Cloud computing is growing rapidly and has started to dominate many parts of the IT market. Cloud revenues are rising at around 25% per year and, according to Jeremy Duke of Synergy Research Group:
“Major barriers to cloud adoption are now almost a thing of the past, especially on the public-cloud side. Cloud technologies are now generating massive revenues for technology vendors and cloud service providers, and yet there are still many years of strong growth ahead.”
The market leader in cloud services (as opposed to cloud hardware) is Amazon Web Services (AWS), a subsidiary of Amazon. At the end of 2016, it had a market share of around 40%, larger than the next three competitors (Microsoft, Google and IBM), combined. AWS originated cloud computing some 10 years ago. It is set to have generated revenue of $13 billion in 2016.
The cloud computing services market is an oligopoly, with a significant market leader, AWS. But is the competition from other players in the market, including IT giants, such as Google, Microsoft, IBM and Oracle, enough to guarantee that the market stays competitive and that prices will fall as technology improves and costs fall?
Certainly all the major players are investing heavily in new services, better infrastructure and marketing. And they are already established suppliers in other sectors of the IT market. Microsoft and Google, in particular, are strong contenders to AWS. Nevertheless, as the first article states:
Neither Google nor Microsoft have an easy task since AWS will continue to be an innovation machine with a widely recognized brand among the all-important developer community. Both Amazon’s major competitors have an opportunity to solidify themselves as strong alternatives in what is turning into a public cloud oligopoly.
While Amazon dominates cloud infrastructure, an oligopoly is emerging. Which will buyers bet on? diginomica, Kurt Marko (16/2/17)
Study: AWS has 45% share of public cloud infrastructure market — more than Microsoft, Google, IBM combined GeekWire, Dan Richman (31/10/16)
Cloud computing revenues jumped 25% in 2016, with strong growth ahead, researcher says GeekWire, Dan Richman (4/1/17)
Press releases Synergy Research Group
- Distinguish the different segments of the cloud computing market.
- What competitive advantages does AWS have over its major rivals?
- What specific advantages does Microsoft have in the cloud computing market?
- Is the amount of competition in the cloud computing market enough to prevent the firms from charging excessive prices to their customers? How might you assess what is ‘excessive’?
- What barriers to entry are there in the cloud computing market? Should they be a worry for competition authorities?
- Are the any network economies in cloud computing? What might they be?
- Cloud computing is a rapidly developing industry (for example, the relatively recent development of cloud containers). How does the speed of development impact on competition?
- How would market saturation affect competition and the behaviour of the major players?
According to the BBC’s Joe Lynam, “Britain has the most competitive and dynamic retail environment in the world, which attracts shoppers globally.” It is perhaps this fact which may save BHS, with new owners being attracted by such an opportunity. BHS is soon expected to file for administration, with debts of more than £1.3 billion and having failed to secure the loan needed to keep it afloat. If this company collapses, it will bring an end to the life of an 88 year old giant.
The British retail scene has certainly changed over the past decade, with names such as Woolworths and Comet disappearing – could BHS be the next casualty of the changing retail climate? In the world of retail, tastes change quickly and those stores who fail to change with the times are the ones that suffer. One of the factors behind the downfall of BHS is the ‘dated’ nature of its stores and fashions. As clothing outlets such as Zara, Oasis and Next have continued to change with the times, commentators suggest that BHS continues with a trading offer from the 1980s. With the online shopping trend, many household names adapted their strategy, but BHS failed to do so and the second chance that BHS asked the public for when Sir Philip Green, its former owner, sold BHS in 2015 hasn’t materialised.
With administrators ready to be brought in and thousands of jobs hanging in the balance, the administrators will be looking at methods to attract funding, new owners or so-called ‘cherry pickers’ who may be interested in buying up the more profitable stores. Some of their stores remain in prime locations and deliver a tidy profit and it is perhaps these gems, together with the tradition that British Home Stores brings that may yet see the company saved. The outcome for BHS will not only affect the jobs of its employees, but will affect the pensions of thousands of workers. The BHS pension fund currently has a deficit of £576 million and so the Pension Protection Fund will have to look closely at the situation before thinking about issues a contribution notice to those connected with the fund.
A deal was on the cards last week, with BHS owner Dominic Chappell in talks with Mike Ashley’s Sports Direct, but the high debts and pensions deficit appears to have deterred this deal. The failing fortunes of BHS have now come back to haunt former owner, Sir Philip Green, who in March 2015, sold the business for just £1. Sir Philip may return to save the day, but the options for this once giant of the British high street are rather limited. The following articles consider the fortunes of BHS.
