Great examples of near pure monopolies
A big hat tip to one of my students Arno Albici for spotting a superb article in the Economist about a cluster of mid-sized Japanese manufacturers who continue to enjoy near pure-monopoly power in highly specific, high value-added businesses. decades of industry expertise and reinvesting profit to fund high levels of research and innovation continue to give these companies a remarkable competitive strength in the market. The barriers to entry for rival manufacturers are very high and this helps to explain the limited contestability in the global marketplace.
For example:
Shimano earns around $1.5 billion a year by supplying 60-70% of the world’s bicycle gears and brakes
YKK makes around half the world’s zip fasteners by value,
75% of motors for hard-disk drives in computers come from a firm called Nidec
90% of the micro-motors used to adjust the rear-view mirror in every car are made by Mabuchi
“Many technology products have become commodities, but certain components have not, since they require continual innovation. So entry barriers to the business of making them remain high, and although the margins on the final goods have deteriorated, the margins on specialised, high-end components are still juicy.: Much more here
Navigating our Global Future - Ian Goldin at TED
Ian Goldin speaking at the TED conference in Oxford in 2009. A short but deeply interesting talk about globalisation and some of the systemic risks and systemic shocks that are likely to become more virulent.
read more...»Broadband and economic development
Access to and the speed and reliability of broadband infrastructure is one of the key institutional factors that impact on economic development. The lack of an affordable and cost-effective broadband network can be a huge barrier to economic growth especially in an age where companies in many rich countries are looking to outsource their back office and call centre services to countries where operating costs are lowest. The 2009 UNCTAD Information Economy Report provides a wealth of background information on the global digital divide.
According to the latest report, businesses and consumers are 200 times more likely to have access to broadband in developed countries than in the poorest Least Developed Countries (LDCs). And the monthly cost of broadband access varies to an incredible degree - from over $1,300 a month in Burkina Faso, the Central African Republic to less than $13 in Egypt.
read more...»Kindling a desire for e-books
I am eagerly awaiting the arrival of a Kindle - it may have to wait for my return to Hong Kong where I am spending some of the half term delivering some presentations to students and teachers (more on this when I get there). Rory Cellan Jones from the BBC has been road-testing the Kindle and is very enthusiastic. Diane Coyle can see some of the benefits but is more sceptical and like many of us doesn’t want to be surrounded by empty bookshelves. I will be taking two hard backs with me on the flight. Roger Bootle’s new book The Trouble with Markets and the much-hyped SuperFreakonomics by Steve Levitt and Stephen Dubner reviewed here by Tim Harford.
UK broadband in the slow lane
The relatively slow speed of the average broadband connections for most UK businesses and households will act as a contsraint on future competitiveness and growth. This report from BBC news finds that a study of the global state of broadband has put the UK 25th out of 66 countries in terms of the quality and reach of its networks. Rory Cellan Jones follows up the report with his own observations
“Britain has done well in the first broadband wave, using a pretty efficient copper network and DSL technology to get homes across most of the country connected. But other countries are moving forward more rapidly to build next generation networks using cable and fibre-optics.”
Investment in broadband can have significant demand and supply-side effects - the real consequences of under-investment will become more painful and obvious as time goes on - but who should pay for the extra capital spending needed? Will the new broadband tax make any noticeable difference?
Kindlenomics
Amazon has announced that it will start shipping the Kindle e-reader in the next few days. Leander McCormick-Goodhart is doubtful about whether this spells the end of books. The Kindle device is part of an increasingly contestable market space whose size is set to rise sharply in the months and years to come. I have added a few links to Leander’s blog post. According to Chris Nuttall in an FT blog last month “there are now more than 45 e-reader models available worldwide, according to E Ink, the dominant technology provider for their displays.”
read more...»Telecom entry barriers are falling
John Gapper’s blog is one that I follow on a regular basis. Today he writes about a further shrinkage of barriers to entry in the mobile phone market.
Explaining Creative Destruction
Leander McCormick-Goodhart provides an overview of the concept of creative destruction
read more...»The Times interviews Google’s Eric Schmidt
This is a hugely interesting interview with the CEO of Google Eric Schmidt. The questions and issues covered range from the future of cloud computing, the decline of traditional print media through to the challenge of maintaining an innovative momentum in an organisation that now employs over 20,000 people.
