Monday, 28 September 2015

The console price wars

Sony's latest console, the PS4, has recently dropped in price to match its rival, Microsoft's XBox One.

The two companies have been fighting a war over three generations of games consoles. First the PS2 hugely outperformed the original XBox. Then the PS3 went up against the XBox 360 where they performed roughly equally (although both were thoroughly outsold by Nintendo's Wii). So far Sony is winning the latest battle, outselling both the XBox One and Nintendo's new WiiU.

The price wars really started with the previous generation. The XBox 360 was much cheaper than the PS3 until late in its life, mostly because the 360 didn't have a Blu-ray player. Meanwhile, the XBox One was about $100 more expensive than the PS4 at launch, although they've now reached roughly the same price.

Here are the lessons we think any manufacturer can learn from the console wars:

1. Don't jump on bandwagons. The PS3 struggled against the XBox 360 on price. And most of that was down to the integrated Blu-ray player. Now, for a Blu-ray player, the PS3 was really cheap. But it wasn't competing with other Blu-ray players; it was competing with the 360. Beyond that, when the PS3 came out, Blu-ray was still fighting with HD-DVD over what would be the next media standard. This mean many people were reluctant to commit to one side or the other by buying a player. The expense of the Blu-ray disc drive meant Sony ended up selling consoles at a loss for a while - a disaster for any manufacturer.

2. Expand your market. The Wii was such a huge success because it appealed to a much wider audience than its competitors. By focusing only on 'hardcore' gamers, Microsoft and Sony really missed out.

3. Move quickly. The XBox 360 was out for nearly a year before the Wii or PS3. And when the PS3 finally arrived, it wasn't much more powerful or graphically superior than the 360 (the Wii took a different strategy, as I cover above). With great games like Call of Duty 2 at launch and Halo 3 arriving at practically the same time as the PS3, XBox was able to steal a march on Playstation.

4. Innovate. The WiiU hasn't performed nearly as well as the Wii. That's because it doesn't offer much new to anyone who already owns a Wii. The next generation of consoles may end up using VR headsets like the Oculus Rift to add another dimension to the gaming experience.

5. Steal what works. After the success of the Wii's motion controls, Microsoft and Sony followed suit with the Kinect and Move for their respective consoles. This helped them capture some of the magic and wide appeal of the Wii.

Thursday, 24 September 2015

How can VW recover from the emissions scandal?

Volkswagen is in a lot of trouble. It faces fines of up to $18bn (£11.6bn) for manipulating emissions tests results. Essentially, VW engineers programmed the software in some of their diesel cars to recognise when the cars were being tested and dramatically reduced the cars' emissions for the duration of the tests. As soon as the tests finished, they went back to their normal high levels (nearly forty times the legal limit) because the lower levels are impossible to sustain during normal driving.

We're not talking about an insignificant amount of extra emissions, either. If the 11 million cars that VW has admitted to rigging were putting out emissions at the higher rate, the extra would be roughly the same as the UK's total combined emissions for all power stations, vehicles, industry and agriculture.

The advantage for Volkswagen is obvious: by cheating the tests, it's able to produce cars more cheaply. Kevin Drum has written a good piece for Mother Jones covering exactly what VW did. We're going to look more at what VW should do to fix the problem.

VW has started well by having CEO Martin Winterkorn apologise. Their US Chief Executive, Michael Horn, has also admitted wrongdoing, saying, 'Our company was dishonest with the EPA, and the California air resources board and with all of you, and in my German words: we have totally screwed up... We are committed to do what must be done and to begin to restore your trust. We will pay what we have to pay.'

But apologies are clearly not enough. Winterkorn has now resigned - he didn't really have a choice. Either he knew about it and was complicit or - possibly worse - he didn't know and was incompetent. Horn and others may well both be forced to resign too. And the fines are, again, a good place to start, but it's possible that VW executives may face criminal charges too.

Our consultant, Artur Oganov, said, 'It's going to take nothing less than a total restructuring of the entire company to restore consumer confidence. VW has a long road ahead of it.'


Wednesday, 9 September 2015

How black cabs are fighting back against Uber

Uber has been in the headlines again recently. The app has quickly risen to capture a large market share from taxi drivers in London and other cities all over the world. London's black-cab drivers are fighting back, though. They've started offering discounts of up to 30% on journeys of six miles or more at off-peak times - as long as passengers use a new app called Gett, that is.

Uber is infamous for charging more at busy times (the much-maligned 'surge pricing') and has come under fire for huge price increases during the recent Tube strikes. Gett, meanwhile, is selling itself on the opposite offer - it'll be cheaper when it's quiet and priced normally when it's busy.

This is an interesting approach by the black-cab drivers. But it doesn't solve the fundamental problem they face - black-cab drivers can't afford to work at the prices that Uber pays. Between training, the cars, maintenance etc. their overheads are simply much greater than those of Uber drivers.

Our consultant, Artur Oganov, gave us his thoughts: 'I use Uber every day, nearly. I can't remember the last time I was in a black cab. The service is the same to me. I could give Gett a try, maybe. But unless it's cheaper, I can't see me using it regularly. The black cabs have to compete on price and convenience, or nobody will use them. A new app is a good idea for convenience, but if it doesn't address price, it won't work.'

Monday, 7 September 2015

What's the best way to phrase your questions?

The UK is going to have a referendum on whether it will remain part of the EU. There was some concern about what exactly the question on the voting paper would say. This made me think about how we phrase questions and how it can affect the answers you get.

