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Author: rezmo One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 8764  
Subject: Understanding Commoditized Date: 2/12/2000 3:30 PM
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I'm having a bit of a problem understanding the use of commoditized in reference to hard disk suppliers in the book. How do products that are sold individually "become" commodities? I do get that they usually become integrated in "systems" but GG mentions more than once this process which I don't quite grasp.
TIA
Rez
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Author: MikeBuckley Big red star, 1000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 835 of 8764
Subject: Re: Understanding Commoditized Date: 2/12/2000 3:56 PM
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Rez,

I'm having a bit of a problem understanding the use of commoditized in reference to hard disk suppliers in the book.

In that context, a product category becomes commoditized when there are few or no ways to add value to them in a way that differentiates one product from another. The result is that no matter how high the margins were when the product category first began being adopted, those margins sink lower and lower until they become razor thin. That happens because the only way one provider can differentiate from a competitor is by offering a lower price.

When a product categoty suffers from that competitive situation, it is said to be a commodity. Examples are electronic components, computers, light bulbs, paper clips, and televisions.

Make sense?

--Mike Buckley

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Author: kingrex Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 837 of 8764
Subject: Re: Understanding Commoditized Date: 2/12/2000 6:23 PM
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<< How do products that are sold individually "become" commodities? I do get that they usually become integrated in "systems" but GG mentions more than once this process which I don't quite grasp. >>


One thing that makes it hard to grasp is that the makers of these "commodotized" products don't necessarily accept the tag without a fight...take computers and televisions, two product categories mentioned by Mike - the manufacturers of those items haven't exactly thrown-in the towel, although the Street doesn't recognize their right to unusually high multiples anymore. Dell still tries to differentiate itself from, say, Compaq, on the basis of quality, but it's now the whole product - product, availability, service and support, on-line presence - that's become the basis of differentiation. As for televisions, Sony still points to its advanced technology as a means of differentiating its products, but the old brand just doesn't carry the weight it once did. Now, it seems like a race to bring new technology to market first.


Hey, I bought this swell Dell Dimension because of its groovy Sony Trinitron monitor!


rex



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Author: MikeBuckley Big red star, 1000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 838 of 8764
Subject: Re: Understanding Commoditized Date: 2/12/2000 8:12 PM
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Hey, I bought this swell Dell Dimension because of its groovy Sony Trinitron monitor!

Rex,

LOL! That little bit of facetiousness does the topic more justice than an entire treatise!

Seriously, your post reminds me that I should have added that while certain product categories suffer from commodification, certain sub-sectors within them that haven't been adopted by the mass market are far less commoditized. The trade-off is that while they don't suffer as much from erosion of profit margin, they also don't enjoy the benefits of mass-market adoption. A good example might be a 24-inch Trinitron monitor as opposed to the 15-inch model.

--Mike Buckley




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Author: tjbd Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 839 of 8764
Subject: Re: Understanding Commoditized Date: 2/12/2000 9:10 PM
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When a product categoty suffers from that competitive situation, it is said to be a
commodity. Examples are electronic components, computers, light bulbs, paper clips,
and televisions.


Mike,
Your description was perfectly apt, but your examples then went on to muddy the water.

Milk and gasoline would be ideal examples of commodities. Then there examples such as batteries, which really ARE exactly the same (almost all are made by two companies) and are only differenciated by the degree to which consumers are lead to believe, by clever advertising, that one brand is better than the next.

As for computers, you might be able to say that PC's have been commoditized, but Apple happily has been able to differenciate by ACTUALLY making a product worthy of garnering higher margins. Then coupling that with clever marketing.

PC companies can still add value (with better service or offering a free car wash with each Windows upgrade) just not into the equipment itself.

As for televisions, Rex said it. Sony's are still better than the rest.

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Author: MikeBuckley Big red star, 1000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 842 of 8764
Subject: Re: Understanding Commoditized Date: 2/12/2000 11:04 PM
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tjbd,

As for computers, you might be able to say that PC's have been commoditized, but Apple happily has been able to differenciate by ACTUALLY making a product worthy of garnering higher margins. Then coupling that with clever marketing.

Very true. But the primary reason Apple is able to do that is because it is a chimp that dominates the only proprietary architecture other than Windows-based desktops. (Remember that the power of a chimp that dominates a niche market such as Apple's is second in power only to the power of a Gorilla.) To the extent that Apple garners higher margins, about seven points more than Dell as an example, it is because of their power in the niche operating software market.