“So we have 20 per cent time for example, which means that engineers can spend roughly one day a week working on things they find interesting. We let people create start-ups within Google—Wave, Android and Chrome are some examples of the company within a company model.
This link takes you to the rest of the interview
McLaren’s new super sports car - income elasticity and status races
We are told that this new product has been forty-five years in the making. McLaren has unveiled its new super sports car, designed using Formula 1 technology.
This BBC video offers a sneak preview of the new car and it might be a good one to use when discussing needs and wants! Or the income elasticity of demand for luxury products and the price premium for motorists already wetting themselves in anticipation of getting behind the wheel! Given the relative absence of economies of scale in production, you might get students to estimate the likely introductory price in the market?
At a pinch I would price it between £175,000 and £200,000 but then again I am happy to potter around in a nine year old Citroen that is just a year from the knackers yard.
Oracle-Sun merger
Despite getting clearance from the U.S Department of Justice, earlier this month, Europe’s top competition regulator today opened a full, in-depth inquiry into the proposed $7.4bn acquisition of Sun Microsystems by Oracle, citing concerns about the potential for anti-competitive effects if the merger went ahead unconditionally.
read more...»Browser Wars!
Over the summer, it seems that the browser wars have intensified, and Microsoft’s Internet Explorer’s virtual monopoly has its days numbered. Earlier this year, Google brought out its Chrome browser, to rival Microsoft’s Internet Explorer, and today it was announced that Google have signed a deal to get it in to Sony PCs.
read more...»Contestable Markets - Spotify takes on iTunes
Here is the latest move in the battle for position, power and profitability in the market for digital downloads. Spotify the music streaming service based in Sweden has submitted an application to Apple for their iPhone that will allow their premium service users to search for music on the Spotify playlists and download their free library of songs onto their mobile phone.
Spotify say that the free application for the iPhone has met all of the developer guidelines required by Apple. The application will not allow users to buy music from the iTunes online store and herein lies the stumbling block! Will Apple really allow potentially one of its major rivals in the market place to find a home on the ultra-popular iPhone? Their dominance of the mobile phone music market looks too strong and too profitable to allow this new application. Spotify has become tremendously popular within a short space of time - it is claimed that they have over two million users in the UK alone.
*The advertising-funded version of Spotify is free of charge
*The premium service costs Euro 9.99 a month
*Apple has already approved several other music services such as Last.fm, Deezer and Pandora but these are much smaller competitors
*Music technology experts say that one of the main advantages of the Spotify application for the iPhone is offline play - push a button to download your Spotify playlists containing up to 3,333 songs to the app for playing whilst not connected
Here Rory Cellan-Jones from the BBC test drives the new Spotify application
And this Guardian editorial sings the praises of being able to listen to music without paying over the odds
Update: In August 2009 Apple announced that it had approved the bid for an iPhone app from Spotify. Details here
Using the Big Question
The Big Question feature in the Independent is a reassuringly regular source of useful and interesting background articles. There is often an economic / environmental /social / business perspective to their choice of topics in the news. And the Indy handily provides some vivid graphics that can serve well as student handouts or a prompt for a data response question. Here is a brief selection of recent features
Why is inequality rising in the UK? (July 2009)
Can the G8 meet its climate change targets? (July 2009)
What has gone wrong between the Chancellor and the Governor? (June 2009)
Will there be cuts in public spending whichever party is in power? (June 2009)
Why are games consoles the focus of the battle between computer giants? (June 2009)
Economics Snapshot - Sharing Information on Social Networks
Sharing information through social networking
There are many tools for people to share content they have seen on the internet. Which applications have the greatest market share at the moment?
Facebook 24%
Email 11%
Twitter 11%
Yahoo Bookmarks 5.5%
My Space 5%
Others include Stumble Upon, Digg It, Windows Live
Source: Alley Insider
http://www.businessinsider.com/alleyinsider
Microsoft to offer users a choice of browsers
The battle between Microsoft and the EU competition commission seems to have gone on for an age. In the latest move Microsoft has agreed to contact European users of its Windows software to a choice of Web browsers. The browsers featured in the ballot would be determined by market share; the five with the highest—at the moment, Internet Explorer, Firefox, Apple Inc.‘s Safari, Opera and Chrome—are almost certain to be displayed. What is critical is the number of web users who then decide to switch to an alternative browser and click on an option for Microsoft IE to be removed as the default web browser. My default choice is now Firefox from Mozilla. Windows 7 is due for release on the 22nd of October.
