Hi, Joel. I had a little extra time on my hands so I thought I'd respond to a really silly post of yours from yesterday, which was, in turn, a response to one of my usual cogent, incisive ones.
>>>One, KE has stated that Iomega will not sell drives at a loss. He has repeatedly stressed that the plan is to reduce costs and then reduce prices.<
So, now that we have had a faster than anticipated ramp-up at Penang, shouldn't we be seeing price cuts galore. Add on the fact that that US sales in the last quarter were more or less flat, and I would think we would be seeing price cuts galore. Mind you, I am not saying that price cuts are bearish or bullish, I'm am just trying to follow your
reasoning.<<
No, Joel, just because Penang is now online that doesn't mean that we should instantly see "price cuts galore." What we should expect to see is an orderly decrease in Zip prices, with each decrease coming after per unit costs have been reduced to the point where the drives can profitably be sold at he new price. That's fairly simple logic to follow isn't it? And it sounds like a pretty good business plan, too.
Of course, in between actual price cuts, there may be interim steps like rebates, which have the benefit of producing a perceived cut, without actually reducing per-unit revenues by the exact amount of the cut.
As far as price cuts being bullish or bearish, it would depend upon the reason for the cuts. Cuts made according to plan, and with the goal of reaching price points which research has shown will generate sharply increased sales, would seem to me to be bullish.
Again, we now return to a snip from your post, which first quotes my earlier one.
>>>He has also said that drives sold to OEMs will generate much less income per unit FOR THE DRIVES, but are expected to help generate the higher margin disk sales, which is where the real profit is anyway.<
Did someone post that the effective price of the disks was being cut too? How does this reflect on KE's game plan and the idea of disks as razor blades?<<<<
Well, someone may have posted something to that effect, but I have seen no announcements about it. Pricing Zip disks within the past week, I have found that they're still about where they were. However, it certainly seems to me that lower media prices would also stimulate increased sales, and I would not see any problem with price cuts on disks. There is quite a bit of profit in those disks.
Just another small point. It's not helpful, from the standpoint of logical analysis, to get too hung up on the specifics of analogies. The "razor blade" thing can be carried too far. Zip disks are still expensive enough not to be considered disposable. That doesn't mean that there's no business sense in the plan to sell drives at minimal profit, and then make money on the disks.
Frankly, Joel, I don't see why you have a problem following my logic. It should be a snap for a guy like you, with a PhD and all.
- Allen |
