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.


America’s Bank

America’s Bank: The Epic Struggle to Create the Federal Reserve by Roger Lowenstein is a fascinating book about politics and how the Federal Reserve was started. Below is an excerpt from the book:

Power HouseAmerica bank.jpg

However, if the war temporarily thrust the Fed into a subservient role, it also broadened its field of action. Many people had envisioned that, apart from emergencies, the agency would play a passive role– as the Act put it, simply” discount[ing] notes, drafts, and bills of exchange arising out of actual commercial transactions.” Harvard’s Oliver Sprague had predicted an extreme degree of passivity, testifying just before enactment, “After the institution has been going ten or fifteen years it will almost run itself” This would soon seem ludicrous. In fairness, centralizers such as Warburg always wanted a more dynamic agency. Within a year of the Fed’s founding, so did the board. In its first annual report, the board signaled its disposition to be proactive. Its duty, it asserted, “is not to await emergencies but by anticipation to do what it can to prevent them.”

Just as Wall Street had hoped, the Fed’s emergence, coupled with the war, catapulted America’s standing in world finance. By keeping Britain and France afloat, the United States, long a debtor nation, suddenly became a significant creditor. In return for exports of food, arms, and other supplies, gold poured into American harbors. After America’s entry into the war, Congress fulfilled Warburg’s insistent demands and amended the Act to widen the board’s powers. The amendments greatly increased the Fed’s note-issuing capacity; notes in circulation doubled within months. And the Reserve Banks, by issuing more notes, were able to soak up much of the bullion previously stashed in people’s pockets and in the vaults of member banks. The Fed’s enlarged and unified gold cache elevated the dollar’s status as an international currency.

The Age of Edison

I read this good book The Age of Edison by Ernest Freeberg . It’s so amazing how electricity and the light bulb changed the world. The light bulb had effects on the insurance industry, architects, sign makers and retail. Just image your world without electric light’s and electricity. Below is an excerpt from the book.

The Age of EdisonAge of Edison

In a similar fashion, Hoover suggested that the impact of Edison’s lights far surpassed anything that one man could have envisioned in 1879. The great inventor had aimed to liberate people from their gas and oil lamps by providing a better and cheaper light. But far beyond that, the humble bulb that left Edison’s laboratory and made its way in the world had been transformed by the creativity of others to serve “an infinite variety of unexpected uses”;

It enables us to postpone our spectacles for a few years longer; it has made reading in bed infinitely more comfortable; by merely pushing a button we have introduced the element of surprise in dealing with burglars; the goblins that lived in dark corners and under the bed have now been driven to the outdoors; evil deeds which inhabit the dark have been driven back into the farthest retreats of the night; it enables the doctor to peer into the recesses of our insides; it substitutes for the hot water bottle in aches and pains; it enables our towns and cities to clothe themselves in gaiety by night, no matter how sad their appearance may be by day. And by all its multitude uses it has lengthened the hours of our active lives, decreased our fears, replaced the dark with good cheer, increased our safety, decreased our toil, and enabled us to read the type in the telephone book. It has become the friend of man and child.”

In this, Hoover recognized what most other speakers had missed that day: that what Edison and his rival inventors had done fifty years earlier was to release upon the world a technology with enormous potential, one with far too many possibilities for anyone person to anticipate or create. Edison conceded as much. “When I laid the foundation of the electrical industry,” he told a reporter during the festivities, “I did not dream that it would grow to its present proportions. Its development has been a source of amazement to me.”!

Hoover’s playful list of the light’s various applications captured some of these “amazing” and unexpected consequences of Edison’s invention, though his tally was far from complete. To it we should add the light’s role in expanding human knowledge of the deep sea and the microscopic world, of caves and polar darkness. The light inspired creative adaptations by architects, urban planners, lighting designers, sign makers, window dressers, and theater artists. And we should remember the untold number of inventions and social conventions that others developed in order to fully realize the light’s potential: the engineering standards, insurance guidelines, consumer protections, and utility regulations. Hoover noted that light made Americans more productive, less afraid and vulnerable, but might have also mentioned its role in creating other distinctive markers of modern life-our frenetic pace and long hours, our assumption that any barrier imposed by nature can be overturned or ignored in the name of economic efficiency, the exhilarating and disorienting effects of electric mass marketing and retail, and the experience of living, working, and playing in spaces carefully engineered by illuminators to induce a proper mood.

Though Hoover captured just a part of the electric light’s enormous economic, social, and cultural impact, he deserves credit for acknowledging that Edison, for all his greatness, was only the foremost among many, some known and others long forgotten, who had played some part in inventing the light bulb and thus in creating this essential part of modern culture. Edison recognized this more than anyone, and offered the fullest tribute that evening to all those who had joined him in building a world of electric light. In a voice quavering with emotion, the world’s greatest inventor told his global audience, “I would be embarrassed at the honors that are being heaped on me were it not for the fact that in honoring me you are also honoring that vast army of thinkers and workers of the past, and those who are carrying on; without whom my own work would have gone for nothing. If I have spurred men to greater effort and if our work has widened the horizon of man’s understanding even a little and given a measure of happiness to the world, I am content.”

After giving his brief remarks, Edison collapsed and had to be taken to Ford’s house for several days of bed rest. “I am tired of all the glory,” he complained. “I want to get back to work.”

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.


“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.
-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.

Five Key Housing Issues for 2010

An article in the Wall Street Journal How Will the Housing Market Look in 2010?, Nick Timiraos list five issues.

Mortgage Rates: The Mortgage Bankers’ Association says that it expects rates to rise by around one-quarter of a percentage point, but others say rates could jump by as much as a full percentage point.

Fannie, Freddie and the FHA: The future of Fannie and Freddie remains nearly as uncertain now as it was one year ago, but the White House has said it will offer its recommendations on how to remake the U.S. housing-finance infrastructure early this year.

Loan Modifications: Loan modification efforts have helped to hold back the supply of foreclosures for sale.

More Loan Resets: Meanwhile, more interest-only loans that allowed borrowers to avoid making principle payments for three, five, or seven years will reset to higher payments.

Tax Credit and Home Sales: While it wouldn’t be surprising to see prices tick down again during the winter, when home sales are normally cooler, there’s still a good deal of debate between housing economists and analysts over whether a “double-dip” could lead home prices to fall below the bottom that was set last April.

Some additional questions, I think you might want to consider:

How will the market affect the size of new home construction in 2010?

What impact will the above issues have on the 2010 housing supply?

Housing Starts vs Carloads of Lumber

I found this publication called Rail Time Indicators November 2009. On Page 13, it shows the weekly Rail carloads of Lumber.

Combined U.S. + Canadian Average Weekly Rail Carloads of Lumber and Primary Forest Products

On Page 24, it shows Housing Starts versus Rail Carloads of Lumber. In 2008 and 2009 the carloads of lumber exceeds the demand of Housing Starts, indicating that the remodeling market is the strongest.

U.S. Housing Starts vs. U.S.+Canadian Rail Carloads of Lumber, Wood & Forest Products