Sounds + Food 'n' Retail

One of the things I do on this blog is deciding on the potential of industry-segments, ranging from farming to coffee-shops, and from grocery to other types of retail. On Tech IT Easy I've previously expressed my scepticism at media (in which I include text, art, audio, video, and gaming), especially in terms of business-models, which I think that segment lacks.

Equally so, I see fairly little space for it in the physical retail segment, simply because it is so much more convenient to purchase and consume it via digital means. The PC (and other tech-gadgets) have essentially become the hub for all things media, and creating barriers to that experience just leads consumers to pursue more convenient ways of experiencing that media. That search for convenience is something that I've also approached in a previous post on this blog.

Let's look at some media-types and how they are being sold online.

For Video - there's iTunes, consoles, and set-top boxes that are controlled by media-producers. In any case, the power-differentials between producers and intermediaries is very unbalanced and it isn't a nice segment to enter as a retailer. Also, let's not forget the free alternatives: YouTube et. al and piracy.

For Audio - again iTunes, Rhapsody, and Amazon MP3 Store, but also smaller digital store for independent artists, like CD-Baby (which operates through iTunes also). Let us again not forget piracy and the fact that much of music is being produced through digital means and it makes sense to organise distribution that way also.

For text - there's again online outlets like Amazon for eBooks (Kindle) and Zinio for magazines. And let's not forget that 99% of text-based media is viewable for free online. Still, admittedly, electronic devices for consumption are not yet able to compete with paper-based methods, at least where price is concerned. Also Audible should not be forgotten as a source for audio-books, recently bought up by Amazon and partially distributed through iTunes again.

For Gaming - I'm not too familiar with the online market for this one. Even so, there's Steam, a digital distribution system by Valve, a platform which they recently opened up for use by other game-publishers. There's also plenty of smaller games being distributed through Xbox-live, the future Playstation Home, and of course the internet.

Finally, Art - here the situation is more complex, while on the other hand being relatively simple. It is complex for artists like my mother, who paints, and conducts business on a personal level by interacting with her customers. On the other hand, there's photography and digital art, arguably the evolution of traditional art, which is easy (for some) to produce digitally and distribute online. I suppose every industry has that friction between the traditional way of doing things and "the new way."

All in all, I don't see media as a big cash-cow for physical retail. I like to think that, because production and distribution becomes cheaper, that its cost will eventually fall to a very low price, allowing for it to be included as an added-value component in the service-proposition of physical retail-outlets (to which I also include restaurants, etc.). I also like to think that creating environments that make the consumption of media a comfortable process (e.g. cinemas) also has some potential.

But my outlook for selling media as a product, something that could easily be sold digitally, remains bleak. Please let me know if there are arguments against my point of view, as I'm here to learn.

It is time for those links again! This time, we'll be discussing the economics of Apple's physical stores, how Walmart is enforcing RFID, how retailers are trying to trick people to buy more expensive things, how people perceive fun in games, and 10 ultra-geeky home-cinemas.

As usual, my bookmarks can be found here, and the previously covered links, here. Enjoy!

Link 1: Why is Apple saturating (US) cities with retail stores? is a question that Choire Sicha asks on Kottke.org, and lead me to this profit & cost breakdown of Apple's retail stores at Seeking Alpha (see pic below). It does appear it's all about the money, though hard it remains to read Apple's mind 100%. In related news, OObject lists all the items needed to build an Apple store.



Link 2: Is RFID economically feasible? I'm planning to dedicate at least 1-2 posts on RFID on this blog in the future, as I've essentially been following its development since the early coverage on Slashdot. This story on InformationWeek discusses the pressure that Walmart, certainly the biggest champion for RFID in the retail-arena, is putting on its suppliers to finally add RFID into their logistics-chain. As far as I remember, the latter have been complaining about the unfair balance of cost that RFID causes, shifting most of them onto suppliers. I assume, however, that these chips and pallets are reusable.

Link 3: What makes games fun? Lightspeed Venture Partners has an interesting blog, which mostly discusses the business and principles behind digital games. I follow it because games are fun, and if you can understand the source-code of fun, you can replicate it elsewhere. In that spirit, then, it links to an interesting white paper trying to map out what exactly goes on in gamers' heads while playing games. Part 1 is also very much worth a read.

Link 4: A buyer's christmas? The New Yorker digs into consumers' buying behaviour. Interesting is, that people use the net most often to find info, not to buy, but can use that info inside stores (we'll still need ubiquitous internet for it to be shoppers' utopia, however). Equally interesting is, that if a store has two microwaves, consumers will usually buy the cheaper one. With three products, however, they will usually by the mid-priced one. There's still room for trickery, I guess…

Link 5: 10 stunning ultra-geeky home cinemas. In the spirit of my previous post on cinemas & luxury, I thought that this link would be fitting. The Star Trek-themed one is a little too geeky for me, but the Titanic one (no. 6) looks awesome. I'm still doubtful about whether it's about the design or about the movie, but I can't deny that people put a lot of work into designing these.

There are few things in this world I hate more than electronical problems. Yesterday, I had a new harddrive installed in my Mac-laptop. I could have done it myself, but, by my estimates, it would have required me unscrewing and rescrewing approximately 40 screws. So, no thanks! I was in Germany on this occasion and gave the shop my mobile number. The only problem, I found out later, was that my phone refused to roam.

