, with the most extensive number of apps that can be added on to customize and increase its usefulness.]
Even though this addition by Mozilla will require the cooperation of advertisers and ad networks–which may be meager at best–it is a welcome step in the right direction. Anything that gives more control to users over information that is important to them is an improvement.
True, people are often far too cavalier about how they share personal information on the web. See Facebook or MySpace for examples. On the other hand, some companies continue to skirt the edge of ethics in capturing and using this information. See Facebook again, which frequently changes its privacy features in such a way that personal information is shared unless users opt out. Then it conveniently (and intentionally) “forgets” to inform them clearly about the implication of such changes and how to reverse them.
Other companies simply capture site visit and click information to build de facto profiles of users, and then sell this to ad networks. While this information is arguably less critical (we’re not talking phone numbers, a child’s school address, or the hair color of old girlfriends here), the gathering of it is totally under the radar–most users are completely unaware it’s even going on.
In any event, I’m an avid Firefox user, so I’m happy to see them taking this step. But it doesn’t go far enough. Through online tacking, companies are continually pursuing that advertising holy grail–a “demographic of one” that lets them perfectly target ads to individuals based on their unique interests and tastes. If this is truly valuable to advertisers, and really helps them save money in the process, then I say let them pay for it.
I propose to “opt in” to personal tracking if ad networks will pay me for it. Why should they get info on my habits for free? If nobody is willing to pay me, I’ll opt out of tracking altogether and they get nothing.
This is just a precursor to an idea I’ve floated before: Pay for Attention. Why should Google (NASDAQ: GOOG) and other middlemen make all the money for “delivering” me to advertisers?
It’s my attention that advertisers want. Let them pay me for it directly. Disintermediation is a time-honored web practice, after all.
If you want your banner add to show up next to my Facebook feed, pay me. If you want your ads to show up in my search results, pay me. My attention is worth a lot, and in today’s environment of continual distractions I have no intention of simply giving it away.
You think this power doesn’t already exist? Try this
- Clear your browser cookies daily
- Clear your browser cache every time you close the browser
- Install an add-in such as Adblock Plus to your Firefox browser.
You’ll be amazed at how bad the “targeting” becomes, and in fact how few advertisements you see at all. Some months ago a friend commented to me that he loved Facebook but hated the ads. I realized I had never seen an ad on Facebook before. I fired up Internet Explorer (not equipped with my ad blocker) and was appalled at all the banner ads being thrown at me.
So take control of your profile until such time as ad networks are willing to pay you for it. And if you are a startup looking to commercialize this idea of Pay for Attention, contact me, I’d love to help you get it off the ground. I think the concept has commercial legs.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Location, Location, Location
Location, location, location. That’s the mantra of what drives value in the real estate industry. However, the modern version might well be, “Location, just less of it.”
Today, Barnes & Noble (NYSE: BKS) announced it is putting itself on the block, looking for a buyer as it struggles to survive in a world of digital books.
[Frankly, I'm not so sure it's digital books that are causing the problem so much as online purchases. Certainly, digital books are growing wildly, but off of a very small base--according to Publisher's Weekly, they amount to only about 1% of the market. So maybe not a short-term catastrophe, though it's certainly a future threat.]
Either way, the problem with Barnes & Noble is real estate. One of the key ratios by which they are measured is return on assets–and with their large number of expensive stores, the fewer pricey books they sell, the more the operating metrics plummet. It’s almost like reverse leverage.
For years now, booksellers have sought other means to drive traffic into their retail outlets, peddling music and videos, opening in-store cafes, offering reading areas, etc. All to generate a higher return on their store “assets”.
I have this strange feeling of deja vu.
Blockbuster (BLOKA.PK) now trades on the Pink Sheets for exactly the same reason. They too were fixated on driving traffic to their stores. They too operated under the assumption that their true competitive advantage was their locations, and they had to keep earning a return on those assets. This caused them to make some rather odd decisions, such as enticing people to drive to their stores just to fill up a media player with movies to take home. Meanwhile, Netflix ate their lunch shipping discs (and now simply bits) directly to customers.
Similarly, Amazon (and others) killed Toys R Us, who had a similar problem with too much real estate and the accompanying high overhead. Why drive your car to the crowded store (along with acquisitive children badgering you for every bright and shiny thing they see) when you could have Christmas delivered to your door? And cheaper too.
It’s really a shame, as I still enjoy browsing in bookstores. Checking up on favorite writers to see if they have something new. Finding an unfamiliar author to take a chance on. But there’s no question they are struggling.
