SmartPhones Will Be Better Then PCs

Written and Edited by Gregory Bartolomei

According to a news article published by the Associated Press and republished by IBN Live today (February 9th, 2011) [smartphones-outsell-pcs] smart-phones have officially outsold personal computers with 100.9 million phones shipped verses 92.1 million personal computers sold at the end of 2010.

The news article suggests that the rate of sales for smart-phones and PCs are not related and thus not suggesting a trend in the consumer electronics market.

The arguments for this line of reasoning are twofold: one, smart-phones and PCs serve different functions and two, the price difference between the products should be considered in the rate of sales.
To the first argument, that smart-phones and PCs serve different functions, let us define these different functions. All things being equal, a smart-phone is a tool for one to one communication via phone calls or SMS. All things being equal. a computer is a tool for data processing (text, numerical, multimedia, ect…). However, where is the line drawn between these two technologies? For example, all smart-phones can store and process multimedia data while a few models (bordering on many models) offer limited word and numerical processing capacity. Also, with programs like Skype (and other related voice over internet protocols) consumers can use PC’s to communicate via phone calls or SMS. It seems the difference between smart-phones and PCs has become blurred.

To the second argument, that the price difference between the products should be considered in the rate of sales, an analysis of the prices of the products both initial and future are worth due consideration. Let us assume that the average cost of a smart-phone is $100 (the price given in the article) and that the average price of a PC’s is $800 (average price of thirty computers listed on Walmart.com, Tigerdirect.com, and Target.com rounded for simplicity) all things being equal. The cost attached to a smart phone include a two year contract for service, a data plan, and a minutes/SMS plan. The cost attached to a PC’s are a service plan for internet in a home or via one of the numerous hotspot wireless provider. However, it should be noted that more and more business such as Panera bread, Starbuck, and Barnes & Noble are providing free internet. Let us assume however, that a PC purchase requires the additional purchase of internet tied to a one year contract.

Analysis of Cost

SmartPhone: Initial $100 plus two year contract charged monthly (24 months) of data plan average cost $90 a month (this number was assumed from the average midrange charges on a number of smartphone websites)

Thus $100+NPV of $90 for 24 periods at 1.6% inflation = $1881.97

PC: Initial $800 plus one year contact charged monthly (12 months) of internet service at an average cost of $50 a month (this number was assumed from an average of  midrange charges on a number of internet provider websites.)

Thus $800 +NPV of $50 for 12 periods at 1.6% inflation = $1341.99

This analysis shows the NPV of a smartphone purchase to be $539.97 more than the cost of a PC purchase. This suggest that a price sensitive consumer would be willing to purchase a PC over a smartphone due to the cost savings.

However, perhaps the most important issue of the differences between a smartphone and PC has yet to be addressed; their mobility. All things being equal, smart-phones are more model then PCs at the cost of their capacity to data process and preform the higher functions of PCs. However, with the expected introduction of technologies like virtual keyboards and projection imagining devices – the size of a smart-phone will soon not be a limit to the functionality it can provide.

So, if the differences between PCs and smart-phones are blurred, the cost of a smart phone is greater then PCs, and the question of the differences in mobility and therefore capacity to data process will soon not be a question what then does this imply to the consumer electronics market?

It suggest that smart-phones and PCs are related and that as soon as smart phones can data process the products will become substitutes. In conclusion, a change is coming and this change will be as radical and significant to consumer electronics as how the P2P software program Napster fundamentally changed the music industry.

This should be something that is a serious consideration to PC manufacturers and if they do not adapt to this upcoming change; there will be a shift in the consumers electronics market.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

Night of the Living Casino

Screen Shot 2013-10-21 at 4.22.31 PM“Everything dies, that’s a fact. But maybe everything that dies someday comes back.”
Bruce Springsteen’s 1982 song “Atlantic City” echoed up and down the New Jersey shoreline over 20 years ago. The boss sang about the once iconic town and how desperate people used it as an “all or nothing” shot to get out of a financial rut. However, with a deal nearly reached on the new Revel Casino development in Atlantic City, Springsteen’s song may have a new meaning.
Recently, J.P. Morgan has received commitments for $850 Million for the $1.5 Billion capital structuring. This, along with help from the New Jersey State government, could be the “all or nothing” shot to get Atlantic City, and perhaps even the state, out of the financial rut. With tax rebates of $261Million, over a 20 year period, pledged by Gov. Christie, the eleven – hundred room resort may be able to attract the crowd necessary to revive AC back to its “glory days” level.[1]According to a recent Washington Post[2] article, Atlantic City goers are spending 30% less at the casinos, the gambling market in general is down around 22%, and gross operating profit per hour is down 61%. As the nation’s second largest gambling market, AC followed industry leader Las Vegas by $1.61 Billion in 2009[3]. What is one of the main differences between Vegas and AC? The Branding.