BHS seeks Sports Direct lifeline as it heads for collapse The Guardian, Graham Ruddick (24/04/16)
BHS expected to file for administration on Monday BBC News (25/04/16)
Thousands of BHS workers face anxious wait amid administration fears The Telegraph (25/04/16)
BHS administration: ‘Imminent bankruptcy’ puts 11,000 jobs at risk Independent, Peter Yeung (25/04/16)
Up to 11,000 jobs face the axe as BHS is expected to announce collapse of chain after efforts to find rescuer failed Mail Online, Neil Craven (24/04/16)
BHS nears collapse putting 11,000 jobs at risk Sky News (25/04/16)
BHS set to file for administration after sales talks fail Financial Times, Murad Ahmed (25/04/16)
- Using a demand and supply diagram, can you explain some of the factors that have contributed to the difficult position that BHS finds itself in?
- Now, can you use a diagram showing revenues and profits and explain the current position of BHS?
- What type of market structure does BHS operate in? Can this be used to explain why it is in its current position?
- How has the company failed in adapting its business strategy to the changing times?
- Looking back at the history of BHS, can you apply the product life cycle to this store?
- If another company is considering purchasing BHS, or at least some of its stores, what key information will it need and what might make it likely to go ahead with such a purchase?
In an earlier post, Elizabeth looked at oligopolistic competition between supermarkets. Although supermarkets have been accused of tacit price collusion on many occasions in the past, price competition has been growing. And recent developments show that it is likely to get a lot fiercer as the ‘big four’ try to take on the ‘deep discounters’, Aldi and Lidl.
Part of the reason for the growth in price competition has been a change in shopping behaviour. Rather than doing one big shop per week in Tesco, Sainsbury’s, Asda or Morrisons, many consumers are doing smaller shops as they seek to get more for their money. A pattern is emerging for many consumers who are getting their essentials in Aldi or Lidl, their ‘special’ items in more upmarket shops, such as Waitrose, Marks & Spencer or small high street shops (such as bakers and ethnic food shops) and getting much fewer products from the big four. Other consumers, on limited incomes, who have seen their real incomes fall as prices have risen faster than wages, are doing virtually all their shopping in the deep discounters. As the Guardian article below states:
A steely focus on price and simplicity, against a backdrop of falling living standards that has sharpened customers’ eye for a bargain, has seen the discounter grab market share from competitors and transform what we expect from our weekly shop.
The result is that the big four are seeing their market share falling, as the chart shows. (Click here for a PowerPoint of the chart.) In the past year, Tesco’s market share has fallen from 29.9% to 28.1%, Asda’s from 17.8% to 16.3%, Sainsbury’s from 16.9% to 16.2% and Morrisons’ from 11.7% to 11.0%. By contrast, Aldi’s has risen from 3.9% to 5.4% and Lidl’s from 3.1% to 4.0%, while Waitrose’s has also risen, from 4.7% to 4.9%. And it’s not just market share that has been falling for the big four. Profits have also fallen, as have share prices. Sales revenues in the four weeks to 13 September are down 1.6% on the same period a year ago; sales volumes are down 1.9%.
But can the big four take on the discounters at their own game? Morrison’s has just announced a form of price match scheme called ‘Match & More’. If a shopper finds that a comparable grocery shop is cheaper in not only Tesco, Sainsbury’s or Asda, but also in Aldi or Lidl, then ‘Match & More users will automatically get the difference back in points on their card. Shoppers also will be able to collect extra points on hundreds of featured products and fuel’. When the difference has risen to a total £5 (5000 points), the shopper will get a £5 voucher at the till. The idea is to encourage customers to stay loyal to Morrisons.
But what if Tesco, Asda and Sainsbury’s do the same? What will be the impact on their prices and profits. Will there be a race to the bottom in prices, or will they be able to keep prices higher than the deep discounters, hoping that many customers will not cash in their vouchers?
But if effectively the big four felt forced to cut their prices to match Aldi and Lidl, could they afford to do so? This depends on their comparative average costs. At first sight, it might be thought that the big four could succeed in profitably matching the discounters, thereby clawing back market share. After all, they are much bigger and it might be thought that they would benefit from greater economies of scale and hence lower costs.
But it is not as simple as this. The discounters have lower costs than the big four. Their shops are typically in areas where rents or land prices are lower; their shops are smaller; they carry many fewer lines and thus gain economies of scale on each line; they have a much higher proportion of own-brand products; products are displayed in the boxes they come in, thus saving on the staff costs of unpacking them and placing them on shelves; they buy what is cheapest and thus do not always display the same brands.
So is Morrison’s a wise strategy? Will other supermarkets be forced to follow? Is there a prisoners’ dilemma here and, if so, is there any form of collusion in which the big four can engage which is not illegal? Can the big four differentiate themselves from the discounters and the up-market supermarkets in ways that will attract back customers?
It is worrying times for the big four.
