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How To Buy A Car

Thursday, May 10th, 2007

Prius

Last October Michael Arrington wrote about his experience buying a car with minimal exposure to car dealers. I learned a lot from that - not from the post itself, but from the comments, where many people pointed out that he could have done much better. Having just bought a car myself for the first time in my life, I humbly present my five-step process for painless auto purchase.

1. Decide exactly what you want.

All of the information you need is online. Find friends or colleagues who have bought the models that you are interested in, ask them whether they are satisfied, and see if they will let you test drive their car. (Thanks Ted and Rhiana!) Consider renting the models you like for a day or two. As a last resort, go to a dealer for a test drive. Do include the dealer when you are ready to price your car, but this is the extent of your moral obligation. Decide make, model, colors, and options, but do not get fixated on one particular combination. If there’s only one car in the world that you want, you can’t bargain for it.

2. Pay $15 for a new car buying kit from Consumer Reports.

You could spend a few weeks researching dealer incentives, holdbacks, and invoice prices for the models that you care about. Or you can trust Consumer Reports to figure it all out.

3. Wait until the last day of the month.

Seriously. Dealers have quotas to meet. Selling one more car to you - even for zero profit - may trigger bonuses for everyone on the lot. If you’re fixated on one combination of model, package, and color, they may not have it that day. But you are not.

4. Call four dealers and get the best price.

Bid the first dealer the Consumer Reports ‘bottom line price’ plus 2%. Take his best offer to the second dealer. Repeat.

In my case, the first dealer accepted my bid. The second beat it by $100. The third sounded genuinely surprised, and said he could not come close. The fourth matched the second and was nearer to our home, so we bought from him. I asked him to calculate the price including tax and registration over the phone so that there could be no ambiguity.

5. Buy the car.

Sign papers, listen patiently while they explain all optional extras, decline all optional extras, drive car off lot.

I can’t advise you on how to negotiate a lease, because we were fortunate enough to be able to pay cash. But the same principle applies: get at least two quotes. Ask your bank or credit union to pre-approve a loan for the amount that you expect the car to cost. If the dealer can offer better terms, fine.

What has this to do with starting a company?

The same basic rules apply to all negotiations, with new employees, investors, vendors, partners, and customers. Know exactly what you want and what you are prepared to compromise on. Always have an alternative and know what the terms are. Try to do deals when the other party is under pressure to close and not when you are. Never agree to anything that pops up at signing. And if there is no ongoing personal relationship, do not let a salesperson trick you into feeling obliged to do business with him or her.

Posted in Economics | Comments

Five Thousand Dollars per Megabyte

Sunday, January 14th, 2007

How Apple intends to keep you from installing software on the iPhone?
(Photo by protohiro)

Watch Steve’s demo of text messaging on the iPhone from his keynote address. The Mercury News has posted their bootleg version. It was shot with a camcorder over the heads of the Apple fanboys like a pirate DVD, but at least they indexed it, so you can jump straight to the bit about texting.

Forgive the crowd their cries of pleasure and awe. It’s a packed house, it’s the most anticipated product launch ever, he’s had forty minutes to soften them up by now, and this Reality Distortion Field goes to eleven.

But come on, that’s just iChat, Apple’s instant messaging client, running over SMS. What’s the point of that?

The point is price discrimination.

Steve typed "Sounds great. See you there." 28 characters, 28 bytes. Call it 30. What does it cost to transmit 30 bytes?

  • iChat on my Macbook: zero.
  • iChat running on an iPhone using WiFi: zero.
  • iChat running on an iPhone using Cingular’s GPRS/EDGE data network: 6 hundredths of a penny.
  • Steve’s ‘cool new text messaging app’ on an iPhone: 15c. 

A nickel and a dime.

15c for 30 bytes = $0.15 X 1,000,000 / 30 = $5,000 per megabyte.

