Saturday, February 2, 2013

The Stock Market

Pretty much spot on, Mark Cuban. Aivars Lode

The Number.I recommend that anyone with an interest in the market jump at the chance to buy it.
In 1990, I sold my company, MicroSolutions which specialized in what at the time was the relatively new
business of helping companies network their computer equipment to CompuServe. After taxes, I walked away
with about $2 million. That was going to be my nest egg, and my goal was to protect it at all costs, and grow it
I set about interviewing stockbrokers and settled upon a broker from Goldman Sachs, Raleigh Ralls. Raleigh was
in his late 20s, and relatively new to Goldman. But we hit it off very well and I trusted him. As we planned my
financial future, I made it clear that I wanted my nest egg to be invested not like I was 30 years old, but as if I
were 60 years old. I was a widows and orphans investor.
Over the next year I stuck to my plan. I trusted Raleigh, and he put me in bonds, dividend-paying utilities
and blue chips, just as I asked.
During that year, Raleigh began asking me a lot of questions about technology. Because of my experience at
MicroSolutions, I knew the products and companies that were hot. Synoptics, Wellfleet, NetWorth, Lotus, Novell
and others. I knew which had products that worked, didn’t work, were selling or not. How these companies
were marketed, and whether or not they were or would be successful.
I couldn’t believe that I would have an advantage in the market. After all, I had read A Random Walk Down Wall
Street in college. I truly thought that the markets were efficient, that any available knowledge about a company
was already reflected in its stock price. Yet I saw Raleigh using the information I gave him to make money for
his clients. He finally broke me down to start using this information to my advantage to make some money in the
market. Finally after more than a year, I relented. I was ready to trade.
Notice I didn’t use the word invest. I wasn’t an investor. I just wanted to make money. The reason I was ready
to try was that it was patently obvious that the market wasn’t efficient. Someone like me with industry knowledge
had an advantage. My knowledge could be used profitably. As we got ready to start, I asked Raleigh if he had any
words of wisdom that I should remember. His response was simple. “Get Long, Get Loud”.
Get Long, Get Loud. As we started buying and selling technology stocks, most of which were in the local area
networking field that I had specialized in at MicroSolutions, Raleigh put me on the phone with analysts, money
managers, individual investors, reporters, anyone with money or influence who wanted to talk technology and stocks.
We talked about token ring topologies that didn’t work on 10BaseT. We talked about what companies were
stuffing channels – selling more equipment to their distributors than the distributors really needed to meet the retail
demand. We talked about who was winning, and who was losing. We talked about things that really amounted to
the things you would hear if you attended any industry trade show panel. Yet after hanging up the phone with
these people, I would watch stocks move up and down. Of course as the stocks moved, the number of people wanting to
talk to me grew.
I remember buying stock in a Canadian company called Gandalf Technologies in the early 90s. Gandalf made Ethernet
bridges that allowed businesses and homes to connect to the Internet and each other via high-speed digital phone lines
called ISDN.
I had bought one for my house and liked the product, and I’d talked to other people who’d used it. They had
decent results, nothing spectacular, but good enough. I had no idea Gandalf was even a public company until a
friend of Raleigh’s asked me about it. What did I think about Gandalf Technologies? It was trading at the time at
about a buck a share. It was a decent company, I said. It had competition, but the market was new and they had as
much chance as anyone to succeed. Sure, I’ll buy some, and I would be happy to answer any questions about the
technology. The market size, the competition, the growth rates. Whatever I knew, I would tell.
I bought the stock, I answered the questions, and I watched Gandalf climb from a dollar to about $20 a share over
the next months.
At a dollar, I could make an argument that Gandalf could be attractive. Its market was growing, and compared
to the competition, it was reasonably valued on a price-sales or price-earnings basis. But at $20, the company’s
market value was close to $1 billion – which in those days was real money. The situation was crazy. People were
buying the stock because other people were buying the stock.
To add to the volume, a mid-sized investment bank that specialized in technology companies came out with a buy
rating on Gandalf. They reiterated all the marketing mishmash that was fun to talk about when the stock was a
dollar. The ISDN market was exploding. The product was good. Gandalf was adding distributors. If they
only maintained X percentage of the market, they would grow to some big number. Their competitors were trading at