That is the source of the risk, according to some analysts. The new Revel Casino will attempt to rebrand Atlantic City into a place for business meetings and vacations – not just gambling.
Looking at this from a five forces model, could this work? New entrants into Atlantic City have been successful, including the Borgata which is currently the most successful and the newest AC Casino. Substitutes such as online gambling have becoming increasingly popular; thus, taking profits away from casinos. Suppliers are not very relevant or powerful in this industry. However, existing competitors are a threat. With new casinos spouting up in Pennsylvania, existing casinos in New York, and the national focus on Las Vegas as the gambling capital, Atlantic City seems nothing more than a fun weekend. This is especially true to people who can go to local casinos on weekdays or to people who save up for yearly vacations in Las Vegas. However, if its marketing campaign can accurately depict their new unique product, Revel’s competitors are nearly none existent, east of the Mississippi.
The overwhelming question is within the fifth force: buyers. In other words, will people buy in to this new branding? The economy seems to be improving and discretionary spending will soon grow with it. If the economy continues to grow, then Revel can create a new business and vacation destination and Atlantic City, as a whole, can possibly come back to life.
This industry is relatively attractive for Revel. With two forces, threats of entry and suppliers, in their favor as well as the conquerable forces of substitutes and competitors, Revel has a fighting chance to win buyers. I believe that it can become the East Coast Business and Vacation destination as well as a place for gamblers.
Everything dies, that’s a fact. But with new spending and branding, AC can come back.
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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.
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Berzon, Alexandra. “Big Casino Project Back From Dead.” Wall Street Journal. 9 February, 2011.http://www.washingtontimes.com/news/2010/dec/7/atlantic-city-casino-profits-plummet/

http://www.americangaming.org/Industry/factsheets/statistics_detail.cfv?id=4

Is Facebook Really Worth Fifty Billion Dollars?

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Written and Edited by Gregory Bartolomei

The most recent valuation of Facebook says that the private firm is worth fifty billion dollars after a five hundred million dollar investment by Goldman Sacks Inc. This valuation seems to be more like a speculation. The value of Facebook is accounting terms is that it booked a reported two billion dollars in sales at the close of the fiscal year 2010 which makes Facebook the largest and fastest growing internet firm in the history of internet firms.

Is Facebook really worth fifty billion dollars?

An application of a basic model for valuing a firm (a firm’s value is the present value of all its future cash flows) or [Cash Flow of a Firm + (1+growth rate)]/ Discount Rate seems justified to ball park the value of Facebook.

Let Cash Flow= 2 Billion – last years cash flow.

Let Growth Rate = 5% – as a lack of data will not allow for a calculation of a sustainable growth rate.
Let the Discount Rate= 4% – the prime rate for 2010.[$2,000,000,000+(1.05)]/.04= $52,500,000,000This basic valuation puts the current valuation two and half billion dollars short. However, this valuation does not account for risk systematic or unsystematic, increases or decreases in the growth/discount rate, and other variables that could have an adverse effect on Facebook’s value.For example, what would happen if Facebook’s servers were hacked? This not an unfounded question. Already users are seeing applications inside of Facebook that are designed to hack personal information. What would happen if a user decided to take down the network? That would be a catastrophic system failure.

Another potential issue is the current lawsuit that Verizon is filing over the Net Neutrally Laws. Since an increasing number of Facebook users are going mobile (using the mobile application for Facebook) there is a threat that a change to the current laws could adversely effect a mobile users access to Facebook. While not as catastrophic as a hack, loosing or diminishing the mobile interface would reduce the value of Facebook to its users and in turn advertising firms that buy information from Facebook.

Additionally, internet privacy laws could be rewritten. Currently, sites like www.thepiratebay.orgwww.bittorrent.com, and www.facebook.com enjoy not dealing with privacy laws. While The Pirate Bay and Bit Torrent enjoy facilitating p2p of music, video, books, programs, operating systems, and anything else that can be uploaded to the internet they are in violation of copyright laws (as defined in the USA.) While they are in a sense untouchable, many companies (namely internet providers) are being pressured into preventing their customers from accessing such site and committing copyright violations. This situation faced by The Pirate Bay and Bit Torrent is very similar to the situation faced by Facebook.

Because of the wealth of personal information loaded onto Facebook, there is a concern that Facebook is selling that information to marketeers. Another concern is that users whom are seeking jobs are being scoped out on Facebook by recruiters. Facebook is supposed to be the social experience and both of these factors represent a dilemma for its users. However, these issues also represent dilemmas for lawmakers. Facebook represents uncharted waters; should marketeers not have access to publicly stated information? Should firms not have the right to view a Facebook profile to evaluate the mettle of a potential employee? If the law rules that Facebook can not provide users information then that adversely effects Facebook’s fiscal purpose. If the law rules that firms can review profiles, will there be a decline in overall usage thus effecting the amount of information Facebook can provided; effecting its total sales?

If it is assumed that these three issues have a 5% chance of happening (all things being equal) than adding an addition 15% to the discount rate in the basic valuation expression previously used should give an adjusted valuation.

Let Cash Flow= 2 Billion – last years cash flow.

Let Growth Rate = 5% – as a lack of data will not allow for a calculation of a sustainable growth rate.
Let the Discount Rate= 4% – the prime rate for 2010 plus 15% for risk.[$2,000,000,000+(1.05)]/.19= $11,052,631,578.This valuation shows almost an 80% reduction in the value of the firm.While these valuations are crude (there is a real lack of data because Facebook is not reporting its finances) they are not dismissible.

I would argue that the valuation of Facebook has not successfully accounted for many of the risks that it faces going into its future operations. While the firm represents great potential for making money, people should not be so eager to throw their money at Facebook. In an objective sense Facebook is a young unproven technology that carries an equal amount of risk for the rewards that it is offer.

Facebook is too good of an investment to be true – thus it is not worth fifty billion dollars.

It should be noted that the three risks discussed do not considered all of the factors that could effect Facebook. A thought out Porter analysis or a SWOT would yield many other risks or perhaps growth opportunities.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.