Linked by alcibiades on Tue 30th May 2006 20:40 UTC
In the News Dell and its business model has been the focus of a lot of comment on Apple oriented forums in recent months. The Dell model is said to be unviable, and Dell's recent news is said to prove this. A limited endorsement of sorts for the so called "end to end model" in music has been published by Walt Mossberg in the WSJ. Recently a real sky-is-falling article with this theme has appeared here. This is a subject that matters. If the advocates of the so-called "end to end model" are right, it implies that the industry structure which allows us all to source hardware from wherever we want, and run a variety of OSs on it, is in danger.
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cr8dle2grave
Member since:
2005-07-11

No offense, but I'm having a very difficult time making much sense of your comment. I'll try and respond insofar as I can.

Commodity markets overtake non-commodity markets because they're a more sensible business model.

Yes and no. Commodity markets don't necessarily make more sense to producers. Producers generally fight commoditization over the short term. Consumers though are greatly advantaged by commodity markets, which represents the economic pressure that normally leads to commoditization.

Unfortunately, our elections prove that consumers don't make their choices based on those reasons. Comfort, price and inertia play a larger role in those decisions.

Are you speaking of rational choice models? Genreally speaking, I have a lot of objections to rational choice theory (although it is a useful assumption for constructing certain models).

Either you have to accept these facts and adjust your understanding of markets accordingly or make up some "people won't stand for this forever, you know!" response that dismisses it. Pick the more intellectually honest one of the two.

Nothing I've said ignores the fact of Apple's present dominant status. Instead I've presented the opinion that, absent a change in position over the licensing over FairPlay, they will eventually fail.

Music players aren't computers. They don't adhere to any platform and so far there hasn't been a reason for vendors to adopt one. They don't have to be built to a particular set of specs and run a familiar OS, so your comparison of consumers to CIOs is nonsensical.

Sorry, I can't make sense of what you're saying here.

If you truly believe building an OS to the widest distribution of hardware available is a market-building strength, look at Linux and Microsoft. One OS has to reverse engineer chipsets and the other's vendor has to sign NDAs with the manufacturers of those chipsets. It's a technical nightmare at times.

And yet that business model, whatever technical difficulties it may involve, represents well over 90% of the entire market. I'd say the market has chosen a winner.

Your other fallacy is extrapolating long term trends from short term trends.

Please point out to me one single instance over the last century of a commodity market which has shifted to a non-commodity market. (hint: there isn't one)

Reply Parent Score: 1

Cloudy Member since:
2006-02-15

Please point out to me one single instance over the last century of a commodity market which has shifted to a non-commodity market. (hint: there isn't one)

Never say never. The market for high-end steel string accoustical guitars is a counter example. As recently as 1990, the market was dominated by a small number of commodity manufacturers, most notably Martin and Gibson.

Due to many factors, there has been a rebirth of luthier-built guitars, and in 2005, more custom high-end guitars were sold than factory manufactured guitars in the same category.

Reply Parent Score: 1

cr8dle2grave Member since:
2005-07-11

Interesting. I stand corrected...but you know what they say about exceptions proving the rule.

Reply Parent Score: 1

snozzberry Member since:
2005-11-14

Nothing I've said ignores the fact of Apple's present dominant status. Instead I've presented the opinion that, absent a change in position over the licensing over FairPlay, they will eventually fail.

The successful companies in the computer business have been the ones whose business models evolve to at least some extent. That said, Apple's core business model has been stable for them, and their core business is selling hardware which doesn't require a nerd to help you with it. That's a two-part sentence and the first clause is the linchpin. Because the second clause holds true, they haven't had to ally themselves with enormous distributors to stay alive. Remove either part and the model disintegrates. While Apple has changed their PR repeatedly over the years, the general impression of what their product line stands for hasn't. Apple brings you the power to do X without having to learn Y.

Pundits foam at the mouth telling everyone that Apple should compete on the same terms as a software company with virtually no overhead whose primary markets are hardware manufacturers and corporate customers. Microsoft's revenues are at least two-thirds inside sales, and the poor adoption rate for upgraders in both the OS and office suite bears this estimate out.

Back to FairPlay. No company in its right mind is going to give up an advantage until either market pressure or litigation forces them to. What I fail to hear from anyone predicting iTMS' demise is the exact mechanics of it happening based on current trends, or anything other than the nebulous threat of Microsoft suddenly overtaking a market they've had years to penetrate without demonstrable success. Dell had every economic and distribution advantage on their hands and still blew it completely.

First to market is not to be underestimated.

"Music players aren't computers. They don't adhere to any platform and so far there hasn't been a reason for vendors to adopt one. They don't have to be built to a particular set of specs and run a familiar OS, so your comparison of consumers to CIOs is nonsensical."

Sorry, I can't make sense of what you're saying here.

Your earlier post made an analogy of CIOs buying PCs rather than Macs to music players, and I was reminding you that analogies are illustrative devices to explain an unfamiliar concept by showing a familiar one, but they are NOT to be used as a logical proof. Computers, mobile phones, and music players are markets covered by the same news outlets and manufactured by the same kinds of companies, but there's a repeated logical failure on the part of pundits who assume that the market forces in each area are substitutable. They aren't; Dell can't sell music players and Apple can't sell ROKRs.