Even so, were it not for the commoditization of product category Apple would be able to make even higher margins. Because the entire category is largely commoditized, the differentiation Apple can use to separate itself from the rest of the desk-top and lap-top world of computers has a positive but definitely a limited effect on margins.

When applying Gorilla-Gaming concepts to investing, I think it's important to recognize that there are varying degrees of commoditization. You're right that milk has been commodotized more than computers.

But no matter how strong a company's computer is, no matter how much one computer is differentiated from the competition, it is simply not possible for a computer manufacturer to operate completely devoid of the commoditization that has affected the category in which it competes. If a product category is being or has been commoditized, the worst and best products as well as the most differentiated and least differentiated products in it will suffer the consequences to one degree or another of eroding profit margins. That's the nature of royalty games. That's one reason even the strongest players in royalty games, the Kings, are to be held lightly.

--Mike Buckley

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Author: MikeBuckley Big red star, 1000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 843 of 8764
Subject: Re: Understanding Commoditized Date: 2/12/2000 11:12 PM
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. But the primary reason Apple is able to do that is because it is a chimp that dominates the only proprietary architecture other than Windows-based desktops.

Oops! I meant to write that Apple is a chimp that dominates the only proprietary operating system architecture for desk tops other than Windows-based systems.

--Mike Buckley

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Author: tjbd Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 854 of 8764
Subject: Re: Understanding Commoditized Date: 2/13/2000 1:18 PM
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But the primary reason Apple is able to do that is because it is a chimp that
dominates the only proprietary architecture other than Windows-based desktops.


Mike, you may call it a chimp, but only in the desktop PC arena. People who don't follow Apple closely miss the fact that they hold the patents on an exploding
"enabling technology" which has an open architecture and is being widely adopted as the standard. That being
IEEE-1394 or "Firewire".

You must also keep your eye on Apples Quicktime. Their partnership with Akamai is changing the playing field of streaming media as we speak. You just haven't heard much about it yet. When DSL is more widely integrated into the market, you'll being hearing more form Cupertino. They are in the bowling alley and are going to pick up the 7-10 split.

Then everyone will be saying, "Hey, we thought they were dead?!"

Steve Jobs was Upside's CEO of the year (he has won atleast two more similar titles) because those in the know recognize that Apple is back and better than before. Much better. Just watch.

Tim

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Author: rezmo One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 855 of 8764
Subject: Re: Understanding Commoditized Date: 2/13/2000 1:22 PM
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My hat is off to all of you gentlemen! Would that I had had this sort of teaching in my college years--I might have learned something <g>. Seriously, It strikes me that this concept is useful considering non high tech markets.
Thank you all

Art Resnick

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Author: MikeBuckley Big red star, 1000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 860 of 8764
Subject: Re: Understanding Commoditized Date: 2/13/2000 4:21 PM
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Firewire,

Tim,

I remember the day MF Mom (formerly of Motley Fool fame in the networking folder whose picture was in Time magazine with her children) and her family were among a group of investing friends enjoying an afternoon of good times. one of the visionaries in the crowd asked about up and coming technologies, to which MF Mom's husband spent about five mintues talking about Firewire. That was probably in 1996, 1997 at the latest.

Personally, I think wireless networks might eventually eliminate the need for Firewire, but it's not as if I'm enough of an expert on the subject to properly defend that position.

--Mike Buckley

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Author: tjbd Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 863 of 8764
Subject: Re: Understanding Commoditized Date: 2/13/2000 5:10 PM
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Personally, I think wireless networks might eventually eliminate the need for Firewire, but it's not as if I'm enough of an
expert on the subject to properly defend that position.


Here are some experts on the field, though I haven't been able to find the links, yet:

(1) C.V. Byus, Y. Ma and M.A. Stuchly, "The Ability of Magnetic Fields To Serve as a Co-Promotional Stimulus to the
Development of Papillomas on the Skin of the Mouse," Paper No.18-3, 17th Annual Meeting of the Bioelectromagnetics
Society (BEMS), Boston, June 18-22, 1995.

(2) T. Kumlin et al., "A Study of the Possible Cancer-Promoting Effects of 50 Hz Magnetic Fields on UV-Initiated Skin
Tumors in ODC-Transgenic Mice," Paper No.P-126C, BEMS, 1995.