Probably some private equity firm will buy Barnes & Noble, and turn it around, as was the case with Toys R Us. Perhaps even Blockbuster will survive. Stranger things have happened. However, one thing is for sure:
There will be a lot fewer locations.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Alpha Bits
Alan Reynolds has an op-ed out this morning in the Wall Street Journal chastising those who believe poor job growth is driving us into a double dip recession–the so-called “W” pattern. It seems Reynolds would have us believe that our economy is more like a “U” (or, dare I suggest, a “V”?). And that as a result Keynesian efforts to keep supporting the economy are not needed.
It’s well researched and well written, and argues persuasively that–properly interpreted–recent jobs numbers aren’t all that bad, amounting to a net gain this year of roughly 100,000 private sector jobs per month. (It’s about double that if you add in government jobs, some of which are temporary). I even agree we need to be careful with the fiscal magic wand, at least absent a long-term strategy for handling the deficit, as Bernanke suggested yesterday.
However, for all his hair-splitting, Reynolds seems to miss the point.
Recent estimates indicate more than 8 million jobs were lost during the panic and Great Recession. In a nice, steady expansion (3-5% annual GDP growth), let’s say the economy adds maybe 300-350,000 jobs per month. At that rate it will take 24 months just to get back to where we were beforehand, employment-wise. And at only 100,000 jobs per month this year, we haven’t really started the clock yet.
Imagine. Two years just to catch up.
Even worse, we’re not counting the growth in the labor force since 2008 (young people coming of age minus those retiring). Plus fewer than expected can afford to retire now, given how their savings have been decimated in recent years.
Then there’s the economy. Yes, there have been impressive gains over the last year or so. Always stated breathlessly by the popular and financial press, in terms of double-digit percentage growth. Little mention of the drastically low base that growth is from. In fact, frightfully few actual numbers at all. Just growth percentages. No indication of how far we still are from the level of economic prosperity we enjoyed in 2006 or 2007.
[Some of that growth, by the way, has come from temporary fixes--namely government stimulus. The rest has been due to industry overproducing to rebuild inventories, after running the pipeline dry when few were buying. In the old days we called that stuffing the channel. Now we refer to it as a rebounding economy.]
Further, there are all the references to growing corporate profits. Sure, if you lay off lots of people and lower costs, then even with falling sales you can engineer rising profits. But that can’t last without an increase in demand. And that requires workers with salaries, as well as currently employed people with rising incomes.
What we’ve seen so far has been more akin to a relief rally in sales than a true demand increase. People who had been holding their breath finally buying that refrigerator or car once they realize they won’t be losing their job. But flooding the economy with cheap money, as the government has done, is ineffective in an environment of low demand and fear over jobs and savings.
It’s like pushing a rope.
Until there is unequivocal evidence that people feel confident enough to really start buying again, small businesses–the engine of job creation–won’t hire. Nor will banks lend to them. It doesn’t matter how cheap money is, no one will risk lending to a business that can’t demonstrate demand. Despite the rise in the market over the last year, banks aren’t lending, which shows you what they really think.
Bottom line, with vastly lower employment, lower (and slowly rising) housing prices, a drop in equity wealth, a rise in the savings rate, and massive consumer deleveraging, its difficult to conceive of a way we can get our economy back to pre 2008 levels in anything less than 4 or 5 years, perhaps more. If we do, it will only be because consumers are going into debt again, simply postponing the inevitable. Or as I’ve discussed before, re-inflating the bubble.
So is the economy headed for a double dip (“W”)? Perhaps, but not likely. Frankly, I suspect it’s more like a “square root” symbol–sharp fall, then a small rise, then flat. But no matter which you believe, what is clear, and most relevant, is that the recovery is not a “V” or even a “U”.
Yet that’s exactly what the market has priced in over the last year.
There’s no doubt we’ve had an impressive bull run in the market since March 2009. However, the cracks are showing. It’s been clear to me for some time that the market has gotten ahead of itself, and that this is one of those times where the market and economy have become disassociated. Until recently, the pundits have all been saying that we can’t be at a market top, because there’s still too much money on the sidelines, and we don’t have a top until all that money rushes in.
They underestimate the uncertainty that still grips many on Main Street. People have been keeping a lot of their funds in cash or safe bonds because they no longer trust the market.
Really, what I think was happening up until the “flash crash” is that money managers have been talking their book. Waiting for the suckers to come in at the last minute so they could sell at the top. Except the suckers didn’t come, and with all the new fear and volatility introduced by Europe’s problems, they aren’t going to. Which is why there’s been so much selling lately, and why I believe this is more than a simple correction in a continuing bull market.
We’ve been in a secular (long-term) bear market since 2000, and there’s no sign we’ll be out of it soon. Not until we get the economy back to prior levels–which as we’ve seen will take awhile. We may be at the end of the cyclical bull market that began last March, and could experience one or more short-term bears and bulls before we finally pull out of all this.
