Sony Slowly Turning an Oligopoly into a Monopoly

The gaming console market has long been dominated by the top three firms of Nintendo, Sony, and Microsoft. Since the departure of Atari from the market, these have been the only firms with mass produced consoles for consumers to buy. This is due to the console industry being very fixed cost based, and the consumer base is very loyal to their brands. Even as new generations of consoles have come out, these three firms have been the ones to come out with new consoles instead of new firms entering. However, with the newest generations of consoles coming out: Sony’s Playstation 4, Microsoft’s XBOX One, and Nintendo’s Wii U, Sony has taken over control of half the market.

The main competitors in the video game market are Sony and Microsoft since Nintendo’s console is much different in nature and appeals to a different consumer base. In the previous generation, the Playstation 3 and XBOX 360, sales for each were almost identical worldwide. However, with the new generation consoles, Sony has dominated Microsoft. The Playstation 4 has had over 25.3 million shipments worldwide, while the XBOX One has had only 14.32 million shipments. The result is that when the shipments of all three consoles are compiled, Sony has a remarkable 50% of all worldwide new generation console shipments.
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While the actual sales of consoles is generating less revenue for Microsoft, publishers are also gaining less revenue from Microsoft’s XBOX One as well. One for example, Ubisoft, made similar revenue off of the XBOX 360 and Playstation 3, about 450 million euros off each console. For the new generation of consoles, Ubisoft has gained only 394 million euros off the XBOX One and 660 million euros off the Playststion 4. It is important to project what might occur due to this. Microsoft may lose deals with publishers if Sony continues to beat them this badly. If Microsoft loses deals with publishers and gamers cannot play their favorite game on their system, Microsoft may lose even more customers to Sony.

 

Links

http://arstechnica.com/gaming/2015/07/analysis-sony-pushes-past-50-percent-of-the-worldwide-console-market/

When Diamond Prices Fall

Diamonds are considered to be one of the most durable, if not perfectly durable, consumer goods. Because diamonds are highly durable, and thus are typically purchased only once by an individual over a long period of time, the demand for diamonds depends on consumer expectations about future prices. Presumably, a prospective customer who expects diamond prices to decrease over time would be willing to wait to make the purchase – so long as the gain from price decrease is greater than the opportunity cost of waiting.

Historically, the diamond industry worked to combat this issue through clever advertising and rigid supply control. Consumers were slyly coerced into collectively sharing artificially inflated valuations of diamonds. Diamonds were marketed as scarce, precious, and exceptionally valuable. They were tied to the concept of love and marriage, in effect magnifying the opportunity cost of waiting to make a purchase. Diamond producers followed predetermined price progression strategies, raising price by a few percent each year. These tactics, for a long time, worked to keep diamond prices high.

 

Today, diamond prices are driven by market forces, and this has proven problematic for the industry.

 

Reduced demand amid slowed economic growth has sent tremors through the global diamond pipeline. Chinese diamond purchases decreased significantly amid the country’s short-lived stock market surge, with consumers pouring money into equities instead of jewels. Following the economic downturn, Chinese consumers, who represent the second-largest market for diamonds, have been understandably reluctant to spend disposable income on diamonds. Low oil prices and a weak ruble in the Middle East and Russia have also contributed to the decline in global diamond demand, resulting in significant price decreases for diamonds around the world.

 

According to the Rapaport Diamond Trade Index, one-carat polished diamond prices have fallen 27% on average from their high in mid-2011, while larger 3-carat diamonds are down 23% over the same time period. Consulting firm Bain & Company estimates that diamond prices fell 25% in 2015. Inflated expectations for future growth in demand were not realized, resulting in excess stock accumulation for several of the world’s top clearinghouses.

 

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So what happens when diamond prices fall?

 

The problem lies in the diamond industry’s deeply tangled supply chain. Consumers aren’t taking the bait on lower prices, and retailers have found themselves stuck with high levels of inventory. As a result, they have begun to cease purchases from wholesalers, sending the ripple further upstream. De Beers and other prominent industry players have been forced to close mines and factories in countries such as South Africa and Botswana, putting thousands of miners, cutters, and polishers out of work. Consolidation at the midstream level of diamond production has intensified due to the high level of business closures. Developing nations whose economies depend on the diamond industry are particularly feeling the adverse effect, seeing sharp cuts in GDP. Anglo American, parent company of the famed De Beers, saw its shares hit a 15-year low in August of 2015.

