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...»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.
Servicing the Car Makers
Our motor vehicle industry appears to be in a fragile state, rarely a day goes by without one manufacturer or another locked in talks with the government about loan guarantee schemes or other emergency measures designed to prop up production in a sector hit by falling sales and the challenge of an industry with huge global capacity. The Society of Motor Manufacturers and Traders estimate that nigh on 800,000 people are employed in the motor vehicle industry in the UK. But how many of them have jobs on the production line itself, physically assembling the vehicles? The answer is smaller than you might think.
read more...»Revision: Network Economies of Scale
The power of networks is becoming increasingly recognised in the economics of long run costs, revenues and profits. Network economies rarely figure in mainstream AS and A2 economics textbooks but they will have to eventually as the sheer scope of network effects is understood.
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...»
Our Daily Bread
In a similar vein to Manufactured Landscapes, Our Daily Bread is a no holds barred documentary on industrial farming and food processing. It is available for purchase in DVD format through Amazon UK.
read more...»Contestable Markets – The Market for Smart-Phones
In AS microeconomics the examiner may set you a question about the effects of a new supplier entering a market. There are also frequent questions on the costs and benefits of competitive markets compared to industries dominated by a monopolist or a handful of new firms. In A2 economics, contestable markets form an important part of your study of the theory of market structures, economic welfare and efficiency.
Tim Weber, Business editor of the BBC News website has written a superb article on the competitive pressures building inside the mobile phone market – “as the market for high-end mobiles gets ever more crowded, which should you pick?” – this is a classic tale of a market space become evermore congested as the likes of Apple, Microsoft, Research in Motion and Symbian (developers of the software that run most of Nokia’s smart-phones) compete with each other for a share of the lucrative corporate and personal sector market.
It is a market where performance, functionality, speed and reliability of access, look and feel of the hardware and the length of battery life are all important non-price factors influencing consumer preferences. Price is significant – and the article makes reference to the need to attract heat-seekers or ‘early adopters’ – consumers who are willing to pay a premium price for being among the first to be seen using a new piece of kit.
Despite the obvious barriers to entry for new participants, the smart-phone market is increasingly contestable even though it is dominated by a handful of major players. The increasing use of open-source software has helped to make the battle for market dominance a more intense affair.
Far from being geeky, this is an article that gives you a super case study in how the existing operators are competing with each other. How will the market for smart-phones be affected by the recession?
The article is available here:
Regular articles on the economics of contestable markets appear on my blog here:
Diseconomies of scale are human
One of John Kay’s phrases in his piece in the Financial Times yesterday will stay with me for the remainder of my teaching career. In a piece which focuses on the malign influences of political lobbying by huge economies of scale businesses that have been in relative decline for many a long year, John writes:
“That is true of the carmakers, whose problems are of much longer standing than the current downturn. In automobiles as in many industries, economies of scale are technological, the diseconomies of scale human. Human factors in business are generally more influential than technological ones in determining the long run fate of a company.”
This is a terrific article to use when discussing the root causes of government failures that can result from subsidies and bail-outs given to companies deemed “too large to fail.”
The remainder of John’s article can be found at his excellent web site
Some companies are too powerful to fail
Formula One and External Economies
Honda’s decision to pull their team out of Formula One for next season and their desperate bid to find a buyer for operation provides an example of the shut down point in operation. The costs of putting two cars on the grid are simply staggering - in the order of £150 million per season. And with the global economic downturn hitting marketing budgets for many of the main sponsors of international sport, it is hardly surprising that the first of the major teams has decided that there is no business rationale for staying within the sport. So Honda was the first - who will be next? Answer - keep an eye on Williams.
The Guardian/Observer carried a feature on this story at the weekend and included a nifty graphic which showed the location of the F1 team bases in the UK. McLaren are based in Woking but Renault, Honda, Williams and Red Bull are all clustered in the east Midlands. Partly this is an accident of history - namely the availability of disused airfields after the war. But the article is worth reading as an example of the external economies of scale that can be generated when a group of producers develop and expand in a relatively small geographical area. And as the extract below suggests, the negative multiplier effects that might occur if there is a wider retreat from F1 would be huge.
“Most of the teams currently racing are based in the UK, along with their R&D operations. A whole network of industries, such as component suppliers, engineering and design firms, have sprung up in Britain, mostly in central England, to serve the sport both here and abroad.”
“F1 also helps to support a far larger motorsport industry in the UK, for example rally car racing and all its associated industries. Estimates of the total number of jobs dependent on motorsport in the UK vary between 45,000 and 110,000. Geoff Goddard, professor in Motorsport Engineering Design at Oxford Brookes University, estimates that it accounts for 1 per cent of GDP, not insignificant when compared to car manufacturers, which represent about 5 per cent.”
