I'm not in Kansas anymore

August 20, 2008
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I’m somewhere over Kansas right now – at least I was when I started writing this. I’m flying across country to visit with clients for the week. As I sit in this seat, fingers and toes numb, I find myself thinking about marketing.Keep in mind that all my numbers are fictional and are unlikely to reflect the actual numbers – they are more illustrative than anything.

I’m flying Delta. I’ve never flown on this carrier before and, at a glance, am impressed. The team there have really come up with some innovative ways to help make the company money. On my main flight, 5 hours worth of my trip, I am in a 767. Each seat has a small touch screen monitor in the back that allows you to view details about the flight (it is -59 degrees farenheit outsite and we have travelled ~1050 miles), watch a limited number of satellite television stations, listen to a small variety of CD’s, or rent movies and game time.

The implications of this are interesting to me. Let’s say that each touch screen costs $1,500. This particular plane has what I estimate to be roughly 385 seats. So if my estimates are correct then we can come to a sum of $577,500, just to purchase the screens. We will assume that installation falls under operating costs and will ignore it, for now. So at this point the break even for the purchase of the screens is just shy of $600,000.

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The first interesting point of this setup is that instead of offering a standardized in-flight movie each passenger has the option to choose their own movie, game, television, and more. From what I can tell you must purchase movies and game time. The games are $5 for an “inflight subscription”, which allows you to play all of the games throughout your flight. The movies range from $5 to $7, from what I have seen. Now they can recoup some of the costs of their touch screens.

Let’s say that out of the 385 passengers 10% of them choose to purchase in-flight games. This means that 39 people, rounding up, will make purchases of $5 each, resulting in $195 of revenue. Now let’s be aggressive and say that 50% of passengers purchase a single movie during the flight, all for $7. This adds an additional $1,348 in revenue, bringing our in-flight total to $1,543. Let’s assume that this particular aircraft is able to make three such flights per day, all with the same revenue. This now brings the daily income, from just movies and games, to $4,629 for just this aircraft. If we make an assumption that this plane will fly 250 days out of the year, all with the same daily income, we can posit that the aircraft would recognize $1,157,250 in revenue each year, soley from movie and game rentals. Subtract out the cost of the touch screens and the actual profit, excluding subtraction ofoperations costs, is $579,750.

This number is undoubtedly high as we took some liberties with the numbers and failed to take into account the cost of installation, maintenance, subscription service fees, etc. So let’s take those into account. Let’s assume that each monitor costs $75 to install with each plane requiring a one time $2,500 fee for wiring. This brings installation to $31,375. Assuming that maintenance is required on one monitor a day, every day, and that this maintenance costs $45 we can now account for an additional $11,250 in annual costs. Subscription service fees for Dish Network, which is what is offered, are pretty cheap for basic packages – around $19 per month. So let’s say that Dish Network charges a full rate for each of the monitors. This brings an additional $7,315 per month or $87,780 per year. Adding up our operations expenses we now have an additional $130,405 in expenses.

This takes our annual profit from the system down to $449,345. This, to me, is a pretty impressive return on investment. But let’s say it wasn’t. Let’s say that the system actuall cost them $100,000 more a year than they brought in. This would now be a bad investment right?

Wrong. Here’s where the impressive marketing comes into play. Each time I access the system I see ads – ads that some company must pay money for. Television, radio, and other advertising mediums are quite expensive, despite the major drawback that the target audience can choose to pass over the ad at will. Imagine the rates that would be charged for showing ads to a captive audience. I have ~5 hours that I am stuck in a seat with their ads in front of me, assuming my TV is on the whole time.

I find it impressive to look at something like this and think, “Well its really nice, but I’d rather have had larger seats.” Then I realize that they never did it for me – its only there because it is one more way for the airline to make money.

I’m impressed – but I’d still like a larger seat.