 

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Perhaps, the immensely successful marketing tactic behind the diamond has lost its charm. Or, more likely, the diamond industry is suffering the effects of a lag in the pipeline, and prices will eventually bounce back.

 

Sources:

http://www.marketwatch.com/story/diamonds-are-forever-but-prices-have-room-to-fall-2015-11-03

http://money.cnn.com/2015/08/05/luxury/diamond-prices-china-markets/

http://www.bloomberg.com/news/articles/2015-08-24/de-beers-said-to-cut-diamond-prices-as-much-as-9-on-weak-demand

http://wps.aw.com/aw_carltonper_modernio_4/21/5566/1425016.cw/-/1425019/index.html

http://www.businessoffashion.com/articles/intelligence/distress-diamond-price-rout-jewellery-market

http://www.u.arizona.edu/~sreynold/rand.pdf

 

That Subway on a German riverboat to this Subway in an upstate N.Y. church

australia-victoria-melbourne-central-business-district-cbd-swanston-E5EF04Subway’s franchise-only business model is simply to knit a “healthy fast food” chain as closely and wide-reaching as possible.

With 43,945 sandwich shops in 110 countries as of 2015, including 27,000 in the U.S., Subway is the world’s largest fast food chain. To franchise a Subway, compared to McDonald’s or Jimmy John’s, is easier but in the long run a better deal for the corporation than for the franchisees. While that sounds like a good growing strategy, the chain now faces challenges on the corporate level – its definition of “healthy” has not evolved with the consumers’, especially millennials, and its menu has had few additions. The company now plans to focus on serving captive audience, which could feed into short term growth, but eventually it will have to address criticisms of its handling of food materials and update its menu.

Subway strategically locate its stores so wherever a consumer wants a sandwich, ideally there is a Subway in front of her/him, its chief development officer Don Fertman told the Wall Street Journal in 2014. “We’re continually looking at just about any opportunity for someone to buy a sandwich, wherever that might be,” said Fertman. “The closer we can get to the customer, the better.”

Because the making of a Subway sandwich doesn’t involve frying, shaking, grilling or even flipping, that means anywhere bigger than 350 square feet: in a car dealership in California, a Goodwill store in South Carolina, a Brazilian appliance store, on a German riverboat, in a high school in Detroit and a church in upstate New York. (“I’ve got one backstage in my bathroom,” stand-up comedian Jim Gaffigan said in a 2012 routine.)

Going forward, Fertman told Bloomberg that more than half of North America’s new franchise will be in “nontraditional” locations—schools, hospitals, military bases, zoos, anywhere with a captive audience.

A Subway kiosk in RussiaThe problem is opening new stores and pulling in money from franchisees isn’t a business plan healthy for the corporation.

Subway shops on average sold $437,000 of subs, sodas and cookies in 2014, the smallest sales in half a decade, and about 1/5 as much as a typical McDonald’s $2.4 million. Bloomberg reports that even in the best years, the average sales per Subway store are still among the lowest of the chains. Nonetheless, Subway is enticing to small business owners because one can open a Subway shop with as little as $116,000, company estimates show. To start a McDonald’s, you need at least $1 million and sometimes up to $2 million. The “catch” of a low barrier of entry, however, is high royalties at Subway – 12 percent weekly cut of revenues by the head offices, regardless of a franchised shop’s profitability, (according to the Washington Post; Bloomberg says it’s 8 percent). In comparison, at McDonald’s, headquarters gets 4 percent; at Jimmy John’s, 6 percent, according to Bloomberg.

The chain opened two new shops a day in 2014. As its growth rate rose to 4 percent, its overall turnover rate, including transfers, terminations and closures, was at 8 percent in the same year, according to Franchise Grade, which analyzes the investment value of franchises, reported by Bloomberg. That’s the highest since 2009 but still lower than the industry average of 10 percent.