"Yes, but it isn’t really $5,000," you say. It is if you are Cingular, and you handle a few billion messages like this each quarter. (1)

Short of launching your own private satellite network, on a per byte basis SMS is the world’s most expensive way to communicate, and the most profitable product ever introduced by wireless operators.

On Tuesday, I found this part of the demo irritating, but assumed that I would be able to install iChat myself. Or better still Adium, which supports AIM, MSN, ICQ, and Jabber. (2)

But I will not be able to do that because … it will not be possible to install applications on the iPhone without the approval of Cingular and Apple.

It could get worse. Cingular has ‘not yet determined’ service pricing.

Right now, Cingular charges $19.99 per month for unlimited data; unless you have a Treo or Blackberry or Blackjack, in which case the price is $39.99 per month. Why?

Just because.

Smart customers sign up for the cheaper plan, buy an unlocked smartphone, and install their own email app, saving $200-$300 over the life of the contract (depending on the cost of the smartphone).

What if Cingular introduces an ‘iPhone date plan’ and charges $59.99 per month? I will not be able to do anything about it, because … it will not be possible to install
applications on the iPhone without the approval of Cingular and Apple.

I will not be able to make free phone calls over WiFi on my home or
office network because …

I will not be able to install Skype because …

I will be able to ‘touch my music’ - thanks Steve - but I will not be
able to use my own music to create free ringtones because …

It’s not just about Jobs being a control freak (although that may explain why we have to use Safari, a browser that some major web sites do not support, and why we won’t even be able to buy Java games). It’s not about the ludicrous claim that a third-party app could take down the network. It’s not about preventing other manufacturers from copying the iPhone. It’s about the money.

Fair enough. None of this changes the fact that the iPhone is a remarkable new product. Cingular and Apple exist to make money, and if they can persuade consumers to pay this kind of premium, congratulations.

But as a consumer, I have a choice. And for now the ability to install any application that I want leaves phones powered by Windows Mobile, Symbian, Linux, RIM, and Palm OS with some major advantages over the iPhone.

***

1. Even if Steve bought the biggest bundle of text messages that Cingular offered and used exactly that number every month, this message would still have cost him $250 per megabyte. But he’d have to send 100 messages a day to keep his average that low. On the other hand if he signed up for one of Cingular’s pseudo-unlimited data plans, iChat via GPRS/EDGE would cost him essentially zero.

2. Yes, I know that most people don’t have IM on their phones, so I still have to use SMS to send them a message. And where carriers do offer IM, it generally runs over SMS. But this is circular reasoning.  Other carriers refuse to offer IM-over-data out of the box for the same reason Cingular and Apple do: so that you and I have to pay a premium for SMS.

Posted in Economics, Mobile | Comments

Manifest Destiny Part IV

Tuesday, December 19th, 2006

Via Tom Evslin

This is the last in a series of posts analyzing the forces that might break the hold that carriers have on the mobile market. See also parts I, II, and III.

(10) Regulation

I saved regulation to last, although not to build suspense. Like most entrepreneurs, I recoil from the subject. But wireless spectrum is a commons. There may be better ways of managing the commons than the frequency allocation chart above, but even in a world of open spectrum and software-defined radio we’d still need a licensing regime for new devices.

I’m interested in what kind of regulatory changes we might see in the next five years and their impact on my business.

Network Neutrality

I missed most of the kerfuffle over network neutrality while traveling this year, but now that Congress is in the hands of Democrats legislation seems inevitable. Partisan lines have been drawn.

The central issue is how to prevent a wireline carrier from deliberately degrading service to a content provider that refuses to pay a fee: is self-regulation enough or do we need an umpire? No one is even suggesting that a cable company or DSL provider should have the right to block access to a content provider completely. But wireless carriers do this all the time. Many mobile content providers in the US cannot get their content onto any network. The more people use the mobile web, the more this becomes a free-speech issue - a smart mob can’t use other media to communicate. How long will regulators let this go, not just in the US but in Europe? Or will mobile operators offer network neutrality themselves in exchange for eliminating their liability for content that goes over the network? 

