D+2836

… We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, --That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness.

Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security. …

Signed by John Hancock and 55 others, Philadelphia, Pennsylvania, July 4, 1776

Reproduction courtesy of the National Archives

The living undead of storefront retail

I've been meaning to blog about the great cover on a recent Bloomberg Business Week. (Perhaps thanks to its spendthrift mayor, the magazine is now economically illiterate, but it still has good artwork.)

The cover story was about the travails of the quintessential “big box” retailer, Best Buy. (I’d hoped to post for Halloween but October was a hectic month).

Interestingly, in trying to find the cover story (with the magazine’s useless search engine), I found a 2007 story promoting the stock at a target price of $63. (It’s now at $15). I think this illustrates the point that the displacement of storefront retail by online (particularly Amazon) has been quicker and more severe than almost anyone anticipated.

The October story notes that the company has failed in its online strategy due to an excess of caution:

Best Buy’s response to Amazon and other online threats has been inadequate. The company set up bestbuy.com as early as 2000, when Schulze was still CEO as well as chairman, but years later, as purchases of TVs, stereos, and microwave ovens shifted increasingly to the Web, the site still lacked such basic features as customer reviews. An Internet unit didn’t get much financial support and was kept walled off from store sales. While e-commerce now accounts for more than 20 percent of U.S. consumer-electronics sales, online is only 6 percent of Best Buy’s domestic revenue.

Cannibalism is a concern of most storefront retailers, but one that can be overcome. Of the top 10 US e-commerce sites listed in the story (bestbuy.com was #11), 5 are by companies with a storefront presence: Staples, Apple, Walmart, Office Depot and Sears. Clearly Apple is agnostic to whether it sells its products online or in stores, but Staples has been a great success in making the transition also.

(There is also a certain irony of reading about the death of physical retailers in a physical magazine, given what’s been happening to them recently. The Bloomberg Business Week website seems to violate all the precepts of best-in-class customer-friendly experience, as prescribed for Best Buy.)

So what is the answer? Founder Richard Schulze (now trying to buy back the company) wants to double-down on the in-store experience, a viewpoint supported in an August 6 BBW article about his takeover attempt:

According to Alex Goldfayn, chief executive officer of the marketing strategy consultancy Evangelist Marketing Institute and author of the book Evangelist Marketing, Best Buy needs to focus on improving its in-store shopping experience, rather than competing online. “They need to understand that if they make their business about competing with Amazon, they’re going to lose,” he says. “In fact, they’ve already lost, and they’ve lost painfully and publicly in a very sad and ugly way. Their one advantage in the world is their physical stores.”

Goldfayn, who outlined his Best Buy improvement plan for Mashable in February, suggests a quick and dramatic overhaul. “Rather than thousands of boxes on shelves, which are ugly and don’t do anybody any favors, they need to set up tables for people to interact with the technology,” he says. “There isn’t really a [store] that you can go to now to literally interact with technologies from multiple manufacturers, and Best Buy is in the unique position to let people walk into a store and experience not only the iPad but also the Samsung Galaxy and also another Android tablet.”

Both Goldfayn and Schulze seem to believe that first-rate service would create traffic and loyalty. (It also seems like it would further accelerate showrooming).

The same article also quotes a Morningstar analyst who says customers are driven by price, and the chances of turning around Best Buy are “a long shot.”

Whether Best Buy survives — as a big store, tiny store, discount warehouse or high-service emporium — begs the broader issue of whither storefront retail? The implications go far beyond one company: Books and CDs are gone, electronics is going (cf. Circuit City), and clothes seem to be slowly heading in that direction. Movie theaters are also disappearing in the face of Netflix and (again) Amazon downloads.

Meanwhile, what is the future of commercial real estate in such a scenario? Do strip malls just become restaurants, liquor stores and grocery stores? Does the suburban shopping mall die before it turns 100?

California holds education hostage

From the WSJ, November 1:

[California Governor Jerry] Brown and his labor allies say Proposition 30 will fix the state's budget deficit and ward off education cuts. But the real choice before voters is whether to issue Sacramento's incorrigible spendthrifts another blank check.
…
Mr. Brown has threatened to "trigger" $5.9 billion in education cuts if his initiative fails, but he'd make less than $100 million in other trims. How's that for balance?

Such "trigger cuts" could easily be re-configured with a modicum of political will in Sacramento. Instead of slashing $500 million from higher education, Democrats could kill their quixotic bullet train, which will cost about $360 million this year alone in debt service, and chop $100 million in tax credits to their Hollywood friends (who are bankrolling the tax campaign).

Or they could restructure retirement benefits, which cost $6.5 billion this year—up from about $1.4 billion in 1999. There's millions more to be found in modifying current workers' pensions and retirees' cost-of-living adjustments as nearly a dozen states have done. In Rhode Island such reforms have cut the state's pension liability by half.

