Why is Nokia a potentially portent example of organisational Group Think?  Read on and find out…

[...]

In my previous article I discussed the concept of value and how important it discard old ways of thinking in terms of products and costs, to re-focus around the consumer.

In this article, I will further the case for considering services in your business by distinguishing products from services.

Part Three, will look at the success of the Apple Strategy and some real examples of real profit margins including from the sector spread Woolworths enterprise.

So Why Services?

[...]

I have received a number of inquires from clients and readers about services based business models and how to implement one.  In response to this interest, I have developed a few strategies and illustrations to help you.

In this multipart series, I will take you through what services are, and how you can build a services based business or transform your existing product based business, in to a services based business.

So what are services?

[...]

Register Here to participate on this blog.

Apple is at it again, patenting everything in the known iUniverse.  What is your view on patents?  Should blatantly generalist applications and concepts be considered for patents?  Or are we living in a mad gold rush and be quick or be dead?

Apple Patents Anti-Sexting Device.

My personal view is that this is verging on the ridiculous.

“Today the US Patent and Trademark Office approved a patent Apple filed in 2008, which, get this, prevents users from sending or receiving “objectionable” text messages.  The patent’s official title? “Text-based communication control for personal communication device” which actually doesn’t use the pretty ridiculous noun/verb “Sexting,” but come on, we all know what they mean.”

Unfortunately, it appears my predictions were correct.  Australia is now in the full swings of the ‘Dutch Disease’, as our economy approaches US Dollar parity, our exports are unable to compete with deliberately deflated countries such as India and China.  Australia is at a terrible trade disadvantage, while drunk with high Dollar driven consumption.  It beggars belief that only 6 months ago, when I originally wrote my articles questioning Australia’s ‘Economic Miracle’, I was heralded as ‘Doctor Doom’ in some circles.  I counter that I was merely offering a seldom heard counter analysis drowned out by the never ending declarations of Australia’s economic victory over the Global Financial Crisis.  I maintained, that the crisis was not averted, it was merely delayed.  For how long, I will not pretend to hold insight, however that is inevitable, I am sure.

More background on my scepticism of the ‘Australian Miracle’ can be found here:

Australian Coal Exports Continue to Expand

House price growth to slow – or grow?

Business Investment Falls

Australia’s Export Composition

Government Spending Props Up Economy?

Two reports emerged this week, that I am aware of in my current superficial following of the mostly subjective media outlets:

ABC Australia’s 7:30 Report, Tuesday 05 October – will Australia’s resource boom hollow out Australia’s economy? This report should have been aired 10 years ago, not today.  However,  am relieved that at last the assertions of outcasts such as myself are being acknowledged.

Canberra Times, Thursday October 7 2010 “Overvalued housing market threatens to derail economy” (David McLennan). Surprise surprise.  In the mad obsession to divert all available capital to the unproductive sector (residential housing), we have starved the productive sectors of capital, at a time when they need it most as the strengthening Australian Dollar squeezes Australia out of the global market.  Not to mention various layers of market and labour distortion in to the mix that have not helped, but that touches on a contentious area I am not yet brave enough to venture in to.  It is brave enough to question the dominant economic religion in Australia as it is.

In other news, the Reserve Bank of Australia (RBA) held interest rates last week.  This suggests that the RBA does not seem to subscribe to the dominant religion either.

So Australia, drunk on consumption, is blinded to a few dangerous factors that threaten to de-rail our economy and bring back the dreaded 1980s “Banana Republic”.  All of these factors together, can add up to a devastating fire storm.  Anyone who has lived near an area afflicted by a bush fire storm knows how this works.  Any factor in isolation is damaging.  Together, they can add up to something spectacular indeed.

1) High currency, aka the “Dutch Disease” (more on this later) hollowing out Australia’s economy, leaving little left after the mining is gone.

2) Consumption driven economy, fuelled by the above

3) Diversion of capital to the unproductive residential housing sector.  Not in terms of jobs as the dominant economic religion encourages us to believe, but in what this capital ultimately produces, which is nothing.  Residential houses are a lifestyle choice and a psychological support, they are not productive in the sense that a factory or office building is.  There is no net job creation like a factory will produce.  The jobs only exist for the construction of the homes.  It’s a zero sum game if anyone is looking for a ‘economic stimulus’ in residential housing.  We would be better off building factories and critical infrastructure if we needed ‘stimulus’.  And that of course also excludes ‘school halls’.

