Why Winner-Take-AII Is Winning

Is the building supply industry going to turn into a winner-take-all market? Do you have a strategy if technology disrupts the distribution of goods and service? The Second Machine Age: Work, Progress, and Prosperity in a Time of Brilliant Technologies by Erik Brynjolfsson and Andrew McAfee

Why Winner-Take-AII Is WinningSecond Machine Age.jpg

Why are winner-take-all markets more common now? Shifts in the technology for production and distribution, particularly these three changes:

  1. the digitization of more and more information, goods, and services,
  2. the vast improvements in telecommunications and, to a lesser extent, transportation, and
  3. the increased importance of networks and standards.

Albert Einstein once said that black holes are where God divided by zero, and that created some strange physics. While the marginal costs of digital goods do not quite approach zero, they are close enough to create some pretty strange economics. As discussed in chapter 3, digital goods have much lower marginal costs of production than physical goods. Bits are cheaper than atoms, not to mention human labor.

Digitization creates winner-take-all markets because, as noted above, with digital goods capacity constraints become increasingly irrelevant. A single producer with a website can, in principle, fill the demand from millions or even billions of customers. Jenna Marbles’s homemade YouTube video “How to trick people into thinking you’re good looking,” to take one wildly successful example, garnered 5.3 million views the week she posted it in July 2010.13 She’s now earned millions of dollars from over one billion viewings of her videos around the world. Every digital app developer, no matter how humble its offices or how small its staff, almost automatically becomes a micro-multinational, reaching global audiences with a speed that would have been inconceivable in the first machine age.

In contrast, the economics of personal services (nursing) or physical work (gardening) are very different, since each provider, no matter how skilled or hard-working, can only fulfill a tiny fraction of the overall market demand. When an activity transitions from the second category to the first the way tax preparation did, the economics shift toward winner-take-all outcomes. What’s more, lowering prices, the traditional refuge for second-tier products, is of little benefit for anyone whose quality is not already at or near the world’s best. Digital goods have enormous economies of scale, giving the market leader a huge cost advantage and room to beat the price of any competitor while still making a good profit.” Once their fixed costs are covered, each marginal unit produced costs very little to deliver.

June Dashboard

August 3

Current Month

Last Month

Last Year

Existing Homes Sales — June

5,370

5,660

4,890

(Units per Thousand)

New Homes Sales –June

330

267

396

(Units per Thousand)

New Home Starts –June

549

578

583

(Units per Thousand)

New Homes Completed –June

886

702

798

(Units per Thousand)

Housing Affordability Index–June

158.9

166.5

162.5

Pending Home Index –June

77.5

77.7

93.0

S&P/Case-Shilling Index — May

146.43

144.59

139.98

Composite-20

Supply of New Homes –June

7.6

9.6

8.5

(No of Months)

Supply of Existing Homes -June

8.9

8.3

9.4

(No of Months)

Lumber & Wood Products — June

23,599

19,742

22,253

Total Rail Carloads Traffic

Leading Indicator of Remodeling

12.4%

Activity (LIRA) 2rd Quarter 2010

Color
Tint Key

Up
from Previous Month

Down
from Previous Month

May Dashboard


July 2

Current Month

Last Month

Last Year

Existing
Homes Sales — May

5,660

5,790

4,750

(Units
per Thousand)

New
Homes Sales –May

300

446

367

(Units
per Thousand)

New
Home Starts –May

593

659

550

(Units
per Thousand)

New
Homes Completed –May

687

742

812

(Units
per Thousand)

Housing
Affordability Index–May

162.0

168.3

174.2

Pending
Home Index –May

77.6

110.9

92.3

S&P/Case-Shilling
Index — April

144.56

143.35

139.26

Composite-20

Supply
of New Homes –May

8.5

5.8

9.5

(No
of Months)

Supply
of Existing Homes -May

8.3

8.4

9.7

(No
of Months)

Lumber
& Wood Products — May

19,742

21,742

17,400

Total
Rail Carloads Traffic

Leading
Indicator of Remodeling

4.9%

Activity
(LIRA) 1st Quarter 2010

Color
Tint Key

Up
from Previous Month

Down
from Previous Month

Leading Indicator of Remodeling Activity (LIRA)

According to the Leading Indicator of Remodeling Activity was released on April 15, 2010 by Joint Center for Housing Studies of Harvard University. For the first time since 2006, remodeling spending is on the rise. The annual growth is 4.9%

Check out Lumbertribe’s Dashboard for other industry indicators.

What is Leading Indicator of Remodeling Activity (LIRA)?

The LIRA was created to provide the home improvement industry with a timely and accurate estimation of changes in spending activity by homeowners, as well as an estimate of near-term activity, with a horizon of three quarters. On a quarterly basis, the LIRA tracks the annual volume of homeowner expenditures in home improvements and repairs from the C-50 series using the four-quarter moving averages of several indicators that are associated with homeowner maintenance and improvement activity. The annual rates-of-change for the input components of the LIRA are lagged differentially, meaning that they have a different timing relationship with home improvement spending. This relationship was determined by evaluating which lag produced the best correlation with annual rate-of-change of homeowner remodeling expenditures. The input variables were then weighted according to their correlation with the C-50 series and their volatility. Finally, the components were integrated into one four-quarter rate of change that constituted the LIRA.