"If you truly believe building an OS to the widest distribution of hardware available is a market-building strength, look at Linux and Microsoft. One OS has to reverse engineer chipsets and the other's vendor has to sign NDAs with the manufacturers of those chipsets. It's a technical nightmare at times."

And yet that business model, whatever technical difficulties it may involve, represents well over 90% of the entire market. I'd say the market has chosen a winner.

1. Anthropomorphizing an abstraction of complex phenomena to explain its actions is the business of religion, not economics. That's why I quit the major with a 4.0 average and half my credits finished. "The market" is not a person any more than Lady Luck is.

2. If you've learned anything in econ, it's that things always change and the losers are the ones who cannot see it coming or resist it. What works beautifully now may have less of a competitive edge five years in the future. The phrase "all other things remaining equal" depends on the word 'remaining.'

3. Mediocrity usually wins out because it's easiest to maintain and cheapest to produce. This isn't sour grapes, it's a definition of free market capitalism. Never laud a product based on how many units it sells.

Reply Parent Score: 1

cr8dle2grave Member since:
2005-07-11

Pundits foam at the mouth telling everyone that Apple should compete on the same terms as a software company with virtually no overhead whose primary markets are hardware manufacturers and corporate customers.

I've made no complaint about Apple's business model for selling computers. It's not a scalable model, but it's worked well enough keep Apple in business servicing a small but not insignificant niche.

What I fail to hear from anyone predicting iTMS' demise is the exact mechanics of it happening

As I've stated elsewhere, under the assumption that DRM protected media, whether distributed online or on a physical medium, will eventually grow to replace the current model of unprotected media distributed on CDs, were Apple to continue to dominate the market for DRM media to the same extent they currently do, it would result in an Apple monopoly occupying the role currently played by every record store and every manufacturer of CD players.

There are purely economic reasons why such an eventuality is highly unlikely, mostly having to do with market efficiencies, but the most immediate reason is that the major content cartels (RIAA, MPAA, etc...) will never allow it to happen. And it is largely going to be the content cartels, not Apple, who will exercise the deciding vote in determining how the distribution model for DRM protected media eventually works out.

Would you rather negotiate licensing and distribution agreeements with a monopoly interest or an array independent vendors and various industry consortia?

As of right now, Apple and MS are the only games in town for DRM. While Apple's licensing of FairPlay would result in an Apple monopoly position clearly contrary to interests of the content cartels, MS's offering allows for what is essentially a continuation of the status quo in the existing market for media distribution; multiple retail channels and multiple hardware manufacturers competing with one another around standardized and interoperable media.

he nebulous threat of Microsoft suddenly overtaking a market they've had years to penetrate without demonstrable success

The installed base of devices more-or-less compatible with MS's DRM is already larger than the install base of devices which work with Apple's scheme (eg., cell phones, DVD players, game consoles, computers, MP3 players, etc...). What's missing currently is a corresponding retail channel, although you might say that Apple is currently working the kinks out of the basic business model and doing the heavy lifting in generating initial consumer interest, which others will in good position to capitalize upon a little further along in the game.

First to market is not to be underestimated.

Agreed. I don't want MS to win this war. Actually, I'd really prefer almost anyone else win this war. Apple could, if they were license FairPlay under RAND terms to other retailers and hardware manufacturers, give MS a serious run for its money. But by sticking to an end-to-end business model, Apple is ensuring that it will never grow beyond a niche player and, absent the arrival of another serious contender, is all but handing MS the win.

analogies are illustrative devices to explain an unfamiliar concept by showing a familiar one, but they are NOT to be used as a logical proof

Absolutely true. Economics doesn't traffic in logical certainty or analytic truth; it arbitrates among competing claims according to standards of statistical probability predicated upon models derived from material inferences, which are themselves not fully interpretable in a formal sense (the problem of the "hidden variable" being a pretty much intractable one within the domain of economic inquiry).

We must deal with limitations of the tools we have at hand.

there's a repeated logical failure on the part of pundits who assume that the market forces in each area are substitutable

That's not an assumption which I've made. At least not knowingly. My prediction of Apple's inevitable marginalization in the media distribution market isn't based upon a specious analogy with the computer market, but is instead premised primarily upon the fact that they are offering a distribution channel which, when compared to the status quo, disadvantages consumers, cuts many powerful and heavily vested interests out of the loop, and which would result in severly diminishing the relative power of the single most important and powerful players (eg., the content cartels).

Anthropomorphizing an abstraction of complex phenomena to explain its actions is the business of religion, not economics.

My anthropormorphism ("the market has decided") was simply a turn of phrase intended to serve as shorthand for an aggregate statistical phenomenon arising from a large number of individual choices distributed across many autonomous agents.

Mediocrity usually wins out because it's easiest to maintain and cheapest to produce. This isn't sour grapes, it's a definition of free market capitalism. Never laud a product based on how many units it sells.

Au contraire. Mediocrity coupled with the economies of scale attainable in commodity markets uniformly represent a greater collective good, measured both in terms of wealth and utility, than technical excellence which remains the exclusive purview of a select few. In other words, interoperability beats innovation in all but a few corner cases.

Reply Parent Score: 1