huge market caps, so this company looks cheap. Et cetera, et cetera.
The bank made up forecasts formulating revenue numbers at monstrous growth rates that at some point in the future
led to profits. Unfortunately, the bank couldn’t attract enough new money to the stock to sustain its
price. It didn’t have enough brokers to shout out the marketing spiel to entice enough new buyers to pay the old
buyers. The hope among the “sophisticated buyers” was that one bank picking up coverage would lead to others doing the
same. It didn’t happen. No other big investment banks published reports on the stock. The volume turned
So I did the only smart thing. I sold my stock, and I shorted it to boot. Then I told the same people who asked me
why I was buying the stock that I had shorted the stock. Over the next months, the stock sank into oblivion. In
1997, Gandalf filed for bankruptcy. Its shares were canceled – wiped out – a few months later. I wish I
could take credit for the stock going up, and going down. I can’t. If the company had performed well, who knows
what the stock would have done?
But the entire experience taught me quite a bit about how the market works. For years on end a company’s price
can have less to do with a company’s real prospects than with the excitement it and its supporters are able to generate
among investors. That lesson was reinforced as I saw the Gandalf experience repeated with many different stocks
over the next 10 years. Brokers and bankers market and sell stocks. Unless demand can be manufactured, the
stock will decline.
In July of 1998, my partner Todd Wagner and I took our company,, public with Morgan Stanley. used audio and video streaming to enable companies to communicate live with customers, employees,
vendors, anyone with a PC. We founded in 1995, and we were well on our way to being profitable. Still, we
never thought we would go public so quickly. But this was the Internet Era, and the demand for Internet stocks was
starting to explode. So publicly traded we would become and Morgan Stanley would shepherd us.
Part of the process of taking a new company public is something called a road show. The road show is just
that. A company getting ready to sell shares visits the big mutual funds, hedge funds, pension funds – anyone who
can buy millions of dollars of stock in a single order. It’s a sales tour. 7 days, 63 presentations.
We often discussed turning up the volume on the stock. It was the ultimate “Get Loud.” Call it
Prior to the road show, we put together an amazing presentation. We hired consultants to help us. We
practiced and practiced. We argued about what we should and shouldn’t say. We had Morgan Stanley and others
ask us every possible question they could think of so we wouldn’t look stupid when we sat in front of these savvy
Savvy investors? I was shocked. Of the 63 companies and 400-plus participants we visited, I would be
exaggerating if I said we got 10 good questions about our business and how it worked. The vast majority of people
in the meetings had no clue who we were or what we did. They just knew that there were a lot of people talking
about the company and they should be there.
The lack of knowledge at the meetings got to be such a joke between Todd and I that we used to purposely mess up to
see if anyone noticed. Or we would have pet lines that we would make up to crack each other up. Did we ruin
our chance for the IPO? Was our product so complicated that no one got it and as a result no one bought the
stock? Hell no. They might not have had a clue, but that didn’t stop them from buying the stock. We batted
1.000. Every single investor we talked to placed the maximum order allowable for the stock.
On July 18, 1998, went public as BCST, priced at 18 dollars a share. It closed at $62.75, a gain
of almost 250 percent, which at the time was the largest one day rise of a new offering in the history of the stock
market. The same mutual fund managers who were completely clueless about our company placed multimillion orders
for our stock. Multimillion dollar orders using YOUR MONEY.
If the value of a stock is what people will pay for it, then was fairly valued. We were able to
work with Morgan Stanley to create volume around the stock. Volume creates demand. Stocks don’t go up
because companies do well or do poorly. Stocks go up and down depending on supply and demand. If a stock is
marketed well enough to create more demand from buyers than there are sellers, the stock will go up. What about
fundamentals? Fundamentals is a word invented by sellers to find buyers.
Price-earnings ratios, price-sales, the present value of future cash flows, pick one. Fundamentals are merely
metrics created to help stockbrokers sell stocks, and to give buyers reassurance when buying stocks. Even how
profits are calculated is manipulated to give confidence to buyers.
I get asked every day to invest in private companies. I always ask the same couple questions. How soon till I
get my money back, and how much cash can I make from the investment? I never ask what the PE ratio will be, what
the Price to Sales ratio will be. Most private investors are the same way. Heck, in Junior Achievement we were
