Tag Archives: internet

Wall Street Journal on internet pricing

December 24, 2012 By in economics, Industry Analysis, Retail Tags: , , , , , Leave a comment

The Wall Street Journal has an interesting, if somewhat disorganized, front-page article today on how internet retailers vary the prices and the selection of goods they offer to different customers.  The article addresses several different topics, which it doesn’t clearly distinguish:

—different pricing in different countries.  Who doesn’t do this?

—dynamic pricing, where prices of goods or services change depending on time and the availability of inventory.  Airline tickets  or hotel rooms are the model of this type of price change.  There have also been attempts by bricks-and-mortar stores to vary pricing by time of day, so that a gallon of milk costs 50% more at midnight than at noon–though I’m not aware of a single successful experiment of this type.

—customer assessment.  Four aspects:

—-The merchant uses the IP address of the customer as a proxy for zip code and offers different merchandise based on area demographics.

—-The merchant offers different merchandise depending on the device the customer uses to access the site–phone, tablet, PC.

—-The merchant offers different merchandise or pricing based on how the customer arrives on the site–mobile app, social media, search engine.

—-The merchant varies merchandise/pricing depending on the customer’s on-site behavior.

—proximity to bricks-and-mortar alternatives.  Here the online merchant varies pricing, based on how far away the customer is either to its own bricks-and-mortar store or to those of its rivals.

 

The first three of these seem to me to be staples of traditional retailing.  So it’s hardly surprising that once enabling technology became available these tactics would emerge in the online world.

The fourth is the problematic one.

There may be legal or ethical problems with charging higher prices in poor or rural areas where bricks-and-mortar alternatives aren’t readily available.  It seems to me, though, that this pricing behavior trains consumers not to use the sites of these merchants but to automatically go to online-only merchants like Amazon instead.

AMZN and the new (generic) Top Level Domain names on the internet

June 15, 2012 By in generic Top Level Domain (gTLD) names, Industry Analysis, internet Tags: , , , , , , , 1 Comment

gTLDs

The Internet Corporation of Assigned Names and Numbers (ICANN) unveiled the list of approved applicants for a new set of generic Top Level Domain (gTLD) names it proposes to issue.  The addition is intended to expand the number of such TLDs significantly from the current twenty or so (.com, .net, .gov etc.).

why?

The move has two goals:

–to introduce TLDs that use non-Latin based characters.  This means languages like Arabic, Chinese, Japanese or Russian will have domain names in local language characters for the first time.  This will make it easier for people whose first language is not Latin-based to use the internet.  After all, that’s where most of the future growth will be coming from.

Users may not be conversant withLatin-based characters, for example.  And they may have to take elaborate steps with their access devices just to be able to type them.

–to expand the available universe to TLD names beyond those that ICANN finds useful, and to align naming with the specific needs of internet users.

squatters need not apply

…penniless ones, at least.  One provision of the application process is that any entity bidding for the right to control and administer a specific name (that is, to say who can use the TLD and who can’t) already have the infrastructure in place to do so.

who’s bidding?

Here’s the list.

what catches my eye

–Despite the ICANN precautions, most applicants appear to be companies formed specifically to acquire and hold TLD names.  donuts.com, which is funded to the tune of $100 million by venture capital and private equity, is an example.

–there’s little match between the 1900+ TLDs requested and the most expensive search terms–like attorney, insurance or rehab–that internet advertisers buy.

–traditional advertising “grabbers” like “Free” or “Buy” aren’t in great demand, either.

–the most highly contested names are “Apps,” with 13 applicants, and names like “Home,” “Like” and “LLC.”

–the largest companies appear content to stake out their company name and the names of their chief brands, so that no one else can control them.  Other than that, they’ll wait on the sidelines to see the process evolve.

AMZN is the one exception

AMZN has applied for over 30 TLDs in Latin script, as well as filing 10 of the 116 requests for non-Latin TLDs.

Some of the names are what you’d expect, like “.Amazon,” “.author,”  “.book.”