A world without farmers

August 12, 2008
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Over time developing and growing countries generally shift their skill set in an evolutionary manner. As I discussed in Outsourcing and the Economy, the cheaper cost of labor overseas generally creates a void in domestic markets where those workers must either learn a new skill or remain unemployed. People will usually opt to self-sustain and will learn a new skill to maintain a level of productiveness within society.

As more and more jobs move to foreign markets people will inevitably learn higher level skills as a result, thus progressing the entire economy. Assembly line workers in the states may learn to do data entry when their factory work is farmed out to China. The same employees may then learn software engineering when the data entry jobs are farmed out to India.

Alan Greenspan talks extensively about this concept in his book The Age of Turbulence: Adventures in a New World, calling the process “creative destruction”. He supports the eventual fall of blue and white collar work in developed nations saying, “Job security, historically a problem mainly of blue-collar workers, became an issue starting in the 1990s for more highly educated, alluent people.” He later explains the process more succinctly saying, “Production shifts, such as the transfer of some U.S. textiles and apparel manufacturing abroad, have freed resources to engage in the output of products and services world consumers value more highly. The net result has been increased real incomes”, alluding to the tight coupling between increased living standards and performing more valuable job functions as a nation.

If nations are constantly progressing it is feasible to imagine a world where there are no more farmers. This doesn’t necessarily negate having agricultural products, but just the fact that the labor portion of farming, factory work, and other things will have become largely obsolete. How would this world work with no farmers to reap and sow? Enter technology.

In our current society we are already making advances that will allow us to create more virulent fruits and vegetables and are even starting to discover how to grow meat in a lab. These innovations are just the tip of the iceburg and are a sneak preview of the things to come. Farms may be replaced by vertical silos with robotic “farmers” that reap and sow each harvest. We already have the technology to be able to provide artificial sunlight and hydration. This is just one scenario but the possibilities are truly endless.

Can the world eventually progress to a point where there are no farmers? Yes, but I don’t think it will happen, at least not on a global scale. Such a world would require that all the countries that are either unindustrialized or developing reach a point where they no longer provide a source for cheap labor. The basic concept behind this is that building the technology to replace the workers must be cheaper than the actual workers themselves. Until the world reaches a point where the available human labor is more scarce than technology, and thus more expensive, we will not see such a shift.

Wax and Wane

August 11, 2008
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Government spending and/or increased taxes are not bad in and of themselves. What matters in every situation where a politician proposes these things is not only what the change will do to the individual and the company but what it will do for the economy as a whole and whether expanding or contracting these things is the right move given the current state of the nation.

In general, you can have some situations where taxes are needed to fuel government spending and some where they are not. In times of deficit there are not enough funds to cover spending, so you have two options. You can either raise taxes or you can cut spending. Cutting spending is the obvious first choice but will only work to an extent before you start losing control of the basics that our government provides, such as police forces, legislative branches, etc. The only option that remains when cutting spending is not viable is to raise taxes. Conversely, if the nation is in a surplus then raising taxes and reducing government spending don’t really make a lot of sense.

Likewise, government spending can be both a blessing and a burden. In times of economic stagnation government spending, when applied judiciously, can help to stimulate growth within the economy. However, overspending by the government can have the counteractive effect of helping to ramp up inflation, which then has a trickle down effect on unemployment and the general welfare of the economy.

The point I am driving at here is simple: government spending and taxes are only bad in the situation that they are used inappropriately. If you hear that a given senator, mayor, or city official wants to raise taxes, don’t immediately shut them out. Listen to why they want to raise them then judge whether their reasoning is flawed or not. Many times this exercise will reveal that the individual isn’t making the choice that is in the best interest of the people. However, many other times this will prove to be the right choice. Some praise Reagan for operating the country very well in a deficit while others praise Clinton for doing the same with a surplus. The ultimate goal is a zero state where spending exactly equals taxes, however in the inevitable absence of this near mythical zero state, increases and decreases in both government spending and taxes will be warranted in certain situations.