In fact, in hindsight it appears as if the rapid rise in the market from March 2009 to July 2009 was the “relief rally” that compensated for the panic of late ’08, while the rise since last July was the real “bull” market. If so, there’s even a small chance we’ll be revisiting those July lows before we see another sustained rise.
In any case, the part of the alphabet we assign to the economy isn’t the real issue right now. It’s the “W” in the stock market that we ought to be worrying about.
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Escape from Alcatraz
In a recent Wall Street Journal there was an interesting article on jailbreaking iPhones. It seems many people–more than I originally thought–may be using software to “break” the restrictions on an iPhone, allowing the installation of applications that have not been purchased through the App Store, or certified by Apple (NASDAQ: AAPL).
The article quoted Jay Freeman, developer of Cydia, as saying 1.7M have downloaded it–implying a like number of jailbroken iPhones. Even if he’s exaggerating, it’s probably fair to say the total worldwide number of jailbroken iPhones could be in the millions now.
In terms of sheer volume, this doesn’t present much of a threat to App Store revenue. Though certainly the availability of applications that are not blessed by closed Apple ecosystem will appeal to many.
Awhile back, I suggested that the most widespread app for the iPhone in 2009 would be a virus. Subsequently, I was roundly flamed by the ever-sensitive Apple fanboys, who claimed that the App Store system is practically (if not completely) virus-proof.
Above all, there’s the dreaded “Kill Switch”, which lets Apple disable an application on every iPhone in the world, once its discovered to be malicious or defective in a way that allows the spread of a virus.
[The presence of that kill switch has become a lightning rod for those critical of the amount of control Apple has retained over its ecosystem. Google's (NASDAQ: GOOG) Android OS for mobile phones promises a great deal of freedom and diversity. Apple provides a more limited functionality, but users get stability, increased virus security, and a world-class user experience. The liberty vs. security trade-off seems universal.]
I’ll admit to a bit of hyperbole in my original post. And I certainly got more of an education in iPhone security than I ever wanted. So perhaps a virus won’t be the MOST downloaded app. Or happen this year. But I stand by my original sentiment.
Imagine the following: One day, some unexpected data finds its way into your computer. Some time later, tens or even hundreds of copies of the data leave your machine and end up on the hard drives of other people’s PCs. And the process repeats until hundreds of thousands of computers have been infiltrated by copies of this data.
A virus, you say? No, just a joke email. But I think you get my point.
The problem with those who defend Apple is they have far too limited a definition of a virus. No one says it has to be malicious, or take control of your hardware. Hackers are first and foremost pranksters, who often spread mayhem but are also driven by the challenge–seeking recognition in their own way and in their own circles.
And people make mistakes. That includes both the developers of legitimate iPhone applications, as well as Apple itself. Perhaps an innocent error could sneak through the certification process and be exploited by a creative youth with time on his hands. It needn’t be a malicious attack that takes over peoples’ iPhones.
On the other hand, imagine if you could claim bragging rights by forcing Steve Jobs to actually use that kill switch, disabling a popular application on every iPhone in the world.
That would make a hell of a “virus”, wouldn’t it?
Disclosure: I hold no position, either long or short, in any stocks mentioned here.
Close to the Edge
With the New Year upon us, and a possible rally (well, sometime this year we hope), it may be time to think about dipping your toes back into the market. But how to put your money to work?
For technology stocks, I think it’s important to have an “edge”.
Over the past few years, I’ve been following a trend that–while not new–still has plenty of legs. Particularly coming out of this bear market. It’s not a stock screen, but it helps me see which technologies could be viable investment candidates, and which might instead require swimming against the current.
Things like control, intelligence, and value creation have long been shifting away from the center. Moving from large, centralized bodies towards the edge. The edge of markets, networks, locales. There are exceptions, of course, but this movement is still happening.
So I always check first to see whether any new technology–or its market–supports this trend towards decentralization and democratization.
“Uh, gee Scott, that’s great. I have no idea what the hell you’re getting at.” Fair enough. Let’s look at a few examples.
Healthcare
Lots of innovation here. Doctors interacting with patients and each other at a distance. Sending X-Rays to specialists abroad for review. Doctor-patient consultations over videophone instead of in the office. Glucose testers and home dialysis kits let measurements occur at home, not the hospital. Portable ultrasound machines and defibrillators allow diagnosis and treatment in remote areas.
Consumers are rating doctors, sharing treatment experiences, and finding health information via social networks and the Internet. Doctors themselves are forming “expert” networks to vet new research and treatments according to the wisdom of crowds thesis.
