Droid RAZR for 1¢? Max time-value compression

Most of the things that we own are more valuable when new — at least in the period before they become antiques or “ collectibles” (a term for anything that brings nostalgia to aging baby boomers). The value drops over time, because potential buyers are interested in the next hot item.

I’m not referring to asset depreciation as with a car or an old pair of jeans. These things lose value because they deteriorate as they are used. (My kids pay big bucks for used jeans, but they claim that they’re not used, but rather, distressed. Go figure! No, I am referring to the cost difference of buying something new today-vs-buying the same model in 6 months or a year. If it has not slipped into the realm of “antique”, then it’s hotness drops rapidly.

Example #1
Yesterday, I was traveling in New England. I purchased a Sunday Boston newspaper for $3.50. (Well, OK—I paid $4 due to a quirk of local geography).* What do you suppose that my paper will be worth after 2 days? That’s easy! Just as with stock quotes, information loses value rapidly. After 1 or 2 days my newspaper will line a bird cage, or get tossed into the recycle bin. It’s also pretty useful when dashing into a taxi through the rain.

A few online news outlets reverse this model by making current news available for free and charging for access to archives. This is a transient effect of booming internet growth and the fact that older articles have not yet been digitized. When consumers figure out that anything previously free on the web can always be located for free, this model will fall into the dustbin of history.

Example #2
In 2007, Apple introduced the iPhone to throngs of gear heads camped out at stores overnight. Were you surprised at a $200 price drop after two months? Few would be surprised today. Even an iPhone is superseded by other gadgets after a few months. The cost dropped because of a drop in pent up demand and an increase in supply.

Additional examples are all around us. Movies cost $10 when released to theaters. Within 2 months, Netflix pushes them through an all-you-can-eat pipe. Even Avatar was available on DVD and Blu-ray within weeks, and at a fraction of the cost of a night at the movies. (Less, if you have figured out how to use a Torrent).

Enough economics & history. Now, for a WildDuck observation…

9 days = $320.

Even with the historical perspective of the iPhone cost plunge, I was dumb struck by an offer from Amazon Wireless, a Verizon reseller. Anyone reading this in 2011 knows that the hottest recent phone is the Motorola Droid RAZR, especially if you choose Android over Apple. I want this phone and if I hadn’t been traveling when it was introduced on 11/11/11 (at 11:11 AM), I would have nabbed one at full price. After all, it certainly won’t drop significantly in price during the first 10 days, right?

Wrong! Despite a phenomenal debut (and ongoing demand), Amazon has dropped the subsidized price by $320. For those of you scratching your heads, it’s below zero, because the deal includes a $100 Amazon gift card.

What’s wrong with this phone? Does it suffer from a glitch worse than the iPhone death grip? No! What’s wrong is that it is 9 days old. Normally, this is well within the courtship window. Heck! Some early buyers haven’t even received their RAZR. But in the case of über-hyped gadgets, there is a delicate interplay between advertising, production capacity, retail logistics and lust. In the very hot market for 4G LTE phones, a model introduced last week is a relic of the Jurassic era. Who knew?!

* I picked up a Sunday newspaper at Starbucks in Marlborough Massachusetts. The city sits within a major beltway encircling Boston and within the region that gets a Boston news distributor and Boston-local pricing. But wait!

Welcome to Marlborough…Oops! You’re outside of Rt 495!

The hotels & shopping mall that cater to visitors like me are situated in a small section of town just outside the beltway. Retailers at the western edge of Marlborough know that the west highway exit is labeled for a town in the next county. They train cashiers to point out the fine print next to the newspaper price. Every time I visit this city, some barista or french fry queen puts on an empathetic face and glibly informs me in a rehearsed voice: “It says: $4 outside of Rt 495”.

Well, that may sound reasonable to a first time visitor, Babs—but it just doesn’t wash! News distributors don’t bisect towns into price tiers. The out-of-town delivery premium applies to towns beyond Rt 495—and only if the distributor charges for an outlying region. Retailers know this. After all, the sidewalk paper kiosks are all configured to charge the metro price. But the barista continues her script, shrugs and says, “You’re past the circle. That’s the dividing line.”

An unsuspecting visitor doesn’t realize that he is being fleeced. But at least, I can complete the transaction with the inner knowledge that I am being plucked like a holiday turkey. (Yeah, I know…It’s only 50¢. But it’s the principle, dear reader! What happened to fair play?!)

One thought on “Droid RAZR for 1¢? Max time-value compression

  1. Hey Ellery,

    It’s been nearly 6 months since you wrote about a stunning 9th-day price dip on a hot new phone. Today, the Droid RAZR is still Verizon’s leading TV commercial and still at $199. Even with occasional “special offers”, I can’t pick one up a for 1¢ (or better yet—for minus $100 after rebate). The best I have seen is 2 @ $99, which of course leaves an ongoing expense of two new wireless contracts or at least two new 2-year commitments.

    All of this validates your explanation. The cost of a hot commodity is not controlled by just demand but very certainly by momentary supply glitches, even during the early honeymoon. With product hype prepared in advance and massive interest from press and prospective customers, Motorola set their initial manufacturing run to meet a best case launch scenario. When the 1st week demand failed to meet extremely optimistic projections, Amazon found a way to give away phones. I doubt that they discounted the phone below their overall expected return. Even considering the economics of contracts and incentives, it’s clear that someone at Motorola decided to lower the hardare cost right after introduction, albeit briefly…

    What I cannot figure out is why they didn’t simply warehouse the phones for a few weeks. When faced with this predicament, I made a different choice. In the 1990s, I designed a network product for the HVAC industry. In the next 2 decades, it was completely eclipsed by Ethernet and wireless devices, but a few people still add nodes to their very outdated network. I could lower the price from $500 to $7.99. It would certainly be closer to my cost. But despite the enormous markup and many competitive options, the replacement or expansion of networks based on my architecture have few options and a high tolerance for pain. I no longer devote resources to service and support customers (the company went out of business years ago). But I still drop ship new-old inventory from a basement stash. Therefore, I keep the price very high and simply sell to those who can afford it. (Typically, a campus with a very big network that needs a few replacements or a few new nodes).

    Realizing that Motorola is not sitting on 20 year old inventory, I suspect that they could still take a page from my book. By lowering the price (even for just a single Amazon sale), they cheapen the new bird. They condition prospective customers to recall the low price and to expect this deal in the future.

    Ellery, I always respect your 2 cents. Today, you and your readers have mine!

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