Trends I'm Watching

Leveraging the Long Tail

Trend: Virtual companies can stimulate and leverage Long Tail demand for a competitive advantage over brick-and-mortar stores.

Below is a description of The Long Tail from Wikipedia. Then we include an example from The Internet Stock Blog of a virtual company (Neflix) out-competing a well-known rival (BlockBuster Video) by leveraging the Long Tail.

Source: Wikipedia

The phrase The Long Tail, as a proper noun, was first coined¹ by Chris Anderson, drawing on an influential essay by Clay Shirky, "Power Laws, Weblogs and Inequality" that noted that a relative handful of weblogs have many links going into them but "the long tail" of millions of weblogs have only a handful of links going into them. Beginning in a series of speeches in early 2004 and culminating with the publication of a Wired magazine article in October 2004, Anderson described the effects of the long tail on current and future business models. Anderson argued that products that are in low demand or have low sales volume can collectively make up a market share that rivals or exceeds the relatively few current bestsellers and blockbusters, if the store or distribution channel is large enough. Examples of such mega-stores include Amazon.com, Netflix, and even Wikipedia. The Long Tail is a potential market and, as the examples illustrate, successfully tapping in to that long tail market is often enabled by the distribution and sales channel opportunities the Internet creates.

A former Amazon employee described the Long Tail as follows: "We sold more books today that didn't sell at all yesterday than we sold today of all the books that did sell yesterday." In the same sense, Wikipedia has many low popularity articles that, collectively, create a higher quantity of demand than a limited number of mainstream articles found on a professional site such as Britannica.

Link: The Internet Stock Blog ? Netflix and The Long Tail (NFLX).

The Long Tail refers to the end of a one-sided bell curve that measures title depth on one axis and title demand on another axis. The “hill” represents the few number of blockbuster titles that are in high demand while the long tail represent the large number of “catalog” titles that are abundant but have limited demand. Typically, most entertainment providers have focused on the “Large Hill” given this is where the bulk of demand is located. However, the power of the internet, the minimal costs of storing titles, improving distribution capabilities, lower acquisition costs, and analytical software allows for the depth of catalog content to compensate for the lack of demand. Furthermore, these improvements have also allowed the bell curve to flatten out (i.e., more title can not be cost effectively sold). We see NFLX as utilizing the long tail as a competitive advantage that should help generate additional operating leverage.

Stormy Economics Ahead?

Trend: Consumer spending in the US will soon start to slow, with global ramifications.

John Mauldin sees some economic corrections ahead that may not be smooth and gradual. Here are some excerpts from his Dec 23 newsletter addressing the economic imbalances that are global and significant.

Source: Thoughts from the Frontline by John Mauldin

The world economy today depends upon the American consumer being willing to not save and to borrow if necessary to support their spending habits. It is a burden for which we seem genetically designed and one at which we clearly excel. We spend, they produce. They send us all manner of goods and we send them electronic dollars, which in a twist of irony they have lent to us. It is sort of the ultimate in vendor financing.

Ultimately, the US is going to spend less and save more. I know, doubting the ability of the US consumer has been a losing call for 50 years, but we are getting closer to the time when consumer spending on "stuff" is going to slow. How can I say this?

For several reasons. First, we are going to see spending on health care rise another 3% in the next 8 years. That is almost $400 billion dollars. It will still be spent, just not on stuff.

Satellite-based car navigation

Trend: Car navigation systems are moving towards the mass adoption tipping point

IBD highlights a possible trend.

Source: Investor's Business Daily: Car Navigation Prospects Point North.

Satellite-based car navigation devices are hot products this holiday season because of falling prices and new features.

Aftermarket systems are adding new features at a rapid pace. Built-in systems can become dated and would be difficult and expensive to upgrade, analysts say.

Mainstream consumers are just starting to get familiar with car navigation systems. The market is in the early adopter stage, but is "threatening to cross the chasm into the mass market," Driscoll said. That will happen once full-featured units are available for less than $500.

And portable car navigation systems are expected to get even more capable in the near future. Some portable "navi" systems double as MP3 music players, for instance. But real-time traffic data are the biggest current advance.

"Integrating the traffic data has taken the consumer navigation market to the next level," said Steve Koenig, an analyst with the Consumer Electronics Association. "Being able to route you from A to B, that's great. But being able to route you from A to B and around a traffic jam — and do that on the fly in real time — that's really great."

On the horizon are navi units that offer information on local restaurants and other businesses, plus let users surf the Web or check their e-mail while parked.

GTL: Gas to liquids

Trend: Liquified natural gas is a desirable but expensive energy source.

Natural gas can be liquified and used to produce clean energy in a wide variety of engines.

Source: Gas to liquids technology worldwide.