taught to return money to our investors. For some reason, as Alex points out in The Number, buyers of stocks have
lost sight of the value of companies paying them cash for their investment. In today’s markets, cash isn’t earned
by holding a company and collecting dividends. It’s earned by convincing someone to buy your stock from you.
If you really think of it, when a stock doesn’t pay dividends, there really isn’t a whole lot of difference between
a share of stock and a baseball card.
If you put your Mickey Mantle rookie card on your desk, and a share of your favorite non-dividend paying stock next
to it, and let it sit there for 20 years. After 20 years you would still just have two pieces of paper sitting on
your desk.
The difference in value would come from how well they were marketed. If there were millions of stockbrokers
selling baseball cards, if there were financial television channels dedicated to covering the value of baseball cards
with a ticker of baseball card prices streaming at the bottom, if the fund industry spent billions to tell you to buy
and hold baseball cards, I am willing to bet we would talk about the fundamentals of baseball cards instead of
I know that sounds crazy, but the stock market has gone from a place where investors actually own part of a company
and have a say in their management, to a market designed to enrich insiders by allowing them to sell shares they buy
cheaply through options. Companies continuously issue new shares to their managers without asking their existing
shareholders. Those managers then leak that stock to the market a little at a time. It’s unlimited dilution
of existing shareholders’ stakes, death by a thousand dilutive cuts. If that isn’t a scam, I don’t know what
is. Individual shareholders have nothing but the chance to sell it to the next sucker. A mutual fund buys
one million shares of a company with your and your coworkers’ money. You own 1 percent of the company. Six
weeks later you own less, and all that money went to insiders, not to the company. And no one asked your
permission, and you didn’t know you got diluted or by how much till 90 days after the fact if that soon.
When went public, we raised a lot of money that certainly helped us grow as a company. But once
you get past the raising capital part of the market, the stock market becomes not only inefficient, but as close to a
Ponzi scheme as you can get.
As a public company, we got calls every day from people who owned Broadcast.comstock or had bought it for their
funds. They didn’t call because they were confused during our road show, were too embarrassed to ask questions and
wanted to get more information. They called because they wanted to know if the “fundamentals” – the marketing
points – they had heard before were improving. And the most important fundamental was “The Number,” our quarterly
earnings (or in our case, a loss). Once we went public, Morgan Stanley published a report on our company, as did
several other firms. They all projected our quarterly sales and earnings. Would we beat The Number?
Of course, by law, we were not allowed to say anything. That didn’t stop people from asking. They needed
us to beat the forecast. They knew if we beat The Number the volume on the stock would go up. Brokers would
tell their clients about it. The Wall Street Journal would write about it. CNBC would shout the good news
to day traders and investment banks that watched their network all day long. All the volume would drive up the
stock price.
Unfortunately, patience is not a virtue on Wall Street. Every day, portfolios are valued by at closing
price. If the value of your fund isn’t keeping up with the indexes or your competition, the new money coming in
the market won’t come to you. It just wasn’t feasible for these investors to wait till the number was reported by
companies each quarter. The volume had to be on the stocks in you fund. To keep the volume about a stock up, and
the demand for the stock increasing, you needed to have good news to tell.
Volume, The Number, whisper numbers, insiders granting themselves millions and millions of options -
these are the games that Wall Street plays to keep on enriching themselves at the expense of the public. I know
this. I have tried to tell people to be careful before they turned over their life savings and their financial
future to someone whose first job is to keep their job, not make you money.
Till I read The Number by Alex Berenson, I never had a book that explained how the market truly worked that I could
tell my friends, family and acquaintances to read. I never had a book that would truly warn them that the market
was not as fair and honest as mutual fund and brokerage commercials made them out to be. I may be a cynic when it comes
to the stock market, but I am an informed cynic, and that has helped me make some very, very profitable decisions in
the market.
If you are considering investing in the market, any part of it, or if you are considering giving your hard earned
money over to someone else to manage, please, please read The Number first.