That AMZN also wants “.AWS,” “.cloud,” “.fire,” or “.app” probably isn’t too surprising, either.

But it is also asking for “.bot,” “.box,” “.coupon,” “.drive,” “.deal,” “.free,” “.got,” and “.now”.

I think the AMZN move makes a lot of sense, for it anyway.  The company has more spare server capacity than just about anybody, so the cost for it to corral these names isn’t high.  And this many turn out to be just like the earliest days of the internet, when ordinary (albeit geeky) people bought basic domain names like “home.com” and “work.com” just to use for themselves–and later were able to sell them to corporations for tons of money.

The next step in the ICANN process?  …a seven-month call for comments.  The “list” link above will take you there if you want to chime in.

pricing out a polo shirt: investment implications

February 7, 2012 By in Current Market Thoughts, Industry Analysis, Luxury goods, Retail, Stock ideas Tags: , , , , , , , , , 1 Comment

teardowns in tech…

Teardowns have become a staple of IT investing.  Every time a new consumer device appears, tech websites get hold of one and rip it apart. They then publish lists of the components the device contains, along with cost estimates and a guess at assembly time and expense.

It’s all very interesting information.  Sometimes it can be the key factor in deciding whether to buy or sell the stock of a component manufacturer or designer.  Who wouldn’t like to have his chips in the iPhone4S, for example?  Or, suppose your company had a key chip in an older model but has been bumped out by a rival in the latest one?

…and for garments

The Wall Street Journal had an article last week where it did the same thing for a polo shirt.  Not exactly high tech, but I think it’s still interesting  in showing industry structure and where the money is.

KP MacLane

The article is about KP MacLane polo shirts, created by Katherine and Jared MacLane, two former Hermès sales managers who decided to become fashion entrepreneurs.  They sell their shirts online, at http://www.kpmaclane.com, for $155 a pop.

There certainly is a market for expensive polo shirts.  A Hermès polo, for example, retails for almost 3x as much, at $455.  Unlike KP MacLane’s, the Hermès offering does have a pocket.

selling points

According to the company website, the key selling points for the KP MacLane product appear to be:

–environmentally friendly;

–made in the US;

–upscale, niche;

–fusion of European tradition with American “craftmanship,” “ingenuity” and “pride.”

unit costs

The merits of this polo shirt aside, unit costs are as follows:

materials               $10.35

manufacturing     $11.05

shipping               $8.17, including $3 for an embroidered bag the shirt comes in

total                     $29.57 .

pricing

The MacLanes have set the wholesale price for their shirts at $65, a markup of something over 100%.  The wholesale to retail markup is about another 150%.

why is this interesting?

What do I find interesting about this business?

The MacLanes are a startup, so their unit costs are very high.  If they become a success, they’ll be ordering fabric in much larger lots.  This will mean they get a better price.  The same with the cloth-cutting and sewing.  My guess is that they’ll easily shave $2 each off their materials and manufacturing costs, even if they make no sourcing changes.  That would push their per unit outlays down below $25.

That would only be for starters.  But the MacLanes would certainly never lower their prices.   Any cost declines would only become extra margin for them.

On the other hand–and this is what’s really important–if the MacLanes can achieve a $155 price point, their cost of goods is almost irrelevant.

They currently mark up by $125 over the cost of each shirt.  With the economies of scale in sourcing that I’ve assumed, they would increase the markup to $130.  That’s only 4%.  If the MacLanes had a different objective and decided to source both materials and assembly from China, they could probably get their unit costs to $10 or less.  They’d lose their Made in the USA selling point, of course, which might be fatal; their quality control problems would increase exponentially; and they’d only raise their markup by $15.

In addition, it would also defeat the whole purpose of their business, which is to use marketing to create a non-commodity product, that is, one whose selling price is not based on the cost of production.

In other words,…

…the real money in the garment business is not in the manufacturing.  It’s in the brand creation.  The Hermès polo shirt I mentioned above probably doesn’t have production costs higher than the MacLanes’.  But Hermès has spent years of time, effort and spending on creating a brand image that wealthy people want to embody and are willing to spend extraordinary amounts of money to exemplify.