March Dashboard

May
8

Current
Month

Last
Month

Last
Year

Existing Homes Sales — March

5,350

5,010

4,610

(Units per Thousand)

New Homes Sales –March

411

324

332

(Units per Thousand)

New Home Starts –March

626

616

521

(Units per Thousand)

New Homes Completed –March

656

677

833

(Units per Thousand)

Housing Affordability Index–March

170.6

176.5

177.5

Pending Home Index –March

102.9

91.7

85.0

S&P/Case-Shilling Index — February

144.03

145.27

143.11

Composite-20

Supply of New Homes –March

6.7

8.6

11.3

(No of Months)

Supply of Existing Homes -March

8.0

8.5

9.5

(No of Months)

Lumber & Wood Products — March

24,590

18,593

21,537

Total Rail Carloads Traffic

Color Tint Key

Up from
Previous Month

Down from
Previous Month

Home Sizes Fall as Builder Embrace Economy

Here is a press release from RISMEDIA regarding the first drop in the size of homes built in 27 years.

RISMEDIA, January 28, 2010—(MCT)—New-home buyers responded to the tough times in 2009 by opting for smaller houses, driving down the average size of a house built in the United States for the first time in 27 years.

Data recently released by the National Association of Home Builders (NAHB) found the average size of a new home that was completed in 2009 fell to 2,480 square feet from 2,520 square feet in 2008. The last time the average completed-home size fell by a statistically significant amount was 1982.

http://www.lumbertribe.wordpress.com

“You’ve heard the mantra ‘downsize me’ and ’small is the new big?’ Well, last year was definitely a downer,” said Carol Lavender, president of Lavender Design Group, a residential design firm in San Antonio, Texas.

Homeowners surveyed by Better Homes and Gardens magazine said downsizing was becoming a bigger priority: 36% said in November 2009 that they expected their next home to be “somewhat smaller” or “much smaller” than their current home versus 32% who said that in 2008. “Not surprisingly, we see a ‘cents and sensibility’ approach when it comes to buying or improving a home, with practicality and price being the top priorities,” said Eliot Nusbaum, the magazine’s executive editor of home design.

While the small-house movement in the United States has been gaining steam for a number of years, the recession has accelerated it and home builders have responded.

“The era of easy money is over. You really have to think before you go out and decide you need that five-bedroom, five-bath home,” said Rose Quint, the NAHB’s assistant vice president for survey research. “Couple that with the energy cost concerns of consumers today and I think we will continue this trend. Houses will not shrink drastically, but they will shrink.”

Although actual square footage of homes didn’t fall until 2009, the percent of homes with four or more bedrooms in them has been falling since 2007, NAHB data show. And in 2009, the number of homes with three or more bathrooms fell for the first time since 1992.

Two other trends in home construction are contributing to the declining square footages: The prominence of first-time buyers in the housing market and the increasing number of households with members 55 and older who are buying homes.

First-time buyers, driven into the market in good part by the availability of an $8,000 tax credit, are more likely to compromise on home size in exchange for a lower price. And the 55-plus crowd tends to purchase single-story homes, which generally are smaller because of the land costs that favor the more-efficient two-story plans.

“Barely over half of new homes today are built with two stories or more,” Quint said. Two-story homes peaked at about 55% of the market in 2006. For 2010, home builders say they will focus on lower-priced models and smaller homes. More than 95% of builders surveyed by NAHB in January said that was the way they saw their business evolving this year.

The penchant for smaller homes will necessitate some design changes. Builders, attempting to respond to those consumer demands as well as hold the line on prices, told the NAHB surveyors that they were most likely to include these features as standard in their houses this year:

-Walk-in closets in the master bedroom.
-Laundry rooms.
-Insulated front doors.
-Great rooms.
-Energy-efficient windows.
-Linen closets.
-Programmable thermostats.
-Energy-efficient appliances and lighting.
-Separate shower and tub in master bathrooms.
-Nine-foot ceilings on the first floor.

Among the things that builders said they were least likely to add to houses in 2010:

-Outdoor kitchens.
-Outdoor fireplaces.
-Sunrooms.
-Butler’s pantries.
-Media rooms.
-Desks in kitchens.
-Two-story foyers.
-Eight foot ceilings on the first floor.
-Multiple shower heads in the master bath.
-Smaller kitchens.

“You can see that builders are concentrating heavily on energy-saving features,” Quint said. “But a lot of the luxury items are on the chopping block or on hold as builders try to lower costs.”

(c) 2010, MarketWatch.com Inc.

Housing vs Carloads of Lumber

In Rail Time Indicators January 2010, it shows the weekly Rail carloads of Lumber on page 16. On Page 27, it shows Housing Starts versus Rail Carloads of Lumber. The cost of lumber increased this week. Do you think it will keep increasing because of the supply shortage. If you look at the graph Average Carload of Lumber for January 2009 compared to February and March the demand was slightly lower for these months. Last year was the start the of lumber supply shortage.