The secret of their success

Coming from a Nordic background also growing up in Australia; I found this article about why the Nordics are the best governed on the planet, particularly interesting. Aivars Lode

CECIL RHODES ONCE remarked that “to be born an Englishman is to win first prize in the lottery of life.” Today the same thing could be said of being born Nordic. The Nordic countries have not only largely escaped the economic problems that are convulsing the Mediterranean world; they have also largely escaped the social ills that plague America. On any measure of the health of a society—from economic indicators like productivity and innovation to social ones like inequality and crime—the Nordic countries are gathered near the top (see table).
Why has this remote, thinly populated region, with its freezing winters and expanses of wilderness, proved so successful? There was a time when most of its population would have unhesitatingly praised their government, which for most of the 20th century meant the social democrats in one of their various national guises. The government had provided the people with cradle-to-grave welfare services, rescuing them from the brutal life of their 19th-century forebears, and stepped in to save the capitalist economies from their periodic crises.
Government’s role in improving equality is also being questioned. Andreas Bergh, of Sweden’s Research Institute of Industrial Economics, argues that the compression of Swedish incomes took place before the arrival of the welfare state, which was a consequence rather than a cause of the region’s prosperity—and almost killed the goose that laid the golden eggs.But free-marketers have poked holes in the pro-government explanation and offered a powerful alternative. In the period from 1870 to 1970 the Nordic countries were among the world’s fastest-growing countries, thanks to a series of pro-business reforms such as the establishment of banks and the privatisation of forests. But in the 1970s and 1980s the undisciplined growth of government caused the reforms to run into the sands. Free-marketers put the region’s impressive recent performance down to its determination to reduce government spending and set entrepreneurs free.
This special report has supported some of the free-marketers’ arguments. The Nordic countries had got into the habit of spending more on welfare than they could afford and of relying more on a handful of giant companies than was wise. They are right to try to trim their states and make life easier for business. But it would be wrong to ignore the role of government entirely.
The Nordic countries pride themselves on the honesty and transparency of their governments. Nordic governments are subject to rigorous scrutiny: for example, in Sweden everyone has access to all official records. Politicians are vilified if they get off their bicycles and into official limousines.
The Nordics have added two other important qualities to transparency: pragmatism and tough-mindedness. On discovering that the old social democratic consensus was no longer working, they let it go with remarkably little fuss and introduced new ideas from across the political spectrum. They also proved utterly determined in pushing through reforms. It is a grave error to mistake Nordic niceness for softheadedness.
Pragmatism explains why the new consensus has quickly replaced the old one. Few Swedish Social Democratic politicians, for instance, want to dismantle the conservative reforms put in place in recent years. It also explains why Nordic countries can often seem to be amalgams of left- and right-wing policies.
Pragmatism also explains why the Nordics are continuing to upgrade their model. They still have plenty of problems. Their governments remain too big and their private sectors too small. Their taxes are still too high and some of their benefits too generous. The Danish system of flexicurity puts too much emphasis on security and not enough on flexibility. Norway’s oil boom is threatening to destroy the work ethic. It is a bad sign that over 6% of the workforce are on sick leave at any one time and around 9% of the working-age population live on disability pensions. But the Nordics are continuing to introduce structural reforms, perhaps a bit too slowly but stolidly and relentlessly. And they are doing all this without sacrificing what makes the Nordic model so valuable: the ability to invest in human capital and protect people from the disruptions that are part of the capitalist system.
Getting to Denmark
Most of the rich world now faces the same problems that the Nordics faced in the early 1990s—out-of-control public spending and overgenerous entitlement programmes. Southern Europe needs a dose of Nordic tough-mindedness if it is to get its finances under control. And America needs a dose of Nordic pragmatism if it is to have any chance of reining in entitlements and reforming the public sector.
The Nordics are hardly blushing violets when it comes to advertising the virtues of their model. Nordic think-tanks produce detailed studies in English about how they reformed their states. Nordic politicians fight their corner in international meetings and Nordic consultants sell their public-sector expertise around the world. Dag Detter played a leading role in restructuring the Swedish state’s commercial portfolio in the 1990s, representing more than a quarter of the business sector. He has since advised governments in Asia and across Europe.
Yet it is hard to see the Nordic model of government spreading quickly, mainly because the Nordic talent for government is sui generis. Nordic government arose from a combination of difficult geography and benign history. All the Nordic countries have small populations, which means that members of the ruling elites have to get on with each other. Their monarchs lived in relatively modest places and their barons had to strike bargains with independent-minded peasants and seafarers.
They embraced liberalism early. Sweden guaranteed freedom of the press in 1766, and from the 1840s onwards it abolished preference for aristocrats in handing out top government jobs and created a meritocratic and corruption-free civil service. They also embraced Protestantism—a religion that reduces the church to a helpmate and emphasises the direct relationship between the individual and his God. One of the Lutheran church’s main priorities was teaching peasants to read.
The combination of geography and history has provided Nordic governments with two powerful resources: trust in strangers and belief in individual rights. A Eurobarometer survey of broad social trust (as opposed to trust in immediate family) showed the Nordics in leading positions (see chart below). Economists say that high levels of trust result in lower transaction costs—there is no need to resort to American-style lawsuits or Italian-style quid-pro-quo deals in order to get things done. But its virtues go beyond that. Trust means that high-quality people join the civil service. Citizens pay their taxes and play by the rules. Government decisions are widely accepted.