4) Sectors outside of of housing and mining continue to be starved of capital, when Australia should be making hay while the mining sun shines.  Nothing lasts forever, and China is not exactly quiet in it’s ambitions to buy up resources in Africa and South America.  Australia can only hold China to ransom for so long.  And countries without democratic election cycles, for all their ills, can play the waiting game much better than any democratic country.  China is not a country to under-estimate, and is a client relationship we depend extremely heavily on.

5) If the housing bubble bursts, the Emperor will suddenly have no clothes.  Or as other commentators have suggested, when the tide rushes out, we will see who is standing naked.  Unfortunately, this will mean that assets on balance sheets across the country will be written down, leading to catastrophic devaluations in stock markets and retirement funds.  I do not believe the effects will be as bad as in the USA, however the effects will still be severe, when Australia is facing a demographic bulge that is famously under-funded for its retirement and as economic volatility will continue to threaten government revenue.

If Australia continues on its current course, we will indeed become a banana republic when the party’s over.

However, there are options, one of which is to conduct a thorough survey of the assets in the national economy.  One of which is corruption and transparency.  Australia has long since left the USA and most of Europe, including the UK, behind on this measure.  That is a asset to be exploited in the financial markets.  Managing overseas superannuation or pension funds for Islamic countries is a once in a generation opportunity we can not afford to miss.  Within a generation, Australia could transform from hole in the ground to tower in the sky.  And it would not be difficult, it just relies on some diversion of capital, the right legislative frameworks to be in place and some smart marketing by the government and by our financial institutions.  Any financial product targeting overseas Islamic (or any overseas) pension fund management market should be tax exempt at the very least.  Countries such as China and Korea do not hesitate to support their national economic strengths in much more overt ways.  There is no reason why Australia should not do the same.  This would benefit the global financial system, as well as our own well-being.  Australia has a ready resource of highly educated Islamic students and citizens ready to go.  We should encourage them to stay, not let them all go to Singapore where a government less encumbered by democratic voting cycles than our own, has seen this potential and is happily harvesting this resource with full page advertisements in every global magazine.

This is only one option, and there are many others.  I will expand on these over the coming months, while I continue to challenge the dominant economic religion in Australia that threatens to de-rail our economy and send us all in to poverty unless we start investing heavily in our economic strengths, now.

From across the Tasman Sea comes word that that Apple is ramping up its targeted advertising platform.  This will be the great battleground for the next decade, as the likes of Google, Apple and even supermarkets and airlines with loyalty schemes battle it out for supremacy in the customer profile market.  Think what happens every time you use a fuel docket, every time you pay for groceries and leave a footprint with your loyalty card.  Make no doubt, Big Brother is watching you.

Apple uses customer profiles to target mobile phone adverts – Business – NZ Herald News.

But is this necessarily a bad thing?  I am not convinced it is.  For years we have been giving up our most sensitive information to anonymous government and private entities who then decide if we should have security clearances, credit cards, welfare, tax refunds or be pursued for an unpaid parking fine.  Citizen tracking has long been an integral part of civilisation, and at times used for bad.  However, if used wisely, and if citizens retain control and remain informed of how their data is being used, it could be a tool for enormous good.

And by good I refer to realisation of the dreams of capitalism – the most efficient allocation of limited resources for the good of humanity – driven by needs and wants to provide resources to provide the greatest value.  No longer will we be harangued with irrelevant advertising, no longer will companies produce mountains of products to be pushed on to the market often with colossal waste when those products prove to be failure.

Sophisticated customer profiling will democratise capitalism by putting the consumer firmly in control.  Companies will move from slow cumbersome push driven to dynamic rapidly responding pull driven production.  Businesses that fail to embrace the new consumer driven world will ultimately fail as they will be unable to compete with dynamic responsive businesses.  Smaller entrepreneurial companies will be empowered to identify small profitable market niches previously regarded as unprofitable by traditional large push driven businesses.  This will lead to a flourishing of diverse markets and a more colourful society to live in contrast to push driven conformity.

Companies will be forced to bow down and serve the consumer and adapt to their ever changing whims and needs to survive.  Those that do will be amply rewarded.  The consumer will be the winner.