Notice also that the retail markup is hugely greater than the wholesale markup.  Yes, there’s a greater risk in owning retail outlets and in-store merchandise.  But the control of the brand message and of overall inventory is far superior to what a wholesaler is able to do.

the Internet

The internet is still in relative infancy, so I don’t think all its implications for retail are yet apparent.  Some already are, however:

–The role of physical distribution networks as gatekeepers for new products is diminished.  Entrepreneurs like the MacLanes can reach directly to the consumer through the internet, to create pull-thorough demand for their products at low cost.

–Weak brands, like those of many department stores, will face increasing difficulty, as will the brands they carry that use them as their principal means of distribution.  I think this means strong brands will be forced to establish their own retail outlets.  Weaker brands will fall by the wayside.

–For startups, a sophisticated web presence that clearly defines and exemplifies the brand attributes will be essential.

current investment implications

The number-one lesson is to avoid garment manufacturing in favor of branded retailing.

There’s a secular case in favor of luxury retailing, especially for firms that control the majority of their retail distribution.  The same line of thought argues against generic physical distribution, especially physical distribution of the type department stores have.

On the other hand, the broadening of economic recovery in the US is creating a cyclical investment argument in the opposite direction.

What to do?  Several possibilities:

–let relative valuation decide whether you want to make the secular bet or the cyclical one (personally, although I love luxury retail stocks, I’d prefer he cyclical),

–don’t bet.  Avoid the area entirely if you’re an individual investor; look like the index if you’re a professional,

–look for non-garment retailing, like sporting goods,

–find an indirect way to play the recovery of the average consumer.  This is my choice.  I’m betting on hotels.  I’ve owned IHG for a while and I’ve recently bought MAR.

the Silk browser on the Kindle Fire

October 6, 2011 By in e-readers, Industry Analysis, internet, Publishing, Retail, Stock ideas, Technology, Wireless Tags: , , , , , , , Leave a comment

what a browser does…

A web browser is a software program that finds web pages for you and renders them on your computer.  It locates the page you want and then reads and follows the HTML instructions it finds there.  The instructions may require the browser to travel to separate locations so it can get detailed–and sometimes complex–formatting instructions, or favicons, or to call up images that belong to the page.

…takes time and effort

All this can mean lots of round trips communicating between your browser and the page you’ve asked it to look for.  Once you’re on a given page, you’ll most likely want to follow links to other pages, either to watch a video, read an article or get more details about a possible purchase.  That’s a bunch more round trips.  Yes, we’re talking milliseconds (1/1000 of a second) for each one, but even milliseconds eventually add up if there are enough of them.

how AMZN makes Silk “super-fast”

Most of this has to do with the massive “cloud computing” infrastructure AMZN has built in becoming the online department store to the world.

In particular,

–AMZN links directly to the internet backbone.  So it can connect Silk to “outside” web pages up to 20x faster than other services.

–AMZN maintains continuous connections to the “top sites on the web,” eliminating the need for initial introductions between you and the page you want.

–AMZN has a big web hosting business, so lots of sites are inside the AMZN cloud already; AMZN caches others.  No need to go hunting for them.

–for the most popular destinations, AMZN cuts through the back-and-forth between browser and web page and starts to send information it knows you need, even before your browser asks for it.

–AMZN studies how people generally behave on a given page.  Based on its conclusions, it pre-loads content on your browser that it anticiates you may ask for next.

pretty impressive–

In fact, AMZN’s description sounds an awful lot like AOL back in the heady days when dial-up was king and the AOL server farms were all the internet many people ever used.

one caveat

Anyone using the Silk browser may well spend most or all of his time inside the “walled garden” of the AMZN cloud.  This means that, like AOL decades ago, or GOOG or AAPL today, AMZN will be able to see–and analyze–large chunks of the internet life of any such customer.