(3) W. Löscher et al., "Tumor Promotion in a Breast Cancer Model by Exposure to a Weak Alternating Magnetic Field,"
Cancer Letters, 71, pp.75-81, 1993; W. Löscher et al., "Effects of Weak Alternating Magnetic Fields on Nocturnal
Melatonin Production and Mammary Carcinogenesis in Rats," Oncology, 51, pp.288-295, 1994; W. Löscher and M.
Mevissen, "Animal Studies on the Role of 50/60 Hertz Magnetic Fields in Carcinogenesis," Life Sciences, 54,
pp.1531-1543, 1994; M. A. Baum et al., "A Histopathological Study on Alterations in DMBA-Induced Mammary
Carcinogenesis in Rats with 50 Hz, 100 µT Magnetic Field Exposure," Carcinogenesis, 16, pp.119-125, 1995; M.
Mevissen, M. Kietzmann and W. Löscher, "In vivo Exposure of Rats to a Weak Alternating Magnetic Field Increases
Ornithine Decarboxylase Activity in the Mammary Gland by a Similar Extent as the Carcinogen DMBA," Cancer Letters,
90, pp. 207-214, 1995. See also MWN, J/A93, S/O94, J/F95 and M/A95.

(4) J.D. Saffer, S.J. Thurston and N.H. Colburn, "Carcinogenesis in Weak Electromagnetic Fields," Paper No.A-14,
Annual Review of Research on Biological Effects of Electric and Magnetic Fields from the Generation, Delivery and
Use of Electricity (DOE), Albuquerque, NM, November 6-10, 1994.

(5) J.D. Saffer, S.J. Thurston and N.H. Colburn, "Tumor Promotion in JB6 Cells by Weak Electromagnetic Fields," Paper
No.1-5, BEMS, 1995.

(6) R.W. West et al., "Enhancement of Anchorage-Independent Growth in JB6 Cells Exposed to 60 Hz Magnetic Fields,"
Bioelectrochemistry and Bioenergetics, 34, pp.39-43, 1994. See also MWN, J/F95.

(7) Maria Feychting and Anders Ahlbom, "Childhood Leukemia and Residential Exposure to Weak Extremely Low
Frequency Magnetic Fields," Environmental Health Perspectives, Supplement 2, pp.59-62, 1995.

(8) See MWN, M/J95.

(9) Emphasis added. See MWN, S/O93.

(10) D. Hafemeister, Background Paper on Power Line Fields and Public Health, Washington: American Physical
Society, May 1995.

(11) A. Sastre et al., "Residential Magnetic Field Transients: How Do Their Induced Transmembrane Voltages Compare
to Thermal Noise?" Paper No.A-33, DOE, 1994; and G.B. Johnson, R. Kavet and A. Sastre, "Residential Magnetic Field
Transients: Effect of Residential Services on Fields Arising from Distribution Line Capacitor Bank Switching," Paper
No.P-130A, BEMS, 1995.

(12) See MWN, N/D94.

(13) P. Brodeur, "Annals of Radiation: Calamity on Meadow Street," The New Yorker, pp.38-72, July 9, 1990; reprinted
in P. Brodeur, The Great Power Line Cover-Up, Boston: Little Brown and Co., 1993.

(14) See MWN, S/O92.

(15) See MWN, M/J94.

(16) J.D. Sahl and B.S. Murdock, Electric and Magnetic Fields and Human Health: A Review of the Issues and the
Science, Azusa, CA: Southern California Edison, April 1995.


Wireless transmitters create low-frequency magnetic fields. When cancer rates begin to increase at a rate sympathetic to the rate of increase in wireless transmission, people will begin to wonder if all of their products really NEED to be transmitters.

Read all about it:

www.microwavenews.com

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Author: SlyAce Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 864 of 8764
Subject: Re: Understanding Commoditized Date: 2/13/2000 5:53 PM
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OFF TOPIC

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Author: SlyAce Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 866 of 8764
Subject: Re: Understanding Commoditized Date: 2/13/2000 6:00 PM
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OFF TOPIC WARNING:

tjbd,

I am an attorney represting defendants' in mass tort litigation, primarily breast implants and fen/phen. Accordingly, I am always interested in potential new areas of litigation.

Are the EMF risks you write of the same ones that have been around for a while and have not gone anywhere (lawsuit wise) or is this there any relationship to the recent speculation that there may be an association between cell phone use and brain cancer? There was a 20/20 special in October in which the former head researcher for the cell phone research organization stated that industry could no longer credibly claim that such a link was not possible.

Thanks for any info you can give me. I bookmarked the EMF link and will check it out.

Go Blue!

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