Consolidation was going too happen…

25 01 2006

Imation has announced its intention to acquire Memorex International, in an all-cash transaction of $330 million plus payments ranging between $5 million and $45 million to be paid out over a period of three years once the deal closes, contingent on the financial performance of Memorex.
http://www.eweek.com/article2/0,1895,1914165,00.asp

This is a business coming full circle. Remember the first wave. Blank media burning files vs a floppy disc.
With the computer industry leading the way, burners went from 4x to 52x in no-time. Every PC had a burner as standard equipment vs “add on”, then media followed. This same cycle repeated itself with DVD.

Within months, sites like ours, which started by on-line selling of consumable media engaged in the last frontier – a price war. Once you get on the trend-mill of having too sell 20% more per quarter just to break even, something is going too give. Market demand can only supply so much. The manufactures were making disc’s
like M&M’s, by the millions. What were they going too do with the over-stock, the all purpose dumping ground RETAIL. Retail had a catch: (1) Brand Name (2) consignment.

Brand name was easy, until the shelf was full of 14 Brands. Consignment is what changed everything. For those unfamiliar, you send the product @ $1.00, after rebates/sales promotions/price reductions, keeping up with the competition pricing. Retailer finally sold your product at @0.34. Guess who ate that…

The final step in gaining market share is buying the competitors. I like the way Imation spread the deal over a 3 year period. Considering where we were 3 yrs ago, what will be left moving forward? I believe the way of the floppy disc. Notice system boxes still support it.

What I’m really looking for is when will the PC manufactures{i.e HP}continue its development of Printable burners and we start seeing Printable media in Retail Outlets. But this may take some time, technology has always passed from Business to Consumer, not any more, HDTV and BlueRay disc have shown technology will start at home and hopefully you’ll take it too work….

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One response

26 01 2006
Kent Utsey

My wife mentioned a radio interview she heard with Buffett- he talked about having a “moat” around your business. i.e., something that will prevent what you do from becoming a commodity. If you don’t have a unique product, the only way to do it is to provide some kind of additional service that is valued by some niche in the market, and then target that niche.

We face the same challenge- every bank in the world is now offering HSA administration. Many give it away for free, hoping that they will garner huge deposits over time to make up for current losses. Pretty stupid, but that is the competitive reality in our market.

Our “moat” is partly “positioning”-we aren’t just administrators- we are experts in designing and administering custom health plans. We pay attention to medical cost trends, tweak plans as necessary and save our clients huge premium dollars as a result. It is also extra service- we provide an extra safety net to employees. We will set up payment plans if they don’t have enough money to pay a provider, help them sort out their medical bills when things get complicated, make sure they don’t pay “retail” for medical care, provide a live person at the other end of the phone, and give account access to both employers and employees on the web. The banks can’t or won’t provide this expertise and these services. Some employers really value what we do and are willing to pay a premium for it. Some don’t. I really don’t give a flaming rats’ ass about the ones that don’t. They aren’t in my target market.

So let the commodity producers chew each other up and eliminate the profit (and fun) for each other- as long as you can figure out the service and the niche, and differentiate from them, they won’t have any effect on you. Or your profits.

Best,

Kent

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