Unlocked Phones

Carriers control the market because they control the phone. One way they do so is by ‘locking’ handsets to their network; they sell you a phone at a discount and one of the many strings attached is that you can’t take that phone to another provider.

But what if there is no contract? What if the contract is up? Why can’t I buy a CDMA phone directly from LG and demand that Sprint activate it on their network, so long as I pay for service? If I buy a phone from Sprint and switch to Verizon when my contract is up, I can take my phone number with me. Why can’t I take my phone?

A few weeks ago the Librarian of Congress (regulators are everywhere) granted an exemption under the DMCA covering software for unlocking cellphones. So far only Tracfone is seriously affected, because they subsidize handsets without forcing customers to sign a two-year contract. But regulators could go much further. Nothing would do more to increase competition in the US wireless market than legislation requiring carriers to accept other handsets on their network. Right now GSM providers can’t stop you; Verizon will allow it but makes it so hard that no one bothers; Sprint just says no. There is a clear precedent for change: the Carterfone decision.

Full Number Portability

Give someone control of a namespace and they will charge a rent for it. What would NetworkSolutions charge for a domain name if you couldn’t switch to a different registrar? IM interoperability wouldn’t be an issue if you could take your AOL screenname to Yahoo. But Wireless Number Portability is old news, right?

Not in Japan, where it was just introduced. Not in Canada, where they are still waiting. And we are all still waiting for Full Number Portability, between fixed and mobile networks. FNP makes it harder for carriers to charge a toll for terminating a call on a mobile network, a big issue in Europe if not in the US, because the customer can’t know in advance whether the number they are calling is mobile or not.

Restrictions on Subsidies

One way that carriers keep control of the handset is to lock it, but the way that they persuade us to give them that control is by subsidizing our purchase in the first place. Korean regulators have banned and encouraged subsidies at different times, to favor the adoption of certain technologies. Finland has always banned subsidies, to avoid favoring any. Neither country has a shortage of mobile phones as a result.

Banning subsidies makes operator pricing more transparent, and forces them to compete on price and service alone. If they use the savings to cut the price of voice and data, consumers are better off in the long run. If they shift the dollars into marketing instead, we just get more TV ads and expensive handsets. I don’t expect to see a ban in the US, but regulators in other countries may try it.

New Entrants

Regulators play a large role in deciding how many operators there will be in each market, by granting new licenses and approving or vetoing mergers. In the US there is not much on the horizon. Clearwire is rolling out a nationwide Wimax network in the US and European regulators will start auctioning Wimax licenses soon; we have yet to see whether Wimax can match the performance of cellular networks for mobile voice, but dual-mode GSM/Wimax handsets should be more reliable than the WiFi versions, and so cut into the revenue of the incumbent carriers.

Open Spectrum

In the next five years? Not a chance. Be grateful that the FM gadget for your iPod is finally legal in the UK. Hope that somebody can make Bluetooth easier to use. And be grateful for WiFi. Until everybody on your block gets it.

Posted in Economics, Mobile, Web/Tech, Weblogs | Comments

The QWERTY Myth

Wednesday, December 13th, 2006

Uploaded by Whatknot

Cameron Marlow writes about how many taps it takes to enter a URL into a phone, and he’s written a tool to tell us. (Predictive text systems like T9 don’t help for URLs.)

Meanwhile, depending on whether you believe Gartner or the GSM Association, either 2005 or 2006 was the first year in which the number of SMS or text messages sent worldwide passed one trillion. Since fewer than 1% of the phones in the world have a Qwerty keyboard and spam is not yet a major problem (because of the economics), almost all of those one trillion messages were tapped out on a 10-digit keypad.

Back in the days of the (first?) bubble, people used to talk a lot about network effects and the overwhelming competitive advantages that they created. The more buyers visit eBay, the more sellers show up; the more goods there are for sale, the more buyers visit and so on until it becomes almost impossible for a new entrant to displace eBay. This was one argument used to support claims of "first-mover advantage" and strategies like "grow big, grow fast, or go home."