Having spent $500 million in 2013 on promotional spots, more than Progressive or Budweiser, Subway still didn’t see the kind of growth in sales it had expected. And that bothered both the corporate office and the franchisees. On the shop level, managers constantly had to keep up with changing costs of ingredients while still offering corporate promotions like the $5 foot-long subs. On the corporate level, the leadership is frustrated because Subway’s image just isn’t what it used to be – the hip, healthy fast food chain. Newer, smaller brands have gobbled significantly larger market share in that genre.

The Washington Post reported that some franchisees want out. Discounted prices for existing franchises is as low as the price of a car.

Sources:

WaPo: The rise and fall of subway

Bloomberg: subway franchisees unhappy in germany

Bloomberg: Jared isn’t subway’s only problem

qsrmagazine: subway effect

The Effects of the Charter Communications and Time Warner Cable Merger


charter-time-warnerA
lmost a year ago, Charter Communications announced that it would be buying Time Warner Cable for $55 billion dollars. The United States’ government, however, has still not approved the merger and Charter has experienced a large amount of public opposition to this merger due to the large portion of the market share that they will receive if the merger succeeds.

The real concern for the American consumer should be how this merger could potentially affect the market. While it is unlikely that there will ever be a true monopoly in the broadband industry, which provides high-speed internet and cable services, the merger would essentially create a duopoly in the industry. If the merger succeeds Charter Communications would become the second largest cable provider in the United States, holding 23% of the market. They would only follow Comcast who currently holds 47.6% of the market. While neither company would alone hold a majority of the market, the concern becomes their ability to coordinate prices and control over the online video market, which would lead them to essentially act as a monopoly within the market. Their ability to act as a duopoly would be furthered by the innate characteristics of a cable company, which requires large amounts of money, large scales of production, and efficiency in order to provide consumers with a quality experience.

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If passed, not only is the cable industry likely to turn into a duopoly, this could have drastic effects on the market. First Charter Communications and Comcast could use their internet service market power in order to determine at what price and what content consumers have access to. Additionally, they could attempt to increase the price of online video providers, such as Netflix, by adding data caps that would increase the user’s overall price. Lastly, they may restrict which online video providers could be watched through their set-top box. While there are other set-top boxes, such as Apple T.V. or Xbox, that can provide this service, these act as an additional cost to the consumer. Therefore, some American households may only be able to afford their cable providers set-top box.

However, Americans may not need to worry quite yet because the chances of this merger passing are not looking good. President Obama, the FCC Chairman Tom Wheeler, Dish Network, USTelecom, and Public Knowledge have all publicly spoken out in opposition of the merger. Only time will tell, but if the merger is passed we could be experiencing some major price changes in both cable and online video providers in the years to come.

 

Sources:

http://www.slate.com/blogs/moneybox/2015/05/26/charter_will_buy_time_warner_cable_for_55_billion.html

http://variety.com/2016/digital/opinion/why-the-charter-time-warner-cable-merger-is-a-bad-deal-guest-column-1201686665/

http://variety.com/2016/biz/news/charter-time-warner-cable-merger-dish-network-1201684570/

http://fortune.com/2016/04/02/bezos-blue-origin-success/

http://arstechnica.com/business/2016/01/comcast-and-charter-may-soon-control-70-of-25mbps-internet-subscriptions/

http://variety.com/2016/biz/news/charter-time-warner-cable-merger-dish-network-1201684570

Cutting Off Saudi Arabian Crude?

Donald Trump told the New York Times that he would consider cutting off United States oil imports from Saudi Arabia if the country refused to send ground troops to help fight against ISIS. Saudi Arabia is our second largest foreign supplier of crude oil, behind only Canada. I wonder what the economic implications of this decision would be – even further increased U.S. production, defaults in Saudi Arabia? When I saw this headline, my first reaction was to criticize Trump for his failure to respect or even recognize global cultures and nuances. But upon further investigation, Trump may not be suggesting anything that outrageous.