Smart Phones - Smart Money for Apple and RIM
Feature rich smart phones such as the iPhone and Research in Motion’s Blackberry account for a disproportionate share of the operating profits of mobile phone manufacturers.
According to new research by Deutsche Bank, Apple and Research In Motion were responsible for 3% of all cellphones sold in the world last year but 35% of operating profits. In 2009 the figures are forecast to be 5% of the global market in unit terms but 58% of total operating profits. Together Apple and RIM had about 32% of the smart-phone market. Nokia dominates the basic mobile phone handset market where operating margins are much thinner.
The key to understanding the huge profits of smart phone makers is the subsidy offered by the mobile phone network providers who tend to treat mobile handsets as loss-leaders. They are happy to sell a phone for £60 or less because they can recoup the money and more through lucrative monthly call plans where the bulk of users (consumers) are locked in through minimum length of service contracts.
Palm Inc is trying to break into the cell-phone market and take some of the supernormal profits available.
A Walk on the Clunky Side
The Sony Walkman was one of the innovations of its day - freeing up the music lover to play their favourite tracks on the go - thirty years on this appealing BBC magazine feature contrasts the iPod Nano with the Walkman which is thirty years old. A reminder of the benefits of innovation.
Economics Trivia - Global Sales of Mobile Phone Units
Global sales of mobile phone handsets set to fall by 10% in 2009
Nokia is the dominant manufacturer with 38.5% of the market in 2008
Average selling prices of their handsets have fallen from Euro 74 to Euro 62, operating margins are close to 10%
245 million mobile phone handsets were shipped in the first three months of 2009
Source: The Times (17-07-09)
Innovation - A Driving Dynamic for the Economy
Innovative products and processes are the lifeblood of a competitive economy. With attention focused on the likely depth and duration of an economic recession, across the country there are many businesses who have one eye fixed firmly on the recovery and on continuing to develop and test new products. This superb and spirit-lifting BBC video pays a visit to Cambridge Consultants a business that has enjoyed its best ever year during a year of recession - ideas and investment businesses that can gain access to the finance that remains available look well placed to reap the benefits of their innovations - always providing they can get the products to market.
The video features a ‘virtually waterless’ laundry washing machine prototype developed by Xeros. By saving up to 90% of water compared to conventional machines, the Xeros process has the potential to reduce the cost of washing whilst also dramatically cutting carbon emissions.
Windows for a new generation?
It seems that Joseph Schumpeter’s process of creative destruction is still going full throttle ahead, with Google’s announcement this week of a operating system (Chrome OS) to rival Microsoft’s dominance through Windows.
read more...»Will O2’s network be able to carry the traffic?
O2 has won the exclusive contract to sell the new Palm Pre in Britain and the contract means that O2 will be the only UK network selling the Palm Pre and Apple’s iPhone. These exclusive deals for O2 will consolidate its position as the dominant network service provider for smart phones. O2’s parent company Telefonica will also sell the phone exclusively in Spain, Ireland and Germany, buyers of the new phone will be tied into a two-year deal. But given the huge demand for these data hungry devices, will O2’s network capacity be sufficient to cope with the expected surge in phone demand and usage when the Palm Pre arrives in Europe this autumn? Existing iPhone users may find that network access speeds and reliability will suffer and thousands of extra users join the O2 system. More here from dot.life blog written by Rory Cellan-Jones.
Mobile Takeovers - Who will gain if five becomes four?
The press is full of coverage about a possible takeover bid by Vodafone for T-Mobile UK which is currently owned by Deutsche Telekom. Nothing is certain yet - but if a takeover goes ahead and is allowed by the competition authorities, Vodafone will have around 40 per cent of the market for mobile phone users in the UK.