The suggested question was 'Should the United Kingdom remain a member of the European Union?' (with the answers being 'yes' or 'no'). The Electoral Commission, the independent body responsible for election rules, said this was a leading question. 'Yes' is a more positive answer than 'no', and it could have led to people leaning that way.

To look at it another way, it could equally be phrased as 'should the UK leave the EU?'. But it shouldn't be, for the same reason: both phrasings put undue weight on one side or the other.

The final form of the question will be 'should the United Kingdom remain a member of the European Union or leave the European Union?' (with the answers being 'Remain a member of the European Union' and 'Leave the European Union'.) This has much less room for bias regarding positive and negative.

We think you should phrase all questions you ask people carefully - especially if you're looking to get honest feedback from customers or your staff. If they lead people towards being unduly positive or negative, you won't get accurate results and could miss important stuff.

And you'll find that open questions give you a better understanding of the bigger picture than simple yes or no ones.

Let us analyse your feedback processes and tell you how you can improve them. Call us now.

Thursday, 3 September 2015

Why the Chinese government can't save falling stocks

Following on from our story about the Greek stock market crash, we're looking at the Chinese markets today.

The Chinese government has thrown everything but the kitchen sink at their falling stocks: cutting interest rates, limiting short selling, limiting sales from big investors, giving people loans to buy stocks, forcibly devaluing the renminbi, and allowing pension funds to buy stocks.

We're going to look at these measures one by one, explain the theory behind them, then offer an explanation of why it didn't work.

Interest rate cuts

The government cut interest rates unexpectedly on the 29th of June. The logic here is the same as it is in the UK, which has had a 0.5% base rate since March 2008. If people can't get a decent return on their savings by keeping them in the bank, they're more likely to spend them on stocks, which should prop up the falling markets. This hasn't been effective because the kinds of people who usually keep their money at the bank are probably quite risk-averse, and the stock market is extremely volatile right now. Shares are too unsafe an investment for these kinds of investors.

Short selling restrictions

Buying stock with the assumption that its value will decrease is called short selling. Basically, you borrow a share, then sell it. Then, if its value falls, you can repurchase it at a lower price then return it to the person you borrowed it from and pocket the difference. That's why it's an attractive option when markets are falling. But short selling can end up driving prices lower because it affects investor confidence. By limiting the number of people hoping that prices fall, the government is trying to stop price falls. But limits on short selling have historically not worked, most recently during the 2008 crash.

Share selling limits

On the 9th of July, the government limited investors with large stakes in listed firms from selling for at least six months. Like the restriction on short selling, this is designed to boost confidence because certain stocks will be less liquid and therefore more likely to keep their value.  But the investors with large stakes are naturally still worried that they are going to lose a lot of money because prices keep falling. It's just that now they can't do anything about it! This didn't help because there is still a lot of instability elsewhere in the markets.

Loans

This measure is similar to the interest rate cut: if people have extra money to spend on buying shares, that will prop up prices. The government gave out loans of around 1.3tn yuan (£134bn) - a vast amount, but tiny compared to the over 25tn yuan the stock market has lost since June. That's the main reason it hasn't worked; it's just a drop in the ocean.

Devaluation

The renminbi was hit hard in mid-August by a series of devaluations. The Chinese government were trying to improve competitiveness by inviting foreign investment. But the crash in their market has had a huge knock-on effect in the US, Australia and other markets where Chinese companies do a lot of business. Companies there are likely to remain reluctant to invest until the problems in China improve.

Pension fund investment

The government changed the rules for pension funds, and they are now allowed to invest in the stock exchange. As with some of the other measures, the hope is that having more investment in the markets will boost prices and restore confidence. Unfortunately, pension funds tend to be even more conservative and risk-averse than bank savers. They need to guarantee a steady rate of return, and no stock is offering that right now.

Conclusions

The stock market devaluation is probably symptomatic of a bubble popping in China. It's just a symptom, and all the measures we've looked at are only trying to treat that symptom, not fix its causes. The root causes are to do with overconfidence leading to speculation. And the Chinese economy has been facing a general slowdown, especially in manufacturing and construction - two key Chinese industries - for a while.

This is likely a simple market correction and government attempts to fix falling markets by using so many measures so intensively may, in fact, have made things worse by knocking investor confidence and making them believe the situation is more serious than it is.

Tuesday, 1 September 2015

The problem with mergers: Ladbrokes, Coral, Paddy Power and Betfair

A few weeks ago, high street betting shop giants Ladbrokes and Coral have announced plans to merge. And, last week, their rivals Paddy Power and Betfair did the same. Now, these mergers still need to be assessed by the competition regulators to make sure that these two new giants won't have unfair monopolies, but there's plenty to recommend the deals - especially for the struggling Ladbrokes.

Martin Good / Shutterstock.com
One thing we think is important for them to consider is how they integrate their processes. The different chains have different offers and selling points, although a broadly similar customer demographic. All of them are focused in particular on the controversial fixed-odds betting terminals and on their online offerings. They will need to carefully consider how to get their systems to work together, especially their websites and apps, which could prove challenging thanks to technical limitations.

And, if the new groups do end up having to divest shops, they should carefully assess which locations to sell. They should consider things like: proximity to other shops (either owned by them or their competition), turnover, overheads, staff performance and potential changes to their local areas.

Our consultant, Artur Oganov, said, 'It's the fixed-odds machines that could be the biggest problem. There are laws about how many each location can have, so that's why there seem to be more and more betting shops on the streets. But the machines account for 52% of profits from the shops, so they have to have them. If the new groups keep running two networks of those each, they waste a lot of money.'



A story about mergers in the betting industry - how teaming up with a competitor can help you out, but you need to merge your processes carefully.