The World Values Survey, which has been monitoring values in over 100 countries since 1981, says that the Nordics are the world’s biggest believers in individual autonomy. The Nordic combination of big government and individualism may seem odd to some, but according to Lars Tragardh, of Ersta Skondal University College, Stockholm, the Nordics have no trouble reconciling the two: they regard the state’s main job as promoting individual autonomy and social mobility. Any piece of Nordic social legislation—particularly the family laws of recent years—can be justified in terms of individual autonomy. Universal free education allows students of all backgrounds to achieve their potential. Separate taxation of spouses puts wives on an equal footing with their husbands. Universal day care for children makes it possible for both parents to work full-time. Mr Tragardh has a useful phrase to describe this mentality: “statist individualism”.
Nordic people take this attitude to government with them when they go abroad. In the 19th and early 20th centuries some 1.3m people, a quarter of the Swedish population at the time, emigrated, mostly to the United States. America created an entire genre of jokes about “dumb Swedes” and their willingness to obey rules. These dumb Swedes created the best-governed enclaves in America, such as Minnesota. Even today Americans with Nordic roots are 10% more likely than the average American to believe that “most people can be trusted”.
Size isn’t everything
Economists frequently express puzzlement about the Nordic countries’ recent economic success, given that their governments are so big. According to a professional rule of thumb, an increase in tax revenues as a share of GDP of ten percentage points is usually associated with a drop in annual growth of half to one percentage point. But such numbers need to be adjusted to allow for the benefits of honesty and efficiency. The Italian government, for instance, imposes a heavy burden on society because the politicians who run it are mainly concerned with extracting rent rather than providing public services. Goran Persson, a former Swedish prime minister, once compared Sweden’s economy with a bumblebee—“with its overly heavy body and little wings, supposedly it should not be able to fly—but it does.” Today it is fighting fit and flying better than it has done for decades.

Friday, February 1, 2013

Great News for America… and America's Banks

As occured in Aussie the banks came back strongly after our crisis. Aivars Lode

The recovery is getting louder…

Nearly a year ago, I wrote: "The U.S. banking sector hasn't been this healthy in 25 years…"

I explained that the banks, chastened by the near-apocalypse of the 2008-2009 financial meltdown, had renewed their commitment to conservative lending practices. That, combined with a resurgent housing market, was pointing to bigger bank profits…

I called it a "quiet recovery." Since then, things have only gotten better.

Banks today are nearly as strong as they've ever been.

All the positive trends I cited last year have only gained momentum… The housing recovery continues to raise asset values and decrease liabilities for both small and large banks.

Many banks have settled class-action lawsuits that resulted from the credit/mortgage crisis of 2008-2009, too. This resolves some of the undefined, potential liabilities that the banks had to prepare for… and frees up even more capital for lending.

Commercial and industrial lending is growing at nearly 12%, and it shows no sign of slowing down. The chart below shows how banks' commercial and industrial lending is just $100 billion (about 6% away) from all-time highs…

Remember, this is how banks make money – by lending. The more they lend, the more money they make.

With interest rates low, they can borrow money from depositors for next to nothing (as anyone with a savings account knows quite well). Then, they loan it out at higher rates (around 4%-5% for commercial loans). This "interest spread" allows banks to mint money.

Not only are bank profits rolling in, but almost all the banks are as healthy as they've been in almost a century.

A bank's health is measured by how much capital it has relative to its assets. For most major banks, this ratio is higher than it's been since the Great Depression. Part of the reason is regulation. The government raised the requirements after the 2008-2009 crisis… But much of it reflects the industry's return to less leveraged and more careful banking practices.

Another measure of health is the institution's "liquidity" – how much of its assets are shorter-term in nature. Liquidity helps banks react to emergencies and opportunities… You can't deploy cash unless you have it on hand. Right now, liquidity is at 30-year highs.

There are many other banking metrics that show signs of improvement. The loan-loss reserves are dropping as the economy grows and borrowers are better able to meet the commitments.

Most banks have been forced to be extra cautious over the past few years and hold back earnings for possible defaults and losses. But fewer delinquent loans means more income and fewer losses. Many of the assets on the books don't need the same super-conservative loan-loss provisions. Reallocating that set-aside money would increase book value.