Heavy Discounters Up Pressure On The UK’s Big Four Supermarkets Alliance News, Rowena Harris-Doughty (3/6/14)
Tesco loses more market share as supermarket sector slows to record low CITY A.M., Catherine Neilan (23/9/14)
Record low for grocery market growth as inflation disappears Kantar World Panel, Fraser McKevitt (23/9/14)
How Aldi’s price plan shook up Tesco, Morrison’s, Asda and Sainsbury’s The Guardian, Sarah Butler (29/9/14)
Sainsbury’s shares drop 7% on falling sales report BBC News (1/10/14)
Sainsbury results: the reaction Food Manufacture, Mike Stones (3/10/14)
Morrisons Becomes First Of Big Four Grocers To Price Match Aldi, Lidl Alliance News, Rowena Harris-Doughty (2/10/14)
UK: Morrisons Takes On Discounters With Price Match Card KamCity (3/10/14)
Morrisons to match the prices of Aldi and Lidl The Telegraph, Graham Ruddick (2/10/14)
Three reasons why Morrisons price-matching Aldi and Lidl is not a ‘gamechanger’ The Telegraph, Graham Ruddick (2/10/14)
- Would it be possible for the big four to price match the deep discounters?
- What is meant by the prisoners’ dilemma? In what ways are the big four in a prisoners’ dilemma situation?
- Assume that you had to advise Tesco on it strategy? What advise would you give it and why?
- Assume that two firms, M and A, are playing the following ‘game’: firm M pledges to match firm A’s prices; and firm A pledges to sell at 2% below M’s price. What will be the outcome of this game?
- Is Morrisons wise to adopt its ‘Match & More’ strategy?
- Why is it difficult for Morrisons to make a like-for-like comparison with Aldi and Lidl in its ‘Match & More’ strategy?
- Why may Aldi and Lidl benefit from Morrisons’ strategy?
Facebook has announced that it’s purchasing the messaging company WhatsApp. It is paying $19 billion in cash and shares, a sum that dwarfs other acquisitions of start-up companies in the app market. But what are the reasons for the acquisition and how will it affect users?
WhatsApp was founded less than five years ago and has seen massive growth and now has some 450 million active users, 70% of whom use it daily. This compares with Twitter’s 240 million users. An average of one million new users are signing up to WhatsApp each day. As the Wall Street Journal article, linked below, states:
Even by the get-big-fast standards of Silicon Valley, WhatsApp’s story is remarkable. The company, founded in 2009 by Ukrainian Jan Koum and American Brian Acton, reached 450 million users faster than any company in history, wrote Jim Goetz, a partner at investor Sequoia Capital.
Facebook had fewer than 150 million users after its fourth year, one third that of WhatsApp in the same time period.
Yet, despite its large user base, WhatsApp has just 55 employees, including 32 engineers.
For the user, WhatsApp offers a cheap service (free for the first year and just a 99¢ annual fee thereafter). There are no charges for sending or receiving text, pictures and videos. It operates on all mobile systems and carries no ads. It also offers privacy – once sent, messages are deleted from the company’s servers and are thus not available to government and other agencies trying to track people.
With 450 million current active users, this means that revenue next year will not be much in excess of $450 million. Thus it would seem that unless Facebook changes WhatsApp’s charging system or allows advertising (which it says it won’t) or sees massive further growth, there must have been reasons other than simple extra revenue for the acquisition.
Other possible reasons are investigated in the videos and articles below. One is to restrict competition which threatens Facebook’s own share of the messaging market: competition that has seen young people move away from Facebook, which they see is becoming more of a social media platform for families and all generations, not just for the young.
Videos and podcasts
Facebook pays billions for WhatsApp Messenger smartphone service Deutsche Welle, Manuel Özcerkes (19/2/14)
Facebook’s WhatsApp buy no bargain Reuters, Peter Thal Larsen (20/2/14)
Facebook Agrees To Buy WhatsApp For $19bn Sky News, Greg Milam (20/2/14)
Facebook Eliminates Competitor With WhatsApp Bloomberg TV, Om Malik, David Kirkpatrick and Paul Kedrosky (20/2/14)
Why WhatsApp Makes Perfect Sense for Facebook Bloomberg TV, Om Malik, David Kirkpatrick and Paul Kedrosky (20/2/14)
Facebook buying WhatsApp for $19bn BBC News, Mike Butcher (20/2/14)
Is Facebook’s acquisition of WhatsApp a desperate move? CNBC News, Rob Enderle (19/2/14)
Facebook’s $19bn WhatsApp deal ‘unjustifiable’ BBC Today Programme, Larry Magid (20/2/14)
Facebook to buy WhatsApp for $19 billion in deal shocker ReutersGerry Shih and Sarah McBride (20/2/14)
Facebook to Pay $19 Billion for WhatsApp Wall Street Journal, Reed Albergotti, Douglas MacMillan and Evelyn M. Rusli (19/2/14)
Facebook to buy WhatsApp for $19bn The Telegraph, Katherine Rushton (19/2/14)
Facebook buys WhatsApp: Mark Zuckerberg explains why The Telegraph (19/2/14)
WhatsApp deal: for Mark Zuckerberg $19bn is cheap to nullify the threat posed by messaging application The Telegraph, Katherine Rushton (20/2/14)
Why did Facebook buy WhatsApp? TechRadar, Matt Swider (20/2/14)
What is WhatsApp? What has Facebook got for $19bn? The Guardian, Alex Hern (20/2/14)
Facebook to buy messaging app WhatsApp for $19bn BBC News (20/2/14)
WhatsApp – is it worth it? BBC News, Rory Cellan-Jones (20/2/14)
Facebook buys WhatsApp: what the analysts say The Telegraph (19/2/14)
Facebook ‘dead and buried’ as teenagers switch to WhatsApp and Snapchat – because they don’t want mum and dad to see their embarrassing pictures Mail Online (27/12/13)
Facebook and WhatsApp: Getting the messages The Economist (22/2/14)
- Are Facebook and WhatsApp substitutes or complements, or neither?