All of this is related to distributing power or value creation away from traditional central facilities and control.
Companies such as Sonosite (NASDAQ: SONO), HealthGrades (NASDAQ: HGRD), WebMD (NASDAQ: WBMD), Vital Images (NASDAQ: VTAL), and American Well (private) are among many in this space.
Manufacturing
Here’s a favorite.
Computer Aided Design (CAD) made it easier for companies to decentralize or even outsource much of their product design. But now they’re actually outsourcing the fabrication, and in some cases the end product manufacture can be done outside of a factory.
3D Printing (often more formally termed Rapid Prototyping or Rapid Manufacturing) has come of age, with machines that can take computer files and fabricate plastic or metal objects from nothing more than raw material and software. Before, even simple prototypes had to be fabricated over the course of weeks. Now, companies can turn a design into a marketing concept model within hours, and make needed changes much quicker, shortening design cycles. They also can avoid expensive tooling, since short-run items can be “printed” instead of made with traditional manufacturing processes.
Companies like Stratasys (NASDAQ: SSYS) and 3D Systems (NASDAQ: TDSC) make large industrial grade fabricators, as well as less expensive versions suitable for office use. Soon, they (and others like Desktop Factory–private) will make consumer versions cost effective.
Why have a replacement part for that lawn mower or kitchen mixer shipped from the factory, when you could simply download the file and print it at home?
Municipal Networks
While many think this is an idea that went bust, there’s still a huge demand for municipal networks. FCC statistics on broadband penetration are quite misleading, and plenty of Americans have either pokey DSL-like speeds, or no broadband at all. Towns and public utilities, often in partnership with private enterprise, are filling the gap.
True, many of these projects have not fared well–but that was usually due to faulty business models, not the underlying tech. Many ideas have been tried, and people are getting much smarter. There are many thriving wireless and Fiber-to-the-Home projects.
Instead of one giant centralized “mother of all” (Ma) Bell owning your phone or Internet connection, the end piece is owned locally. And its often faster, with more capacity, than many parts of the Internet. This is recapitulating what happened years ago to television in underserved areas, as Community Antenna Television (CATV) gave birth to today’s cable networks.
And it’s happening with energy generation too.
Others
Here’s a partial list of other innovations that are benefiting from “the edge”:
So how do we wrap our minds around this explosion of innovation? I think of this trend as occurring in 3 distinct ways:
Decentralization–moving utility to the edge
The basis for this first one is hardware, and typically some kind of disintermediation. It’s driven by things like the availability of leading-edge technology, shrinking hardware sizes, falling costs, and the Internet.
Examples–3D printing, TiVo, municipal networks, distributed energy generation
Authoring–tapping users to create
Here the basis is centered more around software, the demand for mass customization, and hobbyists. You know, that class of people with time, passion, interest, and the willingness to work for nothing but recognition and/or personal satisfaction. The availability of software tools, Broadband, and the Long Tail (everyone’s a hobbyist in something) are drivers.
Examples–Blogs, mashups, personalized ad streams, podcasts, YouTube
Emergent Systems–enabling collective/cooperative effort
This last is typically facilitated by an enabling service. Often with the existence of an intermediary to provide a control or filtering function. But while the result mimics a more centralized function, the value is created on the edges–a true “whole is greater than sum of parts”. Here the driver is simply networks of people in easy, rapid communication. I think they call that the Internet. 
Examples–Wikipedia, open-source software, eBay, prediction markets, grid computing
Then according to the man who showed his outstretched arm to space,
He turned around and pointed, revealing all the human race.
I shook my head and smiled a whisper, knowing all about the place.
Yes, “Close to the Edge”
Of course, like all classification systems, the answer you get will depend on which consultant you talk to. The concept is pretty general, and sometimes unwieldy. Regardless, I find the edge idea to have a lot of merit, and hope you do too.
The key is to find companies that create, use, and benefit from the technologies that are fostering these trends. Or the markets that they enable. It might be tool, a marketplace, an ad platform, a device, a network, whatever. Then do your research.
Once you get down to individual companies, it’s caveat emptor. Picking stocks based on trends alone is what cost people so much money investing in the likes of Webvan (another “edge” play) or Pets.com.
I have done research on some companies that are emblematic of this trend–including a few mentioned here–to a greater or lesser extent, some more recent than others. In fact many I covered as an analyst fell into this mold–and not by coincidence. But do your own due diligence before investing, or hire someone to do it for you.
Let me know if you think of other ways this idea might be manifesting in technology markets.
Disclosure: I currently hold no positions, either long or short, in any stocks mentioned here. However, I do consult with companies in some of the markets discussed.
by Michael Mauboussin
