Rethinking Efficiency in Size and Vertical Integration

       My Wharton education in economics has led me to assume that large firm can exploit greater economies of scale and scope.  Similarly vertically integrated firms—operating up and down an industry “food chain” can accrue operational efficiencies.

       Theory conflicts with my frequent—and less than satisfactory—encounters with large firms.  In the last two weeks I have travelled extensively and regularly have encountered instances where large firms clearly and intentionally scrimp on customer service, management of web sites and possible maintenance of aircraft.

        Over my 22 years at Penn State, one out of three or four airplane departures from and to my little down has triggered a delay, or cancellation.  On two recent occasions, staff at United Express’s Commuteair, took over 90 minutes to attempt a light bulb repair.  They achieved success in one instance and gave up in the other.  Mainline United cannot seem to get its old or new inflight entertainment systems to work: the audio jacks break, or the new Wi-Fi system doesn’t work.  On an 8 hour flight from Frankfort to Washington, Dulles a light bulb turned on and off repeatedly for the duration of trip.  Minor inconveniences, but what do all these screw up say about United’s commitment to maintenance big and small?

            Bigness, or perhaps the lack of competition also encourages companies to cut corners and to chisel.  I am convinced that so many Comcast customers viscerally hate the company, because of the perception that Comcast conscientiously tries to extract maximum revenues in sneaky and clever ways; just examine the ever increasing line items in their bills.

 

            Comcast is no alone in this race to the bottom. While buying hotel space on Hotwire, using a non-U.S. site, the company snuck in trip insurance without even offering customers the opportunity to choose no.  The U.S. site requires customers to opt out rather than opt in, but the European and Asian site simply includes the charge. Try getting Hotwire to respond to emails. Company reps simply cut and paste scripts that do not respond to the problem and of course do not offer a refund.  I was told to contact the insurance company, even though it was Hotwire that triggered the charge in the first place.  While abroad I was supposed to call Hotwire, so I did.  Of course no live person was available to take my call.

 

            On an on it goes leading me to think that more and more companies can reduce the value proposition of their service without loss of market share.  This has prompted me to rethink my leeriness about the FCC’s reclassification of Internet access. 

            Might companies like Comcast see a financial gain in reducing quality of service as a means to nudge—if not push—end users and upstream content providers to more expensive “better than best efforts” traffic carriage?

New Journalism Vocabulary Words: Newsprint Trims and Access Points

My local newspaper has reduced its value proposition by cutting content and pages. Local managers of this McClatchy asset use the term “newsprint trims” to label the streamlining process. In an email conversation with the Executive Editor I leaned that another benefit from such trimming is that readers and I will have additional “entry points” to the paper, despite the fewer pages.

So I am paying the same $160 a year for a newspaper subscription that provides me with access to a newsletter in lieu of a newspaper. One would think that declining circulation would motivate a newspaper to enhance rather than reduce the value proposition. The Orlando Sentinel appears to embrace this strategy despite the fact that its new owner Sam Zell seems intent on economizing; see http://online.wsj.com/public/article/SB121417869098295551.html.

Despite the new nonsense words here are two key realities for newspapers in this convergent environment: 1) The newspaper business faces great challenges that have reduced double digit margins to single digit margins. I do not see Sam Zell buying any business if he did not think he could generate above average returns; and 2) Local papers generate higher margins than most urban papers.

I do not see newspapers fully exploiting convergence by offering less.