This is good news for banking in general. And it's one more reason I like the banking sector.

My top recommendation in the banking sector, Wells Fargo (WFC), is still a "strong buy." And I'm finding more great opportunities in the sector.

The crisis has passed. And the recovery is gaining strength. Now is a good time to own bank stocks.

Here's to our health, wealth, and a great retirement,

Dr. David Eifrig 

Tuesday, January 29, 2013

Barnes and Noble's hardest lesson: It pays to be small

The internet continues to change the face of retailing. Aivars Lode

Barnes & Noble has struggled to keep up with the growth of digital books, but that's not the only hurdle it faces. We just want stores to be smaller now.

FORTUNE -- Barnes & Noble expects to close up to a third of its retail book stores over the next decade, The Wall Street Journal reported Monday. The closures seem inevitable. Like other retailers, the chain has struggled in a digital world, where readers increasingly turned to e-books and online discounts. Its savior is arguably its Nook products, but sales during the holiday season fell from a year earlier amid competition from the likes of AmazonApple, and Google.
Indeed, it's hard to run a bookstore in the Internet age, but new technology is only part of Barnes & Noble's (BKS) problems. Its stores simply got too big in a nation that increasingly prefers things -- well, smaller.
Since the financial crisis, Americans have warmed to smaller sizes in everything from cars to homes. Even massive Wal-Mart stores (WMT) have downsized. In 1962, the world's biggest retailer opened discount stores averaging 108,000 square feet, says Ed McMahon, senior fellow at the Urban Land Institute. By 1988, Wal-Mart unveiled its Supercenters, averaging 185,000 square feet. But a decade later it opened its Neighborhood markets, which, at an average of 42,000 square feet, was more than two times smaller than its Supercenters. The chain went even smaller in 2011, with its Express stores averaging 15,000 square feet.
The big box trend coincided with what many other retailers did as America's middle class left cities for the suburbsBetween 1960 and 2000, retail space rose ten fold -- growing from 4 to 38 square feet per person, McMahon says. Retail space grew five times faster than retail sales. The financial crisis put an abrupt end to that expansion. There is now more than 1 billion square feet of vacant retail space, mostly where big box retailers once did business.
Beyond Wal-Mart, going small is being driven by several factors - some related, others unrelated: People are getting married later; U.S. cities are growing faster than suburbs for the first time in decades; the remaining suburbs, filled with sleepy strip commercial centers, are being turned into walkable urban places.
Of course, the Internet has played a big role in shrinking physical stores as well. Just as superstores put many local stores out of business, online shopping is hurting big box retailers, McMahon says.
But some local stores that managed to stick around are now thriving again. This is perhaps most evident in the market for books. In the years where big-box chains saw bankruptcies and store closures, the number of independents have generally stayed steady during the past few years. The American Booksellers Association, a trade organization that supports independents says that since the depths of the Great Recession, it has had roughly the same number of members -- 1,524 in 2008 to 1,567 in 2012. Stores did indeed close during those years with few if any new openings, but in 2009, new ones sprung up. Last year, 40 opened nationwide.
That's far fewer than Barnes & Noble, which until 2009 opened 30 or more a year. But the fact that any indie stores are opening at a time when big-box chains are closing says a lot about being small and local.
This isn't to say independents haven't struggled. In November 2011, best-selling novelist Anne Patchett opened Parnassus Books in her hometown, Nashville, TN. When a local bookstore closed and the area lost another one due to the Borders bankruptcy, Patchett partnered with Karen Hayes, a native who left her job in sales at Random House. The closings left a void in the area that's also home to Vanderbilt University, a literary community.
Parnassus filled it, but not all communities may be lucky enough to have an Anne Patchett around.

Sunday, January 27, 2013

In Asia's trend-setting cities, iPhone fatigue sets in

One day a rooster the next a feather duster, if you are in the retail industry with no continued differentiation for customers, you are bound to be disinter mediated. Aivars Lode

(Reuters) - Apple Inc's iconic iPhone is losing some of its luster among Asia's well-heeled consumers in Singapore and Hong Kong, a victim of changing mobile habits and its own runaway success.

Driven by a combination of iPhone fatigue, a desire to be different and a plethora of competing devices, users are turning to other brands, notably those from Samsung Electronics Co Ltd, eating into Apple's market share.

In Singapore, Apple's products were so dominant in 2010 that more devices here ran its iOS operating system per capita than anywhere else in the world.