- What does Facebook stand to gain from the acquisition of WhatsApp? Is the deal a largely defensive one for Facebook?
- Has Facebook paid too much for WhatsApp? What information would help you answer this question?
- Would it be a good idea for Facebook to build in the WhatsApp functionality into the main Facebook platform or would it be better to keep the two products separate by keeping WhatsApp as a self contained company?
- What effects will the acquisition have on competition in the social media and messaging market? Is this good for the user?
- Will the deal attract the attention of Federal competition regulators in the USA? If so, why; if not, why not?
- What are the implications for Google and Twitter?
- Find out and explain what happened to the Facebook share price after the acquisition was announced.
On 5 and 6 April, there was a conference on conscious capitalism in San Francisco. In January, a new book, Conscious Capitalism: Liberating the Heroic Spirit of Business, by John Mackey and Rajendra Sisodia, was published. Many in the business world are enthusiastic about this seemingly new approach to business, which focuses on broader social, environmental and ethical goals, rather than simple profit maximisation.
As the Washington Times review linked to below states:
“Conscious Capitalism” promotes a business culture that embodies “trust, accountability, caring, transparency, integrity, loyalty and egalitarianism.” The management ideal of “Conscious Capitalism” contains four key elements of “decentralization, empowerment, innovation and collaboration.” Above all, this exemplary form of business practice relies on careful attention to four tenets: higher purpose and core values, stakeholder integration, conscious leadership and conscious culture and management.
So how realistic is this vision of caring capitalism? There may be a few inspiring businesspeople, truly committed to improving the interests of the various stakeholders of their business and society more generally, but could it become a model for business in general? And if so, does this require education, monitoring and regulation? Or can a libertarian approach to business generate an environment where conscious and caring capitalists flourish and succeed better than those with a more narrow focus on profit?
The following videos and articles discuss conscious capitalism and the arguments of those, such as John Mackey, founder and co-CEO of Whole Food Market, who advocate it.
Conscious capitalism The Economist, John Mackey (15/3/13)
Conscious Capitalism: Heroes of the Business World Conscious capitalism, April in San Francisco (5/4/13)
It’s Not Corporate Social Responsibility Conscious capitalism, John Mackey (Jan 13)
Articles, reviews and information
Conscious Capitalism: Creating a New Paradigm for Business Whole Planet Foundation, John Mackey
Companies that Practice “Conscious Capitalism” Perform 10x Better Harvard Business Review, Tony Schwartz (4/4/13)
4 Ways to Become a (More) Conscious Capitalist Inc., Francesca Louise Fenzi (8/4/13)
The New Management Paradigm & John Mackey’s Whole Foods Forbes, Steve Denning (5/1/13)
Book Review: ‘Conscious Capitalism’ Washington Times, Anthony j. Sadar (20/3/13)
Book Review: Whole Foods Co-CEO John Mackey’s Conscious Capitalism Huffington Post, Christine Bader (28/1/13)
Chicken Soup for a Davos Soul Wall Street Journal, Alan Murray (16/1/13)
Conscious business Wikipedia
- What are the features of conscious capitalism?
- Do firms “get the shareholders they deserve”?
- How might firms that are not pursuing conscious capitalism be persuaded to become more conscious and more caring?
- How does conscious capitalism differ from corporate social responsibility?
- What would you understand by “conscious consumers”? How might their behaviour differ from other consumers?
- Why might firms engaging in conscious capitalism become more profitable than firms that have a simple aim of profit maximisation?
- What reforms, both internal within a firm and in the legal environment, does John Mackey advocate? Do you agree with his suggestions? What else do you suggest?