While I was waiting, I saw some beautiful atmospheric places, which I wanted to photograph. Only on that day, my neverfailing camera decided it was a good day to never turn on again... great!

When I came home, I tried to install OS X Leopard (the new Mac-OS), but it somehow screwed up and I was up until 2 a.m., trying to fix it (i.e. re-install). Along with that, my new harddrive makes some strange popping sounds every five minutes, which I unsterstand is a software-issue, but since this drive was advertised to be quiet as a mouse, it's annoying nevertheless.

So, yesterday could very well be described as bland and just plain uninspiring. I'll take a few days off from this blog, to focus on the essentials, and will hopefully be back in full force by this weekend.

The five-forces model, as developed by Micheal E. Porter, illustrates the biggest factors that may enter into the strategic decision-making process. These are, on a vertical level, suppliers and customers, on a horizontal level, competition from products, new entrants (can also be vertical), and rivals.

To explain the horizontal/vertical, often when you talk of horizontal, you mean companies and products that are on the same level as you, competing for the attention of the same customers (and suppliers). Vertical relationships are those which a company depends on, either their relationship with suppliers or their relationship with customers. Each of these also operates on their own horizontal axis. The more powerful players on that level become, the more they can affect players on the other levels.

There are different levels of importance per force, depending on the context and type of the firm. When a company is more powerful horizontally, a market-leader, even a monopolist, it does not have to worry about suppliers as much, and is perhaps able, financially, to integrate vertically, taking over some of its suppliers and/or some of the middle-men that stand between the company and its customers. Vertical integration can be important when you want to control the supply chain for some reason, e.g. to increase the level of quality of your products. It can also become important if competition on your horizontal axis is threatening or may become so in the future.

3 examples
You can see this play out in a number of retail-situations. Apple, which is strictly focussed on design and marketing, outsources the manufacturing of most of its products, but is fairly vertically orientated towards the customer-side, doing most of its business in its retail-locations and online stores. Because of this concentration of power in the middle and proximity to the customer, it also has more power over its suppliers, able to make strong demands, and it's also better equipped to compete with horizontal players like HP or Sony, who are not as vertically integrated towards the consumer. The added benefit of a close customer-presence is also that you can use this as an opportunity to create customer-focussed products, something a lot of non-verticallly integrated players are not so good at.

Another fascinating company is Amazon, who spotted an opportunity to surpass brick & mortar stores, by becoming a distributor with a web-based store-front. Traditionally, the book-industry was organised as follows. A book gets printed, it then gets distributed, it then lands in a store, and then the customer buys it. Amazon integrated three of these functions: distribution, store, and customers (four, if you include ebooks into the formula). The end-result was that the customer became empowered: he could review books, even sell books second-hand. Which disempowered other stores where this was not possible, and publishers, who were before able to simply push out best-sellers downstream. Publishers are still powerful of course, essentially acting as a gatekeeper to writers, but this will change as soon as online publishing can be consumed comfortably.

A final example is Ikea, which is surprisingly similar to Amazon. It also started as a distributor, back in the day when a store-front was a newspaper-advert and phone-line. Ikea saved money, by working closely together with manufacturers in Poland, even building and buying machinery for them. The end-result were standardised designs, at low costs, and produced on a massive scale. It became close to the customer, by using its warehouses as store-fronts, and enabling customers to buy via catalogue and later via the web-site. Its competition was the traditional furniture store, conservative and producing designs that were both expensive and focussed on exclusivity (which translates to small-scale production). Because of this perceived strength, they were arrogant enough to not worry so much about prices on the vertical axis, both from their suppliers and for their customers. All of which could be exploited by some frugal and out-of-the-box thinking (a combo which fits surprisingly well together).

These are all three examples of durable goods. If you get into food however, even restaurants, the formula changes. But that is a story for another day.

Be a thief
Isn't 5-forces fun? I think so. So what can we learn from this? For one, that it's important to consider strategy on multiple axes. How will a business deal with its suppliers, its customers, its competition?

Also, it is actually a weakness to be too vertically or horizontally integrated, as that creates a certain arrogance and/or passivity towards how you deal with these parties. New entrants will eventually come, and probably on a different axis all-together. Being too integrated, means that the business has many dependancies, which will make it all that more slower to react to changes.

What I think always pays off, is to be close to customers. By constantly adjusting your strategy, so that the value proposition for customers is increased and personalised for them, you ensure a certain loyalty (which gives you time to change) and you can sense it sooner when their attention drifts towards other types of products.

A final thought. Business is very much an art-form and in art there is one great saying: "Good artists copy, great artist steal." The copying refers to that everything has been done to a degree. People have sold computers, books, furniture, and those products are clearly fulfilling a demand, which, for now, continues to exist. Where people can innovate is in creating new combinations of things. In other words, if you copy a competitor's business-model, you gain only the part of the market that does not already get served by the existing business-model.

If instead you steal the good parts from other business models, and create your own combinations of these good things, you can create greater value-propositions for customers than already exist. This applies just as much to combinations of five forces, as it does for anything else.