Network effects are real and powerful - eBay itself was defeated in the Japanese market because it was too late to enter, and more recently MySpace and Skype and Google’s AdSense (although not Google search itself) have demonstrated the power of networks.

However, during the bubble people made a much stronger claim for network effects: that a product or service could get ‘locked in,’ such that customers would still choose it over a new product that was clearly superior. Their favorite example was the Qwerty keyboard layout, which was supposed to be unassailable despite ‘better’ alternatives like the Dvorak layout.

Cute story, but it just wasn’t true. No one has ever demonstrated that the Dvorak or any other layout offers a meaningful advantage over Qwerty.

The rise of SMS should kill this myth. One trillion messages were composed last year using a keyboard that is clearly worse than Qwerty by any standard measure - speed, ergonomics, error rate - because a regular phone is smaller and cheaper than a Qwerty phone.

‘Smaller and cheaper’ are so important for phones that even RIM has had to degrade the keyboard on Blackberry phones in order to broaden their appeal.

Network effects are real, and confer real competitive advantages, but there is no such thing as lock-in. There is no product or service that a customer won’t drop if something better comes along. It’s just not always obvious what ‘better’ means. That’s part of the Innovator’s Dilemma.

Thanks to Jake for sending me Cameron’s post.

Update: A Citigroup analyst believes that 60%-70% of RIM’s Pearl phones are being bought by current Blackberry subscribers. Not only does this mean that RIM is having trouble breaking out of its niche, it also means that existing Blackberry owners are willing to give up a full Qwerty keyboard.

Posted in Economics, Mobile, Strategy | Comments

DRM is Dead

Thursday, December 7th, 2006

Nicholas Carr writes about EMI’s decision to release the new Norah Jones single as an mp3, as reported in the WSJ.

I see DRM as a futile attempt by a threatened industry to defend their existing business model, which for a hundred years has been predicated on manufacturing and selling some form of physical media (piano rolls, wax cylinders, LPs, or CDs) and earning a ‘breakage’ fee by selling people albums when most of the time they want singles.

What’s interesting about this story - in the light of my own posts about the wireless business - is the immediate cause of EMI’s move. It’s not that some Norwegian kid has cracked another DRM code, it’s that Apple’s DRM strategy - for now - has proved too successful!

Apple has a near-monopoly over sales of digital music. More importantly, they have a lock on the market for digital music players. Music sold through any other DRM channel won’t play on an iPod, so why bother? EMI’s best hope of selling digital music outside Apple is to sell mp3s, which will play anywhere, including iPods.

And mobile operators? Mobile phones will compete with iPods as portable music players, but most people will load up the songs that they already own from their PC, and the carrier will make no money apart from the initial handset sale. ("The iPod makes money. The iTunes Music Store doesn’t.") I can understand people downloading music over the air to their phone on impulse, and paying a premium to do so, but that will be a small business for the record labels and a negligible one for carriers. So why do they even bother? And why don’t all the carriers collaborate on a DRM strategy and build a single channel to compete with Apple? The answer to both questions is that content is the cupholder.

By the way, ‘Chris_B’ in a comment to Carr’s post says that unauthorized duplication of CDs is a much bigger problem than online file-trading. He is probably right for now, but I think that while the music business will survive the transition to digital content in some form, the CD duplicators will not. The only people who buy pirated CDs today are the ones who don’t have Internet access yet.

Traveling all over South-East Asia this year, I rarely saw anyone selling music - a few stalls in the Khao San Road in Bangkok, some sun-faded CDs in a store in Hoi An, Vietnam. Why? Because all the likely buyers were Western tourists and backpackers. And all of us had mp3 players.

On the other hand I saw two Internet Cafes - one in Cambodia and one in Laos - that were charging for the right to download music.

Posted in Economics, Mobile, Music | Comments

Manifest Destiny Part III

Monday, December 4th, 2006

This is the third in a series of posts analyzing what forces might break the hold that carriers have on the mobile market. Part I is here and Part II is here.

