Paul Wallbank – Brilliant Communications

Tag: economy

Disrupting the markets
Generally it’s not a good idea to have nearly a hundred slides in a presentation, but Mary Meeker’s overviews of the tech industry are so rich in data it’s impossible not to spend a weekend looking over the entire sldieshow.

Last week Mary gave her presentation at the All Things Digital conference and as usual she identified a range of trends and issues in the technology industries.

Smartphone upsides

Still the early days of smartphone adoption, with 6 billion mobile phone subscriptions worldwide but only 954 million smartphones activated.

This adoption is driving mobile revenues with income growing at 153% per year. Although as she shows later, this is not necessarily good news for everybody.

Print media’s continued decline

A constant in Mary’s presentations over recent years the key slide in has been ad spend versus usage across various mediums.

In this year’s version we still print still vastly over represented with 25% of US advertising while TV remains static, although Henry Blodget at Business Insider thinks the tipping point might be arriving for broadcasters.

Online’s thin returns

One of the things that really jumps out is how thin onlie revenues really are. In annual terms services like Pandora and Zynga are making between 6 and 25 dollars per active user over a year.

These tiny revenues indicate the problem content creators have in making money on the web, after the gatekeepers like Pandora or Spotify have taken their cut, there isn’t much left to go around.

Facebook and Google are also encountering problems as users move to mobile where revenues are even smaller than those from desktop users. This is constraining both services’ earnings growth.

Disrupting markets and governments

Mary’s presentation goes on to look at the disruption web and mobile technologies are bringing to various markets – it’s a good overview of whats changing right now and the products driving the changes.

It’s not just markets that are being disrupted with Mary also looking the US’s budget position and entitlement culture. This in itself is a massive driver of change which will have a deep effect on our lives regardless of where we live.

Are we in a bubble?

Mary finishes up with a look at whether we’re in a tech bubble or not.

Her view is that we are and we aren’t – there are silly valuations of companies in the private market however the poor performance of tech stocks on the stock market indicate the public aren’t being fooled.

One telling statistic is the only 2% of companies have accounted for nearly all the wealth creation of the 1,720 US tech IPOs between 1980 and 2002. There’s little to indicate much has changed in the decade since.

The optimism in funding new businesses is based in the disruption they are bringing to markets and industries – you only need one eBay or Google in your portfolio and you’re a legend, if not filthy rich.

Both the economic and technological changes are disrupting our own businesses and this is why its worth reading and understanding Mary Meeker’s presentations if only to be prepared for the inevitable changes.

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June 4, 2012
Falling Dominos, Fading Businesses
“When the tide goes out, we find out who’s naked” goes the saying – nowhere is this more true than in the engineering and construction industries.

One of the hallmarks of an economy that has passed its peak is the systemic failure of contracting companies.

During a boom, or a steady growth phase of an economy, contracting companies see cashflows increase as more projects come online.

That growth affects contractors in a number of ways – they start getting used to fatter margins and management starts to believe in their own invulnerability.

Blue sky seems to stretch on forever and massive growth rates seem guaranteed far into the future.

As the market matures the sky starts to turn grey as more contractors start fighting for lucrative jobs seeing cost estimates being fudged and dodgy deals done to win jobs.

Those dodgy contracts eventually come in at a loss and management starts desperately winning more projects to cover the losses on earlier work.

And so a spiral begins.

To make matters worse, the more aggressive contractors start buying out smaller competitors.

Often those competitors have similar bad projects on their books and their impressive growth rates are based upon winning jobs they should never have tendered for.

Eventually the spiral ends when the market stalls and there aren’t enough new projects available for the loss making contractors to cover the accumulated losses. Then the failures begin.

Collapses of the Hasties Group, Reed, St Hilliers and other construction and engineering contractors are classic examples of this cycle.

While shareholders and management carry some of the burden, the real pain of failure is felt by the armies of sub-contractors – largely small, family owned businesses – these companies employ.

Most of these subcontractors will not get paid for their outstanding invoices, forcing all of them to cut back their own employment and spending. For some, they will be forced into liquidation as they can’t pay their own bills.

For the families that own those small businesses the financial and emotional pain is real and immediate. Spending stops, debts go unpaid and relationships fail.

In some cases that small bankrupt plumber, bricklayer or concreter finds the stresses of failure too great and a family loses their breadwinner.

This multiplier effect of business failures and redundancies is one of the reasons the real economy is in a much tighter position than Australia’s political, business and media elites can bear to admit.

Another saying is “a recession is when your neighbour loses their job, a depression is when you lose yours.” For most families, the economy has been in recession for three years as they’ve seen friends and relatives accept reduced hours or have contracts terminated.

Much of the commentary about Australians being irrationally pessimistic misses this aspect of our economy. It’s amusing when the smug comments come from financial and economic journalists who don’t seem to have noticed the difficulties their own industry going through.

There’s a lot of naked people treading water at the moment and the tide is heading out. The question for all of is where the deep water is and where the hell did we leave our speedos.