This stands to give a tremendous marketing advantage to AMZN, in two ways:

–in all likelihood, AMZN will “own” the Silk customer in the way AAPL “owns” users of its app store, and

–AMZN will be able to collect huge amounts of new data about consumer behavior.

Will customers balk at giving so much personal data to AMZN?  …not at all, in my opinion.  But AMZN will have to walk a finer line than before between using customer data for marketing analysis and respecting the privacy of users.

—

4 points about the Kindle Fire

October 4, 2011 By in Current Market Thoughts, e-readers, Entertainment, Industry Analysis, internet, Publishing, Retail, Stock ideas Tags: , , , , , , , Leave a comment

1. Thank book publishers for the Kindle Fire.

AMZN’s initial strategy for e-books was to compete on price.  In fact, it started out offering e-books as a loss leader.  It was paying the publishers $12.50 for a new release and selling it as an e-book for $10.

The book industry didn’t like this one bit, however, because it feared the tactic would destroy the independent bookstore distribution channel.    So it forced AMZN, by threatening not to sell books to the company, to charge $13-$15 an e-book for new releases and keep 30% for itself (see my posts on Kindle economics for more details).  Take that, AMZN!

As I pointed out then–nothing requiring much insight, only having watched Jeff Bezos operate over the years, I thought AMZN would likely shift to using its hardware as a loss leader to build up sales volume.  The process took a little longer than I anticipated, but the Kindle Fire is the result.

According to iSuppli, the components in the Fire and their assembly cost AMZN about $210 a unit, meaning the company gets no recovery of its research and development costs, and loses $10+ for each unit sold, to boot.  If AMZN marked up the Fire the way AAPL does the iPad, it would sell for $275-$300.  Vintage Bezos.

Presumably, though, the early devices have a lot of redundancy built in (what a disaster if the first ones broke a lot).  But component prices will fall, and the device will gradually be simplified.  My guess is that AMZN will cross the breakeven line in the second half of next year.

2.  Fire is the star, but there’s a mini-explosion of regular Kindles as well. 

Along with the 7″ color-screen Fire, AMZN is introducing a new 6″ e-ink Kindle with audio and text-to-speech.  The latter comes in touch screen and physical keyboard models.  With 3G connectivity, they cost $189.  They’re $40-$50 less with wi-fi only (which is what the Fire has).  You can knock another $30-$40 off is you’re willing to accept advertising.

And, of course, there’s still the original 6″ Kindle at $109 and the jumbo-size 9.7″ Kindle DX at $379.

3.  AMZN is already offering Fire extras.

For example, there’s:

–a two-year extended warranty, that also covers three instances of accidental damage, for $44.99,

–a cover for, $24.99-$44.99, and

–streaming of TV shows and movies through Amazon Prime–which costs $79 a year and also gets you free two-day shipping on all AMZN purchases.

4.  AMZN’s formidable cloud computing capabilities back the Fire, too. 

AMZN is promising super-fast internet browsing with the Silk browser every Fire comes equipped with.

How so?

AMZN’s on-line retailing operations require massive server banks.  Because the company has to have enough capacity to handle surges in demand during peak selling periods, it can often be left with as much as 90% of its servers idle.  Years ago, it turned to providing cloud computing services to third parties as a way of using this asset better.  Its careful study of its customers’ behavior while on the Amazon site has also given it the ability to anticipate their needs–meaning it will be able to pre-load onto a Fire device likely next pages even before the user tells the browser to request them.

More about this tomorrow.

my thoughts

Fire may not have the upscale cachet of the iPad.  But the price is right at the level where surveys of US consumers suggest they’re willing to buy a tablet.  It’s small, weighs less than a pound and has a battery life that AMZN puts at 8 hours of active use. 

It seems to me the Fire will prove very attractive to consumers on the go, just as the early netbooks drew traveling businessmen for their light weight and essential functionality.  I doubt the form factor will stagnate in the way that netbooks did, though, and I don’t expect the iPad will move downmarket to challenge.  AMZN could easily be a very big winner with the device.