The United States have increased crude oil production in the last decade, almost doubling in 2015 what it put out in 2005. Trump calls this a “tremendous glut” on the market.

crude US

Melvin Backman, qz.com

With U.S. shale replacing so many foreign suppliers, the market share of crude oil is shifting dramatically. Things are made worse by the decision from OPEC countries and U.S. producers to essentially go their own way, producing rampantly without much regard for what’s actually happening in the market.

But more importantly, U.S. production increases have incredible influence over the economies and governing bodies of OPEC countries. According to Quartz, several OPEC countries can’t balance their budgets when oil is under $45 per barrel. Right now, the average price per barrel of crude oil is $39.91 according to the latest Brent benchmark. The International Energy Agency estimated that per barrel prices would climb back up to the $80 range by the end of the decade if U.S. shale production slowed. But if they do not decrease the volume they’re currently putting out, prices could stay below $50 for the rest of the decade.

So even if Trump is nominated and elected, his decision to cut off Saudi Arabia might not have the effect most would think – we would still have plenty of gas at the pump, and Canada would still be our number one foreign supplier. But that’s not the major concern. We should be more worried about what would happen in terms of OPEC economies if Saudi Arabia were cut off and U.S. production continued to grow exponentially. If we were to rely on Canada and other foreign suppliers, we could see more market stabilization and the possible increase of prices per barrel. But if we continue to attempt crude oil independence and produce independently of foreign supply or domestic demand, we could upset the global economy and possibly send 12 OPEC countries into (further) turmoil. Saudi Arabia said it would be willing to increase its borrowing to 50 percent of GDP in order to keep its market share in oil. The country sold $27 billion in bonds in August of 2015 to help fund their already impressive deficit. The IMF calculates that Saudi Arabia needs $106 per barrel average price in order to reach its deficit “break-even” point.

So how will the global economy react to this shift? What will happen if the United States continues to produce at this level? Will Saudi Arabia have any major effect on our foreign supply?

Sources:

Trump says he would halt oil imports from Saudi Arabia, but could the US survive without them?

In the oil price war, it’s hard to tell who’s losing—OPEC or US shale

Low oil prices could force the Saudis to borrow hundreds of billions of dollars to finance their deficit

3D Printing: A Sound Investment?

Some stock analyst believe that 3D printing will “fundamentally change the way we make things.” Already, the technology has upended the prosthetics market. Coders, doctors, and fathers can now make a prosthetic for $50. A usual prosthetic can cost upwards of $2500. This extraordinary reduction in cost makes 3D printing highly competitive. Not only are the prosthetics cheaper, they are individually customized in style, and replacement costs are next to zero. talonhand1

This remarkable technology has caught the eye of crowd funding efforts. Enabling the Future has raised millions to 3D print prosthetics for war stricken countries. Marvel Comics has sponsored Enable the Future because kids all over the world want their prosthetics to be in the likeness of Marvel Super Heroes. The value 3D printing has added to the world is remarkable. However, should we invest in this technology as a whole?

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Most technology analyst blogs want everyone to invest heavily in 3D printing. They entice you with feel good investments as the profits mostly benefit small communities and not large corporations. They promise mind-blowing innovations such as “3D cars” and “3D clothing.” Yet, many of these blogs are remiss in letting potential investors know about the struggles 3D printing has faced and continues to face.

There are no 3D printed orthotics. For all the innovation and design in prosthetics, coders, doctors, and fathers cannot make a sturdy orthotic. This is because the materials used in 3D printing are plastic. Although this plastic is easily malleable, it is not strong enough to support the weight of a child. 3D printing is limited by its materials, and may have to dramatically increase costs to 3D print sturdier, higher quality, goods. Unfortunately, the world will have to wait to see the first 3D printed and usable car.

If a technology is going to “fundamentally change the way we make things,” it must be more than a one trick pony. The technology must be able to change and lower the costs for a plethora of goods. 3D printing has the potential, but we are years away from a 3D printing revolution. New technologies are new and exciting, but you have to ask yourself, what can this technology feasibly accomplish, before investing.