New technology is being developed and applied to convert natural gas to liquids in gas to liquids technology (GTL). The projects are scalable, allowing design optimisation and application to smaller gas deposits. The key influences on their competitiveness are the cost of capital, operating costs of the plant, feedstock costs, scale and ability to achieve high utilisation rates in production. As a generalisation however, GTL is not competitive against conventional oil production unless the gas has a low opportunity value and is not readily transported.

GTL not only adds value, but capable of producing products that could be sold or blended into refinery stock as superior products with less pollutants for which there is growing demand. Reflecting its origins as a gas, gas to liquids processes produces diesel fuel with an energy density comparable to conventional diesel, but with a higher cetane number permitting a superior performance engine design. Another “problem” emission associated with diesel fuel is particulate matter, which is composed of unburnt carbon and aromatics, and compounds of sulfur. Fine particulates are associated with respiratory problems, while certain complex aromatics have been found to be carcinogenic. Low sulfur content, leads to significant reductions in particulate matter that is generated during combustion, and the low aromatic content reduces the toxicity of the particulate matter reflecting in a worldwide trend towards the reduction of sulfur and aromatics in fuel.

Source: RL32666 - The Gas to Liquids Industry and Natural Gas Markets

Technological improvements and investment commitments from the world’s largest oil companies suggest the gas to liquids (GTL) industry is likely to expand rapidly over the next decade. GTL uses large quantities of natural gas to produce liquid petroleum products like diesel fuel and home heating fuel. The GTL industry might become an important competitor to the liquefied natural gas industry (LNG) in the effort to secure natural gas supplies. As a result, LNG markets may be tighter, with higher prices, potentially altering LNG’s projected role in the U.S. natural gas market.

Commodity Inflation Is Coming

Trend: Commodity prices are moving up as producers are unable to ramp up production.

Source: MSN Money - Stocks for the 2006 commodities crunch - Jubak's Journal

...we're in for another round of commodity inflation in 2006 that will increasingly feed inflation for the economy in general. In November, the core CPI -- that's the CPI with the effects of food and energy prices stripped out -- climbed by 0.2%. That doesn't seem like much, but November marked the second consecutive month where the core rate climbed by 0.2% instead of the 0.1% monthly increases of April through September.

If core inflation gets worrisome enough, the stock and bond markets can forget about the Federal Reserve moving to the sidelines after one or two more interest-rate hikes in 2006. That wouldn't be so important except that the bullish case for stocks in 2006 hinges on an early end to the Fed's interest rate increases. If commodity inflation in 2006 leaks through into higher core CPI inflation, you can forget about that scenario for the Fed -- and forget about a good year in 2006 for stocks and bonds.

All the delays in adding new supply (and the bottlenecks that instead are reducing supply in some instances) make meeting the very modest forecasts for growth in global commodities demand much more of a challenge than it seems. The Organization of Petroleum Exporting Countries forecasts 1.9% growth in global oil demand in 2006, and the International Energy Agency estimate of 2.2% growth isn't all that different.

Strains that are showing in the global commodities supply system say that meeting even that modest growth in demand with a matching increase in supply isn't by any means a sure thing next year. And that much of this new supply will come on line with substantially higher production costs.

This isn't rocket science but basic classical economics: When a system operates at the edge of full capacity, prices rise as unexpected glitches slow production here and there or require extraordinary efforts and extra costs to keep the system running. I think that's what we can expect in most global commodities markets in 2006.

Healthcare Trends to Watch and eHealth Implications

Trend: Healthcare will become more efficient (when it has to).

John Sharp, who writes the eHealth Blog, reports on a speech by Bill Crounse, MD, of Microsoft at the Emerging Technologies and Healthcare Innovations Congress.

Link: HealthNex: Healthcare Trends to Watch and eHealth Implications.

John Sharp sees four crises:

• out of control costs
• unaffordable insurance
• consumer demand
• healthcare worker demand

He then proposes The end of health insurance as we know it - a.ka., health savings accounts

Information everywhere – home monitoring, pervasive use of new devices

Commoditization of healthcare services – retail medicine to concierge

Dumbing-down the profession – labor shortages resulting in more low skill employees

A flattening of the world of healthcare – information technology enabling global healthcare and medical tourism.

Google Introduces Music Search

Trend: Google unveils another feature to increase revenue and dominate commerce online.

The Internet Stock Blog suggests that Googles new music feature will take sales from several prominent internet merchants, notably Amazon, eBay, LookSmart, GuruNet and Scripps.

Link: The Internet Stock Blog ? Google Music Search — Impact on Amazon, Apple, eBay, LookSmart, GuruNet and Scripps (AAPL, AMZN, EBAY, GOOG, GRU, LOOK, SSP).