This is a far cry from the bleak dystopian warnings repeated almost daily in the media and films such as Minority Report where the consumer is portrayed in an omniscient automated society intent on entrapping innocent victims in its web of seduction, lies and corruption.  This world is technologically possible, George Orwell warned of this.  Aldus Huxley, inspired by bold 19th century industrial progress, even espoused it before Hitler popularised industrialised eugenics and Aldus Huxley turned away in horror.

Radio National recently ran an excellent podcast analysing both sides of the story, even interviewing some of those involved in the very act of tracking how we feel.

The dystopian vison would only eventuate if we consciously sought this world and allowed it to be created.  I do not believe this is possible.  It is possible that the very act of having this discussion averts this possibility just as the penning of George Orwell’s 1984 in 1948 raised awareness sufficiently to prevent his nightmarish vision.

I am more optimistic and foresee a natural evolution toward a consumer centric demand driven capitalist society where consumers, and even the environment, benefit from a more responsive and resource efficient productive society.

As long as our democratic institutions remain strong, and we remain intolerant of corruption in all collective endeavours, the future will remain bright.

2010 is indeed heating up to be a battle of battles between Google and Apple.  Several years ago it would have been incomprehensible to imagine Google and Apple going head to head in an all out war, or at least Apple declaring all out war on Google.  The interesting thing is their entirely different business models.  Google’s is founded on advertising, subsidised with a small amount of paid applications.  Apple’s is the other way around – with high margin products and software, subsidised with a small amount of advertising in the (predictably named) iAd platform.  Google has a vested in interest in driving down margins and costs to broaden their market appeal.  Apple has a vested interest in maintaining profit margins through ecosystem lock in and clever marketing.

It is not the first time Google’s apparently charitable business model has come in conflict with a margin dependent business model, and it won’t be the last time.  On the surface, Google like to appear as the good guys who give everything away for free and eschew system lock-in, however this is only because they can afford to do it and in fact need to so they can drive ‘traffic’ through their ecosystem and sell ads.  Google also gathers a level of freely given market  intelligence that would have made George Orwell quiver.

Other companies like Apple rely on attracting and retaining high margin consumers to their ecosystem and providing a high quality level of service and product, in return for being tied to the platform.

So now Apple is launching a new assault on Google with the concept of a paid cloud offering, which essentially means less stuff to carry around and more stuff that is carried for you and available when you need it through the network.

Apple’s War With Google Takes To The Skies With iTunes In The Cloud.

However with all this gold rush toward the ‘cloud’, one question remains.

If access to the cloud is interrupted, what do you do?

Nokia, having invested a great sum of money in to buying out all the owners of Symbian to open source the once leading mobile operating system have quietly dropped Symbian on their high end devices.  It seems the Nokia strategy has failed to yield results, with profit margins and smart phone market share plummeting since 2007.

For the high margin smartphone market, Nokia instead are banking their future on the Intel backed Meego mobile operations system, another Linux variant like Android.  It seems like a match made in heaven – the world’s greatest chip manufacturer looking for a way in to the mobile market, and the worlds biggest mobile manufacturer looking for a way to stay in the mobile market.

It is unclear what they Nokia and Intel hope to achieve from this, as it would seem strategically valid to back the Android mobile operating system, already enjoying significant market share rising faster than the iPhone globally (and here) with reports of already surpassing the iPhone in US markets at 28% and 21% respectively.

However, Symbian still leads although is in decline in mobile phones worldwide, with Android now enjoying the number four spot and rising fast.

Where will Meego will fit in to crowded space, with Samsung also releasing Bada, HP buying out Palm to get hold of WebOS (reportedly very good but lacking market critical momentum) and probably more on the way?

I put odds on 3 to 1 that Nokia will capitulate on Meego within two years and also release an Android based phone.

What an exciting ride in economics this week!  And what an interesting time to see so much contrasting and conflicting reports come out.  The Australia property sector is an ongoing focus of mine, because apparently, property can never fall if you believe the Retail Institute of Australia, and we just need to release more land to solve the housing affordability problem.