The remainder of the article is here
Economies of Scale - Giant Wind Farms
This BBC article on the granting of permission for a giant wind farm off the coast of North Wales might be a good example of the importance of economies of scale in making renewable sources of energy more cost efficient. And heading to the web site of the Gwynt y Môr Offshore Wind Farm accesses some resources on the potential costs and benefits of a scheme that might provide electricity for up to 500,000 homes. If construction goes to plan, the wind farm will start to produce power from 2012.
Frozen Pizzas and Theory of the Firm
A big hat tip to my colleague David Fox who alerted me to this superb three-minute BBC video which takes us inside the Goodfella’s pizza site in Naas, Republic of Ireland - a fully-integrated plant that produces over two million frozen pizzas every week! There is so much in this video. I suggest showing it a couple of times and then gathering together the contributions from students and turning it into a mind map or a word cloud - perhaps using wordle
I tried with one group and they came up with
Capital intensity
Automation
Bulk purchase of ingredients
Economies of linked processes.
High labour productivity (very small workforce)
Standardised products - important for branding
Quality control
Bulky capital
Economies of increased dimensions
Minimising wastage
Perfectly elastic supply
Constant cost
A great short video resource!
Budgeting for expansion
Here is a really good example of two businesses looking to exploit opportunities from the economic downturn.
Travelodge - which is owned by Dubai International Capital - has announced an fresh expansion plan which fits into its long-term aim to grow to over 70,000 rooms in nearly 1000 hotels by 2020 and to be the biggest hotel operator in London by the time the Olympics arrives in 2012.
And as part of the organic growth strategy, Travelodge is teaming up with the discount food retailer Aldi to develop sites together into supermarkets and hotels. Notably two of the initial projects in this joint venture are in Middlesbrough (on Teesside) and in Newquay in Cornwall - both in regions where per capita incomes are substantially below the national average.
Both businesses are taking advantage of the collapse in demand for commercial and residential property - which is freeing up land for others to invest in.
A Dad and his Son go mining ..... once more
This is a heart-warming story from the BBC about the rebirth of Hatfield Main colliery which is back in action once more, coal-mining having been made economically viable by the soaring world price of coal.
read more...»Nokia cuts prices as battle for market share in handsets hots up
Nokia has increased its market share for handsets from 38.4% to 40.9% according to second quarter data from CCS Insight and reported in an article in the Times yesterday. The intense battle for market share is resulting in periodic price wars and the economic downturn seems to have precipitated another one - Nokia is reducing prices by up to 10% .
The mobile phone handset industry is best described as an oligopoly. In the second quarter of 2008 the leading five manufacturers accounted for 83% of world sales.
Nokia 40.9
Samsung 15.3
Motorola 9.4
LG 9.3
Sony Ericsson 8.2
The global mobile phone market grew by 12.3 per cent year-on-year in the first half of 2008 with shipments reaching 584 million units - the economies of large scale production in this kind of industry must be absolutely enormous. The power of the brand and the impact of achieving lower costs per unit are two of the key competitive drivers that impact on consumer prefereces.
Credit crunch lies behind school closures
Few sectors of the economy are immune to the impact of the credit crunch and the market for independent education in the UK is no exception. This week six school closures have been announced and the reality is many of the smaller private schools are under intense financial pressures as a new academic year looms.
read more...»Beanscene battles to avoid being a has-bean
The BBC reports that one of Scotland’s fastest growing coffee houses has gone into administration as bottom-line losses became unsustainable. Beanscene’s 14 shops are spread across Scotland from Ayr to the border town of Hawick to the old town in Leith.
read more...»Declan quizzes the Amazon boss
This is an excellent video snippet with Declan Curry quizzing Amazon chief executive Brian McBride on news that the online retailer - which is estimated to have over 15% of the market share in selling books - has reported profits of $158m in the three months to the end of June, a rise of 102% - helped by DVD releases of hit tv series and the likes of the enw Cold Play album and the incredible volume of sales achieved by the release of Grand Theft Auto IV.
Lots of concepts linked to the brief discussion
Amazon’s buying power in the market - does Amazon get better wholesale prices from the publishers than others in the book trade?
The long term shift towards online retailing and away from bricks and mortar
The emphasis on huge sales volumes allied to low profit margins
In April Amazon opened a new 800,000 sq ft fulfilment centre in Swansea Bay which is the size of ten football pitches
This article links in - smaller bookstores are clubbing together to give themselves better buying power in a bid to compete with the online retailers and the supermarkets.