Google yesterday announced the introduction of a music search feature on its general search engine. In announcing the feature, Google Search Quality Product Manager David Alpert wrote:

We do this sort of thing a lot — adding a bit of special information to results for important searches. For example, we have movie showtimes and stock quotes. The more information we can make easily accessible with a simple search, the better.

Right now the music search feature mostly works for artists popular in the U.S. and a more limited number of artists from other countries, but we plan to expand it to classical music, worldwide artists, and lesser-known performers. Our list of music stores will also grow over time.

Politics and Economics in China

Trend: China and India will need more and more commodities to feed the economic engines that will provide jobs for the poor and job security for government officials.

Jim Jubak presents some little known information about the political climate in China and how it might affect the rest of us.

Source: MSN Money - Global growth means a risky 2006 - Jubak's Journal.

...both China and India are being pushed toward higher growth next year. That, of course, raises the odds that the global economy will overheat, that commodity prices in general will climb and that oil prices, in particular, will spike again.

China is in the midst of a terrifying political crisis. It's terrifying to the ruling Communist party, that is, because the crisis is close to growing from a local to a national one, and because the regime has really only two tools to "fix" the crisis. Repression, the preferred tool, doesn't seem to be working very well. If repression fails, the central government will have to fall back on economic bribery on a massive scale.

The most recent highlight of the crisis occurred on Dec. 6 in the farming and fishing village of Dongzhou, when peasants evicted from their land to make way for a power plant staged a nonviolent protest that was met by a massive show of force. According to the Beijing government, three peasants were killed by gunfire from security forces. The peasants put the death toll at somewhere near 20. The violent suppression of the demonstration was followed by a reign of terror in the area, which was sealed off from outside contact, as security forces searched house to house and took away an estimated 50 alleged ringleaders.

According to official government numbers, this is just one of a rising tide of protests in China. Last year, the number of such protests topped 74,000.

Even more than the sheer number of protests, it's what links them that makes this such a dangerous crisis.

First, like many of the protests, this one took place in a rural area left behind by China's rapid economic growth.

Wind Farming

Trend: Higher oil prices create opportunities for introducing cleaner sources of energy.

Source: News & Media (WBCSD).

Six miles off the coast of Ireland in the Irish Sea are windmills so huge that they look like leftover props from last summer's War of the Worlds. In fact, these 35-story structures, with rotor blades each the length of a football field, make up a pilot wind farm built and operated by General Electric. The turbines supply Ireland's electricity grid near the town of Arklow with enough power to serve 16,000 homes.

For a country that's 90% dependent on imported fossil fuel, the arrival of the world's largest offshore wind farm is a boon. Having recently completed its first year of operation, the Arklow Bank installation saves Ireland 15,000 tons of imported fossil fuel a year and prevents the release of about 68,000 tons of carbon dioxide into the atmosphere, the equivalent of taking about 16,000 cars off the road. Officials are talking about increasing the size of the Arklow installation tenfold, enabling it to supply 10% of all Ireland's electricity needs.

The Arklow wind farm is GE's latest entry in the search for ways to generate power without releasing carbon dioxide and other greenhouse gases into the atmosphere. In perhaps the broadest and largest corporate effort anywhere, GE spent $700 million in 2004 on clean-energy R&D--ranging from hydrogen production to solar cells, cleaner coal plants, and biofuels. CEO Jeff Immelt has frankly described the effort as designed not only to meet environmental challenges but also to "enhance our bottom line." As another GE official succinctly told FORTUNE, "Green is green."

HP, Sun Moving Toward Utility Business Model

Trend: Computer processing time is becoming a commodity.

Source: Investor's Business Daily: HP, Sun Moving Toward Utility Business Model.

Hewlett-Packard (HPQ) and Sun Microsystems (SUNW) are launching competing utilitylike services that make it easier for companies to "rent" computer time over the Internet. Customers would still need a computer to access the Net, of course. But the rented computers would do the heavy lifting — providing as little or as much computing power as needed.

"The utility model needs to be a true utility," said Aisling MacRunnels, who heads Sun's efforts. That means using such services should be as easy as flipping on a light switch or turning up the thermostat, she says.

Sun launched its utility computing effort last summer after a six-month delay. It's testing a service that lets people instantly order up computing resources through a Web site.

Users would enter their credit card info, upload their software code and wait to download the computed results.

The service could handle anything from answering a complex math problem to doing computer animation.

HP earlier this month launched its own version of utility computing. Its service lets businesses use HP's data centers for as little as 50 cents an hour per computer.

Customers first need to talk to an HP sales rep to set up the service. After that, users can tap the service at any time — with 24 hours' notice.

Customers are required to buy a week's worth of computer processing time, though that could involve just a few reserved computers.