(6) Open Standards

Well, obviously. Wide adoption of open standards will reduce the carriers’ ability to control the handset and what you can do with it. The question is why will carriers adopt technologies that threaten their business models? Because they need to deploy those technologies themselves in order to reduce costs and launch new services. This means IP end-to-end, open operating systems, and a growing reliance on open source software. Vodafone has announced that all of their future phones will be based on Windows Mobile, Symbian, and Linux. It will be very difficult for Vodafone to prevent customers doing whatever they want with those phones; consider Cingular’s efforts to cripple dial-up networking on the Treo 650.

(7) Demand from Enterprise Customers

If phones are going to be widely used for Internet access, enterprise customers need a lot more control over employees’ phones than they have today. Remote access; provisioning of software from behind the firewall; the ability to wipe the memory of a lost phone; locating staff; companies like Ford and Citibank do not want to rely on wireless operators for these services any more than they want to let Google host their web applications. Above all they want ‘fixed mobile convergence’, the ability to treat a mobile phone as just another extension on their PBX, another node on their wireless LAN. Carriers can’t deliver FMC without giving up control of the phone.

(8) The Southwest / Ryanair Strategy

Sometimes it seems like every major operator in the world has the same strategy: become the number one branded provider of wireless voice and data services in their market. MVNOs may focus on one segment (people with poor credit or heavy data users or immigrants phoning family members at home), smaller players like Alltel and Leap in the US or 3 in the UK may compete on price because they have no choice, but the major operators will all tell you that their target market is "men and women aged 18-34." Sooner or later one of the majors (perhaps T-Mobile in the US or Softbank in Japan) will give up and adopt a different strategy entirely: become the lowest-cost provider. And the best way to do that for data services is to offer customers unrestricted access to the Internet.

(9) Network Parity

Europeans can stop reading at this point. For them, the idea that one wireless network could offer better coverage than another is a quaint memory by now. Why in 2006 can people not get a wireless signal in many parts of the US? It is not simply because US carriers use a variety of technologies while Europeans standardized on GSM; the three biggest Japanese carriers use three different technologies. It is just that the US is one of the largest and least densely-populated countries on Earth. And local communities have a habit of objecting to new cell towers even while they complain about poor service. Nevertheless, one day there will be very little to separate Verizon, Sprint, Cingular, and T-Mobile in terms of network coverage, and at that point they will have to compete on price, handsets, and data services, just like carriers in Europe.

One more post to come.

 

Posted in Economics, Mobile | Comments

Adverse Selection

Friday, December 1st, 2006

In a previous post I mentioned how the IPO market has almost dried up in the US, mainly due to Sarbanes-Oxley.

The "Interim Report of the Committee on Capital Markets Regulations" recommends changes to Sarbox among several other reforms, but according to the New York Times nobody is happy. Elliott Spitzer calls it "wayward and wrong-headed", the National Venture Capital Association thinks that the recommendations don’t go far enough.

Meanwhile the (original) Times reports on the peformance of US companies that have chosen to list on London’s AIM (Alternative Investment Market), where the regulatory burden is much lower.

This is what they call adverse selection.

Posted in Economics, Startups | Comments

Manifest Destiny Part II

Thursday, November 30th, 2006

This is the second in a series of posts analyzing what forces might break the hold that carriers have on the mobile market. Part I is here.

(3) Subsidies Lose Their Power

Almost 90% of people in the US buy their mobile phones from their carriers; now almost 50% of people in the UK do the same. This allows the carriers to control what people can do with their phones.

So why don’t more people buy mobile phones and wireless service separately, the way they buy PCs and Internet service? Because carriers subsidize the cost of handsets, cutting $100 to $300 off the retail price of a new phone, provided that you sign a two-year contract.

(Why don’t regular ISPs do this? I know of one that tried during the dot-com boom: Gobi. But the math doesn’t work. A broadband ISP would have to keep you as a customer for four years just to earn back the cost of an entry-level Windows PC. A wireless carrier can earn back the cost of a free RAZR in four months.)

