Monday, September 3, 2007

Living in a commoditized world

Searching the Internet, I came across another couple of sites that offer examples of how the U.S. was transformed in the 1960s, 1970s and 1980s by a shift to more competition, deregulation and commoditization.

One is “Bell System Memorial” group of pages at Porticus. It laments

the US Federal Government's deliberate destruction of the best telecommunications system in the world which lead to today's chaotic telecom industry with poor customer service and crappy telephone equipment not to mention the countless FCC and other mandated federal tax charges on your local phone bill - hidden and itemized.
I would be the first to agree that today’s telecom environment doesn’t deliver the 99.9% system reliability that The Phone Company once achieved. But Ma Bell was a monopoly with a sense of noblesse oblige that entitled it to tell us what we needed in telecommunications services. If AT&T had its way, there would be no Carterfone and no competition in handsets and we’d only be using home and business telephones manufactured by Western Electric.

AT&T also fought throughout the 1960s and 1970s to make sure there would be only one cellular carrier (i.e., TPC). This was tried in Japan and Germany in the early 1980s, and the result was overpriced service and no users. As it was, U.S. cell phone adoption was held back for most of the 1980s because it was not a priority for the Baby Bells (who got the cell phone franchise because AT&T didn’t think it was very important). It was only through the efforts of people like Craig McCaw that anyone realized there was a demand for cell phone service (before the 1995 entry of the new PCS carriers increased competition and predictably spurred adoption).

AT&T was filled with a lot of smart people, including (for 15 years) Claude Shannon, the father of the information theory that gave us deep space communications and digital cell phones. But no one company is smart enough to provide all the innovations, technical or economic decisions necessary to run a $14 trillion economy. So I miss Ma Bell, and there are many things she would have done better, but it’s hard to argue that the economy would be better off if she still had an iron grip on America.

The other example is the airline industry. Airlines were once luxurious, with many perks. In reviewing some old promotional material, the Telstar blog notes that service was priced accordingly:
Telstar Logistics came upon a 1954 brochure from Trans World Airlines promoting TWA's daily service to San Francisco. Included in the brochure was the table shown here, listing some typical fares to and from SFO.

Here's how those 1954 fares would convert in 2006 dollars:

San Francisco to New York, round-trip:
First Class: $2198
Sky Tourist: $1448

San Francisco to Chicago, round-trip:
First Class: $1587
Sky Tourist: $1106
TWA was absorbed by American Airlines in 2001. Today a SFO to JFK round trip is $379 ($358+tax) for 7-day advance purchase and $320 ($298+tax) for 14-day advance purchase, less than a quarter the 1954-equivalent prices.

In fact, these numbers seem suspiciously low (i.e. I think the TWA tickets would cost more in 2007 dollars). I ran a more personal example: a 14-day advance purchase round trip from San Diego to Boston today totals $350. During my first year at MIT (1975-1976) the advance purchase price was $400, but that $400 32 years later is worth $1,580.

AaplayingcardsThat extra $1200 buys a lot of McDonald’s-to-go, playing cards and inflight movies. A lot more people are flying now because they can afford it, and it’s my choice what to do with the extra $1200, not the airline’s. I’m told that if I’d like to enjoy good quality service again sometime, I can always fly JetBlue — but somehow that’s no longer as convincing a claim as it once was.

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1 comment:

Khanh Tran-Cohort 7 said...

In my opinion, 25 years ago when prof. West flied in 75-76, the only people can afford to fly is the people with certain level of income.

Looking back at the statistics of minimum wage, in 1976, it was about $2.00/hour. Let take a person working at minimum wage 40 hrs/week. In 1 month of 4 weeks + 1 or 2 extra days. $2/hr x 40 hrs/week x 4 weeks = $320 ~ $340 (before tax, not sure how much he/she will take home after tax, $280 or less?) And the ticket that prof. West got from San Diego to Boston was $400. Clearly, a working class person won't be able to afford that. I even doubt its affordability to the lower-middle to middle class at the time.

With today price, a minimum wage working person at $7.50/hr, I believe that's the current for California, will average a rough $1,200 of monthly income before tax is roughly, using the same calculation, which leave some room for him/her to take a similar flight trip at $320-350 if they really need to go for family matters or other reasons.

Also, the people who wants the luxury and the perks, they can always travel first class which will easily come up to over $1,000. With first class, you can check in at the ticket counter as well as to get in the plan with priority, most of the time is a much shorter line. That's only one of the perks.

I guess that the way our society runs, inventions can only last so long to remain luxurious. It will evolve to a commodity to serve a wide variety of consumers groups with different needs and expectations, but you can still have it in luxury if you choose to do so. The same thing happens to everything else, not just airlines: cars, cell phones, laptops.

To me, commoditization is good 99% of the time. Well, there will always be exceptions to consider.