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June 1, 2012
Could Australia follow the Greek path?
Business Spectator’s Robert Gottliebsen today describes how Australia has caught the Greek disease of low productivity and an overvalued currency.

This is interesting as just last week Robert was bleating on behalf of Australia’s middle class welfare state.

Australia’s productivity has stagnated over the last 15 years, but unlike Greece the ten years before that was a period of massive reform to both employment practices and government spending.

The structure of the Australian economy is very different, not least in its openness, to that of Greece.

What’s more Australia has a floating currency which will eventually correct itself unlike the Euro that Greece finds itself trapped in.

That’s not to say Australians won’t be hurt when that currency correction happens. The failure of the nation’s political, business and media elites in failing to recognise and plan for this is an indictment on all of them – including Robert Gottliebsen.

Australia’s real similarity with Greece is the entitlement culture that both nations have developed.

Over those last 15 years of poor productivity growth, Australia has seen a massive explosion of middle class welfare under the Howard Liberal government which has been institutionalised by the subsequent Rudd and Gillard Labor governments.

Today middle class Australians believe they have a right to generous government benefits subsidising their superannuation, school fees and self funded retirements.

For all the sneering of Australian triumphalists about Greek hairdressers getting lavish government benefits, Australia isn’t far behind Greece in believing these entitlements are a birthright.

A middle class entitlement culture is the real similarity between Australia and Greece. It’s unsustainable in every country that harbours these illusions.

Unlike Greece, Australia doesn’t have sugar daddies in Brussels, Paris and Berlin desperate to prop up the illusion of the European Union. Australia is own its own when the consequences of magic pudding economics become apparent.

Australia’s day of reckoning may arrive much quicker than that of Greece. Then we’ll see the test of how Australians and their politicians are different from our Greek friends.

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May 15, 2012
Customer service gods
“Treat your customer service people like gods,” says online business advisor Todd Alexander.

One of the conceits of the 1980s business model was that customer service, like training and capital investment, is an expense that should be driven down at all costs.

In corporations, government departments and politics those who dealt directly with the customers, taxpayers or voters were seen to be the low level, low status employees who could be outsourced at the first possible opportunity.

That was great when markets were growing and there was an abundance of low hanging fruit to be plucked from the marketplace.

Now that customers are cash strapped and margins are falling, keeping customers happy becomes more important.

A statistic often quoted is that acquiring a new customer costs five times more than keeping an existing one, that difference may be exaggerated but it’s not far from the truth.

Those departing customers can do great damage to the business as well.

In the 1980s customers had little recourse apart from taking their business elsewhere. Often they didn’t have that choice in sectors where duopolies reign.

Now customers can vent their frustrations to the world on the web or through social media and there’s no hiding from the loss of reputation.

What’s more, many of the businesses that relied upon picking the low hanging fruit of a growing economy, high immigration or increasing consumer debt to find more customers through the last thirty years now find the rules of changed.

Customer service now matters.

Any management that considers customer service to be low status is a dinosaur and will soon be following them.

It’s a good time to be disrupting comfortable business models.

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May 3, 2012
Reading the global tea leaves
Where is the world economy heading? An interesting exercise by the website Business Insider looks at the earnings reports and announcements by some of the world’s biggest corporations to get an idea of the the direction of the global business world.

The results of Business Insider’s article are interesting and worthwhile of a closer look as we can see some real trends along with some risky bets by management who seem reluctant to acknowledge we’ve moved out of the 1980s.

China’s western water shortage

This is an interesting curve ball; one of the central planks of the China Cargo Cult that believes unfettered Chines growth will drive the world economy indefinitely is that the country’s inland provinces will grow in a similar pattern to that of the coastal provinces.

Anyone who has travelled in those provinces, particularly in the poorer Northern regions like Gansu, has seen first hand the serious erosion, desertification and water problems these areas face.

It shows the China story is not as simple as many of the cargo cultists believe.

Europe is not dead

Even in the darkest days there are opportunities for innovative organisations and regardless of what we think of McDonald’s products, they aren’t afraid to experiment and take risks.

McDonald’s move to “value meals” in Europe replicates what worked in the United States in both the 2001 and 2008 economic downturns. This appears to be working in Europe just as it did in North America.

We should also keep in mind that Europe is a diverse collection of cultures and economies so despair in Athens doesn’t necessarily mean pessimism in Arnhem.

The bottom of the US housing market

In his investor briefing, JP Morgan Chase CEO Jamie Dimon indicated the bank thought the US housing market is at the bottom subject to the American economy not going back into recession.

While it’s possible that the US housing market has bottomed, it’s highly unlikely we’re going to see the US housing market roar back to 2005 levels even if there is a US recovery so we shouldn’t be expecting hockey stick style growth in the US domestic sector driving the world economy as it did through the early 2000s.

Louis Vuitton confirms that the global market for ultra luxury goods is healthy

The entire luxury goods boom is a side effect of the massive amount of money pumped into to the world economy to deal with the 2008 economic crisis.

Like Macao casinos and Silicon Valley venture capital bubbles, this is transitory and at best a marginal influence on overall growth and employment.