There are three ways that subsidies could go away. The first is regulatory change, but I’ll leave regulations until a later post.

The second is that a carrier could decide to abandon subsidies and use the savings to slash the cost of service, betting on consumers switching to their network and bringing their old phone with them. A new European MVNO, Blyk, is taking this idea to the extreme: no phone, but completely free wireless service - in exchange for receiving ads.

The third possibility is that phones will become cheap enough to make carrier subsidies irrelevant.

We almost got to that point in 2000. Every new phone seemed to cost less than $50, and pumping up the price took upholstery or goldplating. Then came color screens and games and internet access and cameras and music players, and average prices began to climb again.

I believe that some time in the next five years we will reach another plateau, similar to where the phone market was five years ago and where the PC market is today: smaller, lighter, prettier, cheaper, please, but no new features. The price of new mobile phones will head back towards zero without a subsidy, and carriers will lose their power.

(4) Operator Overload

With great power comes great responsibility. By insisting on controlling all the services that pass through your phone, operators take on huge costs and uncertain legal liability.

Imagine if Dell or AOL were to insist on approving every web site in the world before it went live: content, usability, features, legal compliance, everything. This is the one of the implications of a ‘walled garden,’ and some wireless carriers are still trying to do this. It is not possible. You can let everything through and caveat emptor; you can let almost nothing through and make no money from data; or you can burn millions of dollars searching for a technical solution, a third way that doesn’t exist.

Recognizing this, some operators have begun to allow consumers unrestricted access to the Internet. They still put their own sites and ‘approved’ partners out front, but for how much longer? 74% of Americans already go straight to the mobile site of their favorite portal.

What do I mean by unknown liability? Assume that you are Verizon: Are you responsible for faulty merchandise sold by a mobile commerce site? If you have to approve every site on your deck, how do you offer adult content? If someone downloads an mp3 over your network, are you liable for copyright infringement? The solution is the same for wireless operators as it was for wireline ISPs - become a bit-pipe and disclaim all responsibility for what passes over your network.

(5) Flat-rate Pricing

A lot of people seem to think that operators are bound to move to flat-rate pricing for data, and that this will lead to unrestricted Internet access. Yes to the first part, no to the second.

Over time, all communication technologies seem to move towards simplified pricing, such as flat-rate pricing for mobile data. Note that ’simpler’ doesn’t necessarily mean ‘lower.’ Consumers often pay a premium for simplicity.

But switching to a flat rate for data doesn’t make your carrier indifferent to how you use the network. If you pay by the kilobyte, they want to maximize the amount of bandwidth that you use: streaming video, music downloads, multiplayer games. If you pay a flat rate, they want to minimize the amount that you use. Only when it becomes cheap to deliver all kinds of content do they cease to care.

UK operator "3" announced flat-rate pricing for data services a few weeks ago and were greeted as messiahs. I am reserving judgment until I hear what the flat-rate price is, what the usage restrictions are, and why a company that is promising unfettered access to the Internet still needs a partnership with Yahoo. (And since 3 has only 5 million subs, I still won’t care.)

Posted in Economics, Mobile | Comments

The Future Looks Small

Tuesday, November 21st, 2006

Apparently there is a crisis in the world of venture capital. Those who write about it see two distinct problems, one on the way in and one on the way out. Technology has so lowered the cost of starting a business that traditional VCs are no longer needed; on the way out the number of IPOs and big-ticket acquisitions has obviously dwindled, MySpace and YouTube and maybe Facebook being the exceptions. Some entrepreneurs seem quite smug about VC troubles. I think that the ‘crisis’ is largely confined to consumer Internet services, and that it is more of a crisis for entrepreneurs than it is for VCs.