The approximate market shares would look something like this:
Vodafone 40%
O2 (owned by Spain’s Telefónica) 27%
Orange (owned by France Telecom) 22%
3 (owned by Hutchison Whampoa) 8%
If Vodafone and T-Mobile become one business there is one obvious cost saving (or synergy) - namely that the merged business would have to run only one mobile network instead of two, for example, so Vodafone could aim to secure significant savings in capital and operating spending. For any would-be purchaser the risk is over-paying for a business, there are plenty of examples of the ‘winners’ curse’ in past takeover bids.
The mobile phone market is a classic case of an oligopoly with just a handful of corporations dominating the market - but you do not always need a large number of operators to create genuine price and non-price competition in the industry. Indeed the UK is the only major European market with five mobile operators, and some analysts claim that the fierce battle for market share has had the effect of cutting profit margins and reducing the profits needed to reinvest in rolling out the next generation of mobile phone technology and improving the speed and reliability of a mobile phone network that needs to cope with an ever-increasing number of data-rich applications.
Having four rather than five major players looks on the surface to be reducing competition, but perhaps all of the remaining businesses will gain from higher profits at a time when the recession has hit the demand for new handsets and mobile phone services. Vodafone is a giant in the industry reporting revenues of £41bn for the year to March 31, 2009 and an operating profit of £11.8bn.
In the mobile phone service provider market there is always a balance to be struck between economic efficiency and welfare. Competition keeps prices down for consumers and helps to make fast mobile connections more affordable to millions. But the businesses themselves must be able to finance investment on enormous networks and generate a sufficient rate of return for their shareholders. It will be interesting to see how the competition authorities respond to the next wave of consolidation in the industry.
Is recession the mother of invention
A snappy and relevant discussion on the Today programme about how recessionary conditions can provide an impetus to invention and innovation.
Wikinomics - Don Tapscott at the RSA
Don Tapscott asks whether the economic collapse has triggered a crisis of confidence in our previously trusted sources of knowledge. This is an 18 minute video of a superb presentation at the RSA in March 2009 - it certainly triggered the interest of my web savvy Year 12 students! Collaboration as a new factor of production!
read more...»And another thing
Rory Cellan-Jones has a superb blog covering some of his work as the BBC’s technology correspondent.
read more...»Electric cars - subsidise the consumer or producer?
We can expect a battery of articles in the days and weeks ahead on government incentives to grow the UK electric car market. Gordon Brown is reported as favouring a sizeable subsidy for consumers to purchase electric vehicles - according to the FT, buyers of electric cars will be offered discounts of more than £2,000 – paid for by the state – under plans by Gordon Brown to make Britain a leading centre for manufacturing “greener” vehicles.
read more...»
BlackBerry raises the bar (again)
It is the classic contestable market - BlackBerry is locked into a perpetual battle with the likes of the iPhone for the hearts, minds and wallets of corporate and consumer users. The Indy today reports on the release of the new Blackberry Storm - hang the credit crunch, forget the implosion in the real economy, lets get out there and try it!
Standing on the shoulders of giants
It strikes me that we have probably already reached a critical mass for a wide and ever-growing range of open source software products. The BBC’s iPlayer is now cross-platform. Google is based almost entirely on open source software. And Specsavers, one of Britain’s largest private companies with a network of over 1,000 stores (growing at two a week) has built its entire infrastructure on open source. What is true for Specsavers also holds for Pepsi Co and Pixar. Mozilla Firefox, Linux, Moodle and Apache web servers have come of age and are sympotmatic of an age of collaborration and rapid innovation within the open source community.
read more...»Expresso Book Machines - Printing on Demand
“As many as 1m titles may soon be available through on-demand printing, including 600,000 titles being digitised by the publisher Lightning Source, available to be printed in one-off versions on the Espresso machine, as well as hundreds of thousands of “open-source” titles, such as classics with expired copyright.”Countless hours have been spent by look lovers searching in second hand bookstores and online inside the long tail of millions of back-catalogue books and pamphlets that are out of print. The second hand book industry is thriving and several towns such as Sedbergh and Hay on Wye have enjoyed a renaissance built on clusters of bookstores that lure browsers throughout the year. But perhaps the days of longingly poring over second hand book shelves are under threat from a technological innovation called Expresso Book Machine which claims to bring printing on demand into the mainstream of book retailing. This machine is featured in today’s Sunday Times.
read more...»