Barring such reforms, pension costs will continue to balloon and eat up all new revenues. The California State Teachers' Retirement System has projected that it will need between $3.5 billion to $10 billion annually over the next 30 years to stay solvent. So any money allocated to schools will merely backfill the teachers' pension fund.
…
The only way California can escape its recurring fiscal Frankenstorms is through reform and economic growth. The former would stimulate the latter while the Governor's tax initiative would squelch both. Raising taxes on small business owners when one in five Californians is out of work or employed part-time because he can't find a full-time job is the definition of insanity.

Time for Nokia to replace Microsoft?

An article from the Oct 19 edition of Talouselämä, a leading Finnish news magazine:

Tutkijat: Android toiseksi kärjeksi Nokialle

Talouselämä

19.10.2012 09:22päivitetty 19.10.2012 09:26

Nokian olisi otettava Microsoftin rinnalle tai sen sijaan parempi kumppani, kirjoittavat tutkijat Timo Seppälä ja Martin Kenneyperjantaina 19. lokakuuta ilmestyneen Talouselämä-lehden Tebatti-palstalla.

The Google and Microsoft translations are a bit iffy, but here are some excerpts:

Nokia should take into Microsoft alongside, or instead of a better partner, write the researchers Timo Seppälä and Martin Kenney on Friday the 19th October edition of the magazine Talouselämä Tebatti column.

Timo Seppälä is a subsidiary of Etlatieto Ltd, a researcher at Etla, and Martin Kenney, Professor at the University of California (Davis).

The following post is part of a larger BRIE-ETLA research project.

Apple's iPhone revolutionized the mobile use of the Internet. In response, Google developed the Android operating system and offered it to phone manufacturers for free use.

In the past five years has led to a situation where Apple, as well as Samsung and other Android phone manufacturers utilize dominate the smartphone market. Nokia's "burning platform" has shrunk Symbian to insignificance and Microsoft Windows is still the underdog role.
…
Early last year, however, Nokia chose Microsoft's Windows [as its] only smartphone [platform]. In poker terms Nokia played all in, when the hand was a pair of jacks. Microsoft has no immediate risk at all.

The translation (from Finnish from the original English) is a bit hard to follow, but basically tells Nokia (in its home town) that it would have been better either with Meego or Android, and encourages Nokia to drop Windows (or at least choose a second parallel platform) rather than stick it out "until death do us part."

Nokia: bad news without end

Like other CEOs of struggling companies, Stephen Elop has an unenviable job. He took over Nokia in 2010 when his predecessor had been unable to arrest the company’s decline.

Still, let’s not put too fine a point on it: Elop’s gamble to bet the company’s future on switching to the Windows Phone platform has been an absolute disaster.

In quarterly earnings announced Friday, the company lost €4 billion for the first 9 months of 2012 — nearly a billion of that in the 3rd quarter — versus €0.4 billion lost in the same period of 2011. This is not a one-time blip: here months ago, Nokia also lost money and announced massive layoffs.

Smartphone sales have been falling since 2010, but the major collapse came this year as the company phased out its Symbian handsets. AllAboutWindowsPhone.com (née AllAboutSymbian.com) published the damning chart:

Nokia has been more successful at killing Symbian — by starving new releases — than getting people to buy Windows Phones. In fact, as late as Q2, Nokia was still selling more Symbian than Windows phones.

The only uptick in smartphone sales in Q3 came because during Q3, the company has rebranded its S40 (now “Asha Touch”) as a “smartphone” platform. Whether or not the new classification is accurate, it doesn’t reduce in increased sales and highlights how far the company has fallen since its 2010 peak.

It seems like the assumptions behind the Windows bet were flawed. Nokia (or at least Elop) hoped that being the big fish in the Windows pond would be better than slugging it out in the Android market.

Yes, Nokia (at least for now) has the majority of WP sales, but that's not much. The assumption was that Windows Phone would be competitive with Android and iOS, but so far it isn’t. Q3 numbers won’t be out until next month, but in Q2 WP was #5 at 3.5%, after Android, iOS, BlackBerrry and Symbian. Meanwhile, the transition has been managed in such a way to kill its Symbian cash cow before the customers embraced its new products.

For years, Nokia was the world leader in both smartphones and handsets. Now Samsung is selling almost 3x as many Android smartphones as Nokia is selling for WP, Symbian and S40. If Nokia isn’t ready to compete with Samsung, maybe it should just close the handset business and focus on infrastructure.

More realistic is the advice from former Apple Europe president Jean-Louse Gasée: fire Elop and switch to Android. If Nokia’s board believed in accountability, they’d lower the axe after the end of the Christmas quarter, but more likely they’re going to limp along until they can no longer deny the reality of Elop’s failed platform strategy.