True, part of the problem on the IPO side has nothing to do with technology or VCs. It’s a piece of over-zealous legislation called Sarbanes-Oxley that has raised the cost of going public. Personally I think the way to prevent corporate crimes is not to make companies swear to their accountants that they are really really not lying about their EBITDA, but to make them disclose as much information as possible to investors. SarbOx didn’t reveal that dozens of corporate executives had back-dated options; it was Erik Lie, a finance professor from the University of Iowa who crunched numbers that were publicly available.

But mostly the problem is that while the technology and the concepts behind Web 2.0 are exciting and important, the companies that embody them just aren’t very valuable. Pioneering sites like Flickr and delicious sold for less than $50 million each, and even YouTube and MySpace didn’t think that they could survive as independent companies. In total it’s just not enough money to get venture investors excited.

No problem, we are told, since cheap Intel boxes and Amazon S3 and Ruby on Rails and the rest of it mean that you can launch a company with $6,000 and a bowl of ramen.

Wait a minute. All over this country, across every sector, small business owners use an average of $10,000 to start their businesses. Even for this year’s Inc 500, a list of the 500 fastest-growing companies in America over the last four years, the median amount of start-up capital was only $75,000.

The key word is small. Like their peers in construction and retail and transportation, most of the consumer-facing Web 2.0 businesses are small today and will stay small. What is different is that most of the founders of the Web 2.0 companies believe that they are destined to be big.

VCs are adjusting to the fact that just like railroads, automobiles, fast food, bowling alleys, wall-to-wall carpet, fabless semiconductors, and personal computers in days gone by, the consumer Internet market has begun to mature and no longer presents many interesting opportunities for venture returns. (Yes, there will be exceptions; but every so often there is still an opportunity for a venture-backed retail franchise.)

A lot of the entrepreneurs that I meet have not made that adjustment. That’s the crisis.

Posted in Economics, Starting Up, Web/Tech | Comments

Oligopsony

Sunday, September 24th, 2006

When I read that Infospace’s stock price had dropped 22% on reports that it has lost its largest customer, Cingular, and that analysts were calling for the company to shut down and return cash to shareholders, one word came to mind: oligopsony. (That is how my mind works.)

A monopoly describes a marketplace with many buyers but only one seller. The market for PC operating systems is effectively a monopoly, dominated by Microsoft. A monopsony is a market with only one buyer. This is rarer, so the word is unfamiliar. The market for tanks and helicopter gunships in the US is a monopsony.

An oligopoly is a market with many buyers but just a handful of sellers, and an oligopsony is a market with many sellers but just a few buyers. So few that they "can play off one supplier against another, thus lowering their
costs. They can also dictate exact specifications to suppliers, for
delivery schedules, quality, and … pass off much of the risks of overproduction,
natural losses, and variations in cyclical demand to the suppliers." (Wikipedia.)

The market for mobile content and applications in the US is an oligopsony. Four buyers dominate the market - Cingular, Verizon, Sprint (including Nextel), and T-Mobile - but there are hundreds of sellers like Infospace. Consequently the buyers have extraordinary power: power to dictate contract terms, to rein in suppliers that are too ambitious, and even to summon competitors into existence for suppliers who have none. Even if you get to be big and successful, when you only have four possible customers, losing one means losing at least 20% of your revenue overnight.

If you were checking Infospace’s stock this week, you might have guessed that the ticker was INFO (it is actually INSP). INFO is the ticker of Metro One Telecommunications, which was until a few years ago one of the biggest providers of directory services to the US carriers - the original mobile content business. When you called 411 from your wireless phone, Metro One answered. Then the company lost its contract with Sprint, and began a long slow decline from around $150 to $2.50.

How do you make a billion dollars in this kind of market? You can grow your business as fast as possible into one of a handful of powerful sellers - an oligopoly to counter an oligopsony. This has been the strategy of almost every mobile content company to date, and so far none has succeeded. Or you can market your content directly to consumers. Not surprisingly, many new startups in the mobile content market are taking this approach. It will be interesting to see if any of them are more successful than Infospace.

Posted in Economics, Mobile, Starting Up | Comments

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