It’s interesting how many presentations I’ve seen recently citing the luxury goods markets as evidence all is good in the world economy. This shows the desperation of those whose businesses rely on mindless consumerism.

China’s middle class will save us all

If you were searching for a corporate example of the economic cargo cult surrounding China, then Yum Foods would be one of the best.

The idea that China’s “consuming classes” will number half the nation’s population is some sort of economic Lake Wobegon, where everybody is above average.

Even if Yum’s prediction proves to be true, the nature of China’s economy and the nation’s stage of growth means consumption patterns of the country’s middle – or “consuming” – classes are going to more like those of Americans in 1912 rather than 2002 which undermines any business model based upon the late 20th Century’s profligate spending.

Businesses are once again investing in IT

Microsoft suprised us all last week with their profit results. Earnings from Windows, servers and office suites were all up on improved personal computer sales.

That businesses are investing in IT makes sense as one of the things that is cut early by organisations looking for savings is IT. That happened in 2009 in response to the economic crisis.

Even before the 2009 financial shock, businesses had been under-investing in IT partly because of Microsoft’s failure with the Vista operating system.

Now many businesses have decade old desktop computing systems and the pressures to upgrade are becoming intense.

The worry for Microsoft is Apple’s domination of mobile devices and the rise of cloud computing means that its not necessarily Microsoft will benefit from most of the IT investment.

Electricity prices will rise and low natural gas prices are unsustainable

Energy prices are a riddle within an enigma, however there’s certainly some distorting effects in these markets. CSX’s views on natural gas markets illustrate this.

We can expect more convulsions in energy prices as demand hinges on China, the US and European economic growth coupled with the threat of more conflict in Iran and Iraq.

Should China deliver the growth that the cargo cultists believe then energy prices will continue to climb, which may happen anyway.

The end of the telephone

Again Business Insider’s headline is a little misleading, as Verizon see the decline of the POTS – Plain Old Telephone System – networks that were designed around voice data and a switch to data based networks that don’t treat all traffic as information packets.

Data matters more than voice and we don’t want to be tied to a phone line.

That the telcos see mobile data as their main revenue drivers shouldn’t be a surprise as this has been the trend for two decades.

Consumers are borrowing again

This claim is a worry as it indicates some consumers – along with many lenders – are falling into the habits that nearly bought them unstuck in 2008.

A superficial view of the Amex announcement actually raises more questions than it answers and there’s a suspicion that the credit card provider is driving growth through special offers or reforming their excessive merchant charges.

Like JP Morgan, much of Amex’s optimism is based upon the US economy moving out of recession and American consumers resuming their credit binge. The latter may prove to be a bridge too far.

Winning in diverse European markets

Like McDonald’s, IBM sees plenty of opportunity in Europe and makes the point that, like Asia, the European markets are diverse.

IBM may turn out to be a more of a beneficiary of the increased IT spending that Microsoft is relying upon as Big Blue’s consulting services and cloud technologies are more attuned with where the enterprise computing market is going.

Also in an era of government austerity, IBM may be able to offer process savings to cash strapped agencies and authorities.

Asian consumers save the cigarette industry

There’s no doubt East Asian societies like a smoke so the idea that international tobacco brands see great opportunities in markets like South Korea, the Philippines and Indonesia shouldn’t be a surprise.

Interestingly China doesn’t feature in these projections as their market is largely closed to foreign manufacturers.

While the short term looks good for tobacco companies in East Asia, it’s difficult not to see that rising affluence starts to see public health and anti smoking campaigns similar to those in the West developing over the longer term.

Yahoo parties like it’s 1999

Web surfers want relevant content according to Yahoo’s management. Next month we’ll see these business giants claim social networks and cloud computing are the next big thing.

You can’t help but thing Yahoo’s management are very well qualified to tell us when horses have bolted and vanished over the horizon.

The problem for Yahoo is that customised content is expensive unless you’re going to “crowdsource” it with a social layer as Facebook does and Google is trying to do.

If Yahoo can pull something like this off – and there is no indication they can – then the business has a chance of surviving. Right now the smart money would be betting on the being broken up in the near future.

So where is the world economy going?

One unsurprising thing from these corporate projection is that some businesses are better prepared than others for the changes that are happening.

IBM and McDonald’s stand out as those prepared to innovate and change their business models to suit the prevailing situations.

Companies that believe the 1980s are just around the corner again seem to be the ones most vulnerable – its not surprising that its finance organisations like JP Morgan and Amex are betting the farm on continued massive growth in consumer debt.

The China Cargo Cultist are also vulnerable. If it turns out that Chinese growth – like US consumer spending in the 1980s – can’t go on forever then companies like Yum Foods are going to struggle with growth rates far lower than they expect.

One thing is clear, that there are a lot more nuances in the world’s economy that what you’d pick up from media headlines. The key for big and small entrepreneurs is figure out where these nuances present a business opportunity.

Black tea image courtesy of Zsuzsanna Kilian and SXC storck photos.

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April 22, 2012