The Street: 3D Printing

Enabling the Future: Enabling Chile with Spiderman Style

Enabling the Future: Prosthetists Meet 3D Printers

The Money to March Madness

The NCAA’s men basketball tournament attracts millions of viewers, many of whom gamble on the outcome. This year, 13 million brackets were filled out on ESPN. Of those, 99% were “busted” or “broken” after the first day – and only 17 people correctly picked all 16 teams of the Sweet 16 correctly. While the tournament provides a source of entertainment and competition for everyone interested, it provides quite a bit more to the NCAA, TV broadcasters, and a select few basketball programs.

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No. 2 Michigan State lost to No. 15 Middle Tennessee in the first round, ruining many brackets.

March Madness is the NCAA’s most profitable enterprise, bringing in about $900 million in revenue each year. Most of this comes from broadcasting rights, which were sold to CBS and Time Warner in 2006 for a 14-year/$10.8 billion deal. In turn, CBS and Time Warner profit from advertisements during the games – overall ad spending in 2014 topped $1.1 billion. The NCAA also offers marketing opportunities to businesses, which can pay roughly $10 million to be “corporate partners.”

Fans, meanwhile, are expected to collectively wager $9 billion on the tournament – twice the amount usually wagered on the Super Bowl. Someone, somewhere, profits from this – but generally, it isn’t you or me.

The NCAA uses a formula to determine how much money to dole out to basketball programs. As commonly known, college athletes cannot be paid, either in cash or in goods, or else risk losing their “amateur” status and ability to play in the NCAA or other college sports. And while schools also provide a budget for their sports teams, money from the NCAA Basketball Fund can be very useful. However, very few teams actually come out on top from this. Usually, around 3% of men’s college basketball programs generate surpluses – and no women’s teams do. Kentucky, Villanova, Wisconsin and Duke are generally the only teams to turn a profit.

Should the NCAA be giving more to the teams that it uses to profit from? Should the players receive some sort of compensation for their hard work? I would argue yes to both.

Sources:

cbs: march madness: follow the money/

washington post: your ncaa tournament bracket is probably busted

the nation: ncaa makes billions and student athletes get none it/

Intra-African Merger and Acquisition Activity

For a long time, Africa has been a center for foreign investment in emerging market enterprises. A new trend, however, is beginning to develop: African business are engaging in greater and greater intra-African merger and acquisition activity. In 2014, global African merger and acquisition activity was valued at $11b and intra-African merger and acquisitions activity was valued at $4b. In 2015, global African merger and acquisitions activity was valued at $9b, but intra-African merger and acquisitions activity surged to $15b.

 

 

While recent trends have made Africa the second most attractive investment destination in the world, a diversification of investments has begun to reshape the continent’s economy. In the early 2000s, six of the ten fastest growing national economies came from Africa. The reason: Africa has tremendous natural resources and the early 2000s saw a huge boom in commodity prices. Now, with commodities down, many African nations are struggling to keep their economies afloat. Enter the new generation of intra-African merger and acquisitions. 2015 saw a number of large intra-African merger and acquisitions in the telecom and financial sectors. Nigeria’s second largest mobile phone firm will soon acquire acquire the wireless company Comium Cote d’Ivoire for $600 million. And Atlas Mara, a financial firm founded by a Ugandan entrepreneur, will acquire a 45% stake in Banque Populaire du Rwanda. Atlas Mara also purchased a 75% stake in Rwanda Development Bank in 2014.

 

2016 will hopefully be a resilient year for a continent hit by slumping commodity prices. The biggest deal announced so far, the South African investment firm Brait’s planned acquisition of British retailer New Look, is valued at $3b. And while a few deals hardly support an entire continent’s economy, the transition of Africa being a destination for foreign investment to an environment of organic growth is significant. The next few years will be critical for African enterprises to establish themselves as sustainable players in the global economy. In the best case scenario, Africa is able to diversify it’s economy while commodity prices are low, so that when prices rebound, Africa and it’s strengthened firms will be able to take advantage of them.