But StatCounter, which measures traffic collected across a network of 3 million websites, calculates that Apple's share of mobile devices in Singapore - iPad and iPhone - declined sharply last year. From a peak of 72 percent in January 2012, its share fell to 50 percent this month, while Android devices now account for 43 percent of the market, up from 20 percent in the same month last year.

In Hong Kong, devices running Apple's iOS now account for about 30 percent of the total, down from about 45 percent a year ago. Android accounts for nearly two-thirds.

"Apple is still viewed as a prestigious brand, but there are just so many other cool smartphones out there now that the competition is just much stiffer," said Tom Clayton, chief executive of Singapore-based Bubble Motion, which develops a popular regional social media app called Bubbly.

Where Hong Kong and Singapore lead, other key markets across fast-growing Asia usually follow.

"Singapore and Hong Kong tend to be, from an electronics perspective, leading indicators on what is going to be hot in Western Europe and North America, as well as what is going to take off in the region," said Jim Wagstaff, who runs a Singapore-based company called Jam developing mobile apps for enterprises.

Southeast Asia is adopting smartphones fast - consumers spent 78 percent more on smartphones in the 12 months up to September 2012 than they did the year before, according to research company GfK


Anecdotal evidence of iPhone fatigue isn't hard to find: Where a year ago iPhones swamped other devices on the subways of Hong Kong and Singapore they are now outnumbered by Samsung and HTC Corp smartphones.

While this is partly explained by the proliferation of Android devices, from the cheap to the fancy, there are other signs that Apple has lost followers.

Singapore entrepreneur Aileen Sim, recently launched an app for splitting bills called, settling on an iOS version because that was the dominant platform in the three countries she was targeting - Singapore, India and the United States.

"But what surprised us was how strong the call for Android was when we launched our app," she said.

Indeed, 70 percent of their target users - 20-something college students and fresh graduates - said they were either already on Android or planned to switch over.

"Android is becoming really hard to ignore, around the region and in the U.S. for sure, but surprisingly even in Singapore," she said. "Even my younger early-20s cousins are mostly on Android now."

BillPin launched an Android version this month.

Napoleon Biggs, chief strategy officer at Gravitas Group, a Hong Kong-based mobile marketing company, said that while Apple and the iPhone remained premium brands there, Samsung's promotional efforts were playing to an increasingly receptive audience.

For some, it is a matter of wanting to stand out from the iPhone-carrying crowd. Others find the higher-powered, bigger-screened Android devices better suited to their changing habits - watching video, writing Chinese characters - while the cost of switching devices is lower than they expected, given that most popular social and gaming apps are available for both platforms.

"Hong Kong is a very fickle place," Biggs said.

Janet Chan, a 25-year-old Hong Kong advertising executive, has an iPhone 5 but its fast-draining battery and the appeal of a bigger screen for watching movies is prodding her to switch to a Samsung Galaxy Note II.

"After Steve Jobs died, it seems the element of surprise in product launches isn't that great anymore," she said.

To be sure, there are still plenty of people buying Apple devices. Stores selling their products in places such as Indonesia were full over the Christmas holidays, and the company's new official store in Hong Kong's Causeway Bay has queues snaking out of the door most days.

But the iPhone's drop in popularity in trendy Hong Kong and Singapore is mirrored in the upmarket malls of the region.

"IPhones are like Louis Vuitton handbags," said marketing manager Narisara Konglua in Bangkok, who uses a Galaxy SIII. "It's become so commonplace to see people with iPads and iPhones so you lose your cool edge having one."

In the Indonesian capital Jakarta, an assistant manager at Coca Cola's local venture, Gatot Hadipratomo, agrees. The iPhone "used to be a cool gadget but now more and more people use it."

There is another influence at play: hip Korea. Korean pop music, movies and TV are hugely popular around the region and Samsung is riding that wave. And while the impact is more visible in Hong Kong and Singapore, it also translates directly to places like Thailand.

"Thais are not very brand-loyal," says Akkaradert Bumrungmuang, 24, a student at Mahidol University in Bangkok. "That's why whatever is hot or the in-thing to have is adopted quickly here. We follow Korea so whatever is fashionable in Korea will be a big hit."

(Additional reporting by Lee Chyen Yee in Hong Kong; Khettiya Jittapong and Amy Sawitta Lefevre in Bangkok, and Andjarsari Paramaditha in Jakarta; Editing by Emily Kaiser)