Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Politics : Ask Michael Burke -- Ignore unavailable to you. Want to Upgrade?

To: Knighty Tin who wrote (28800)	6/4/1998 3:23:00 PM
From: geewiz	Read Replies (1) \| Respond to of 132070

Hi Mike, I been paying more attention to the commoditization of products and services in the many long years of reading your thread; we've seen it come in every shape and form. It's really the first lesson in a micro course something like profit moves to the marginal cost... been a few semesters... But the evidence is more clear in a fixed product like DRAM chips, and less evident in long distance services. Several years ago when phone cards came out I could not understand why people were paying $19.99 for a thirty minute card; last summer I noticed the thirty minute card was $9.99; this spring my mother-in-law sent out cards that cost $5.99 for the same thirty minutes. Sure is a great deal, even cheaper than my long distance service, yet I feel guilty about calling someone elce with it and just can't find the time to call her....... I see lots of the same commoditization in wireless with Sprint's new service. I can get a wireless account with 600 minutes a month for $89 and that includes the triple A towing and lost key protection and a lot of other totally worthless stuff.... Now I see ATT is fighting back with a monthly rate anywhere in the country. I think ATI may have a weak couple of quarters ahead of it. Their infrastructure is almost complete; it's gonna' look like a biotec that turns the corner on a product and the actual profit is still missing. Avery interesting read in the last December issue of the MIT Technology rag on this topic; Commoditization is an "understudied" area, notes William Lukas, executive director of MIT's International Center for Research on the Management of Technology (ICRMOT), which funds Weil's research. So far, Weil has adapted the simulation to model the airline, telecommunications, and oil and chemical industries; he hopes next to turn his attention to mobile telecommunications service providers in Hong Kong, an "adolescent" industry just beginning to grapple with the dynamics of a maturing market. Weil's project began in 1994 when a group of telecommunications companies affiliated with ICRMOT approved his proposal to create a model of the U.S. airline industry to examine the impact of deregulation. "I felt that there would be strong parallels between what happened in the airline industry and what is happening in the telecommunications industry," Weil explains. "Remember, in the early years of deregulation, airlines were viewed as an exciting growth industry with lots of capital and lots of startups. Fifteen years later, it is widely viewed as a sick industry. We wanted to understand what happened -- and to what extent these dynamics might be universal across industries." The simulation he developed is based on systems dynamics, a computer-modeling method pioneered at MIT in the 1960s by Jay Forrester. The simulation explores feedback relationships among economic and industry variables such as the rate of overall economic expansion, growth in demand, intensity of competition, production capacity, and the pace of technological change. Weil then used the simulation to test alternative business strategies that the airlines might have pursued. "The airlines could have behaved in a much more intelligent way," he says. The established airlines failed to predict that the new carriers entering the deregulated market would devastate the existing fare structure. By anticipating those price changes and cutting costs sooner, he argues, airlines might have avoided colossal losses. The airlines also misread the effects of deregulation on market growth. Although slashing fares released a certain amount of pent-up demand, the spurt in market growth wasn't sustainable. As a result of their mistaken reading of the market, the airlines bought more planes than they needed-and then had to cut prices again to fill them. The airline simulation "helped us see how telecommunications companies in other parts of the world-France, Germany, Latin America, and parts of Asia-could contend with similar dilemmas as they follow the United States into deregulation," Weil says. With the cooperation of ICRMOT member companies France T‚l‚com, Electricit‚ de France, the British Cable and Wireless Group, and its affiliate Hong Kong Telecom, he adapted the simulation to create a model of that industry. His research attracted the interest of two other ICRMOT sponsors, British Petroleum and the chemical firm ICI, which asked Weil to create a model of the petroleum industry last year. Since then, Weil has used his simulation to identify strategy options for companies facing maturing markets-and his models have generated some counterintuitive solutions. Traditionally, for example, established companies have tried to limit total capacity in an industry by forcing new entrants to duplicate established companies' investments. This strategy is based partly on the belief that, once competitors have entered the field, the need to earn a return on their investment will force them to keep prices high. "History has shown that that's absolutely incorrect logic," Weil asserts. "Once the capacity is in place, it's a sunk cost and people will compete very aggressively to fill it up." According to his models, established companies may even find it to their advantage to offer capacity to new entrants. For instance, one British telecommunications company recently decided to lease excess network capacity to newcomers to the market rather than force them to build their own networks; the leases have become a substantial new revenue source. Weil is quick to rattle off other ways companies can maintain their positions in maturing markets, such as outsourcing key components of their work and packaging their products with new services to retain customer loyalty. Eventually, he notes, they may simply have to develop new products or niches and move on. For the whole article check; techreview.com best, art