 

Sources

http://qz.com/408742/african-businesses-are-splashing-out-more-on-ma-in-2015-than-ever-before/

http://qz.com/535075/the-global-commodities-slump-is-hitting-africa-hard/

http://qz.com/400357/cross-border-deals-between-african-businesses-has-been-fueling-local-ma-activity-this-year/

 

How to Buy Your Tickets Smart: An Overview of Ticketing Markets

Durable goods are defined as a product that “consumers derive the benefit from the purchase of the good over a number of periods … [and] consumers can decide the timing of their purchase” (Belleflamme and Peitz 2007). Tickets to games and shows are considered durable goods in the sense that consumers who buy tickets to a performance receive an “experience” they carry with them. For example, the experience of going to a Warriors game this year would stay with you forever as Steph Curry has officially reached Wu-Tang’s “for the children” status. Besides, someone who sees tonight’s show is generally unwilling to pay as much for a ticket for tomorrow’s show.

Davidson Wildcats' Stephen Curry (30) celebrates his team's 82-76 victory over Gonzaga in the 2008 NCAA Division I Men's first round tournament action Friday, March 21, 2008, at the RBC Center in Raleigh, North Carolina. (Jeff Siner/Charlotte Observer/MCT)

(Jeff Siner/Charlotte Observer/MCT)

Tickets are first sold in primary markets and are issued at the box office or online with a face price printed on them. In 2011 and 2013, the average price for a music tour concert admission was about 78 dollars, but this number increased to 82 dollars in 2014. In addition, the concert ticket sales revenue from 1990 to 2014 amounted to 6.2 billion dollars (Statista 2016).

Courty’s model of ticket pricing suggests two reasons why promoters would want to deter brokers. First, consumers who buy late lose out in equilibrium since “brokers capture some of their surplus” (Courty 2003). Consumers usually ask promoters to intervene for a fairer price, which would result in promoters being caught in the middle of a conflict that is really between consumers and brokers. Second, promoters want to take advantage of the profits that can be earned in the late market. The model shows that unless resale is prohibited, promoters should not offer any additional tickets in the late market for equilibrium outcomes. Thus, we observe many restrictions from promoters upon brokers.

Time line of a simple model presented by Courty (2003).

Time line of a simple model presented by Courty (2003).

That was the story thirteen years ago. Today, resale websites such as SeatGeek and StubHub allow anyone to upload their tickets and price them freely to sell. Most sites focus more on transparency than getting a good deal by using phrases like “the price you set is the price buyers see.” As a result, information is more symmetric between sellers and buyers, which leads to the strategy of getting fairly priced tickets.

People typically try to buy tickers from resellers right when they go on sale or just before the show. Supply seems to be highly constrained by demand during the first few days that tickets go on sale. Researchers find that ticket prices during the first couple of months are all over the place and are especially pricey when the tickets went on sale on resale websites. Also, in the two weeks leading up to the concert, a buying and selling frenzy brings most of the auctioned ticket prices down, sometimes even below the primary market ticket value. Therefore, the ideal time to look for tickets at auction is in the two weeks leading up to a given event.

Interestingly, celebrity musicians and other famous touring performers face problems similar to those of a durable good seller with market power. Todd Kendall (2005) investigates how the durable good monopolist could lead to high rates of drug abuse and other self-destructive behavior observed among celebrities in his paper “Durable Good Celebrities.”

Sources:

Belleflamme, P., & Peitz, M. (2007). Industrial Organization: Markets and Strategies. Cambridge, UK: Cambridge University Press.

Concert ticket sales revenue in North America from 1990 to 2014 (in billion U.S. dollars). (n.d.). Retrieved March 21, 2016, from http://www.statista.com/

Courty, P. (2003). Some Economics of Ticket Resale. Journal of Economic Perspectives, 17(2), 85-97.

Kendall, T. D. (n.d.). Durable Good Celebrities. SSRN Electronic Journal SSRN Journal.

The Ticket Economist | The politics and economics of ticket resale (aka scalping). (n.d.). Retrieved March 21, 2016, from http://www.ticketeconomist.com/

Wholesale Beer Prices

I am surprised at the divergence of canned and bottled beer. Now since most beer is sold in cans (my educated guess from what’s on Kroger’s shelves), it does though make sense that the overall index is close to that for canned beer. Note that the PPI is likely weighted by volume, and so is dominated by the pricing of AB InBev and Molson Miller Coors. It would be interesting to be able to track similar data for craft brewers.