However, information now emerging shows that this view  is not shared by international investors, and that even with all the full force of a federal election putting pressure on banks, it is unlikely that bank interest rates will remain as constrained as official RBA interest rates.  As sentiment moves toward regarding Australian residential property as a riskier investment, expected rates of return (interest rates) demanded of Australian banks will rise.  If banks are to remain viable, and this is in everyone’s interest despite what some popular media outlets tell us, they will have to pass on the increased cost of borrowing to mortgagees.

With Australian property now the least affordable in the world, it is not unreasonable to expect a correction.

The question I will continue to ask and look out for signs for, is will the coming bushfire be a healthy one that clears out the forest to make may for newer healthier growth in housing and the economy overall, or will it be something more serious?  Despite all the reports coming out, I am optimistic that the coming economic bushfire about to erupt in the Australian property market, will be a healthy correction and nothing to fear although spooked investors will make it look like something to fear.

Here are a few interesting articles floating around that you may not have seen, as this sort of information rarely receives broad attention.

Early June (almost one month ago)

“AUSTRALIA’S biggest banks have become the victims of aggressive international hedge funds, which are shorting the banks’ stocks after growing concern about the strength of the domestic property market .. A New York hedge fund manager, who did not want to be named, said sentiment towards the Australian banks had soured because of doubts that the strength in the national property market would be sustained“

via US hedge funds dump Australian bank shares | The Australian.

(Well, at least something’s growing)

Yet despite this coming out a month ago, reports in the Australian media are still reporting contrasting and at times conflicting information.  However, that any conflicting reports are emerging, is a sign that a few measures are becoming more widely known.  Eventually, a cunning journalist will connect the dots and see there is something worth investigating here.

Tuesday (June 29)

Reports are emerging that the cost of lending to Australian banks is rising, regardless of any level of ‘political pressure’, because well, the foreign markets where our banks source their funds don’t answer to our politicians.  So while bank bashing will become a popular sport in the coming federal election, it is unlikely this will achieve very much outside of the polls.  Banks may ‘reconsider’ their discount rates, however a bank is not a charity, they still need to make money, and we need to them to make money.  Love them or hate them, events in the USA in 2008 showed us very clearly how struggling and failing banks are in no ones interest.

“The ‘big four’ banks are struggling to maintain their home loan status quo as higher wholesale funding costs increase the pressure on banks to raise their home loan rates. But faced with the potential political backlash for increasing interest rates out of sync with the RBA’s cash rate changes has lead to banks reconsidering their discount rates for new home loans, The Australian reports.”

via Banks to slash loan discount rates due to politcal pressure | Dynamic Business.

“Borrowers are unlikely to get any relief through lower costs in the forseeable future as the big banks face replacing tens of billions of dollars of cheaper-priced debt at much higher rates.  That was the message underlined by ANZ yesterday when it disclosed that its long-term debt was now costing 20 per cent more across its $90 billion portfolio of borrowings, extending to the 2014 financial year.”

via More pain as banks prepare to pass on costs.

Wednesday (June 30)

A report suggesting the housing market is very strong.  Except it’s largely attributed to being artificially created by taxing the future to boost the present (aka ‘stimulus’).

Building permits soar – ABC News (Victoria)

“The value of approved housing permits has climbed to almost $12 billion, up almost a third on the same period a year ago”

“The Building Commission .. Deputy Building Commissioner Sarah McCann-Bartlett says .. it is a combination of very strong growth in the domestic sector, particularly driven by the first home owners grants, and public housing programs, and then the school stimulus package as well as growth in other public buildings,” she said.”

So not much actual real private sector growth there.

New home sales slump, prices stagnate – ABC News

“The widely watched RP Data – Rismark Home Value Index showed a rise in city home prices of just 0.5 per cent (seasonally adjusted) in May .. new home sales slumping by 6.4 per cent in May”

So outside of the publicly supported property market, prices growth is slowing.

Today (Thursday, July 1)

Building approvals slide, retail sales edge higher

“building approvals slipped 6.6 per cent in May (seasonally adjusted), following on from a steep fall in April .. The bureau says all states except South Australia (up 30.6 per cent) reported a fall in building approvals in May, with falls of 24.8 per cent in Tasmania and 13.9 per cent in Western Australia the worst results. However, the total value of building approved rose 2.7 per cent in May driven by a strong rise in non-residential approvals.”

So the property market is strong, where public funds have been diverted to support it.  Elsewhere, it’s sliding.

Interesting times are ahead..