Decline and Fall

Anyone who grew up in the 80s and lived even marginally above subsistence level remembers their first cassette, and they probably remember playing that tape in their first Walkman. Mine was Arrested Development’s 3 Years, 5 Months & 2 Days in the Life Of… which I bought in a Borders in a mall north of Chicago in 1993.

That was a really long time ago. People born that year can vote now. Arrested Development isn’t really remembered- now when you say the name, people think of the TV series. Borders went bankrupt. And a little over a year ago, Sony ceased (cassette) Walkman production in Japan.

I now own a couple of iPods (I know, what were the odds?) and the end of the Walkman got me thinking- how did they compare in adoption? And what happens to the iPod 20 years from now?

The decline of a product is a key question for those of us who try to create technology and try to invest in it. People in the tech world, I have noticed, are almost obsessed with growth, and for good reason: they invest in small companies, often with no product at all, let alone an established sales base. How fast a product can grow is basically the only criterion that can even be estimated at this point.

I came to the tech world from a stodgy value investing background. This is the world of cigar-butt investing. Find companies that have fallen out of favor and invest in them cheap, because they’re still pumping out cash, and just hanging around is much more profitable than growing in the medium term.

I’m particularly interested because, as a start-up founder/employee, investing in current technology titans is probably my best strategy to ‘hedge’ myself. I know the space. If a start-up disrupts and takes down a titan, I’ll probably be right on top of it (able to trade ahead of the market), and start-up companies (generally) hire start-up ‘guys’, so I’ll probably employable. If the interest in the current start-up boom fades, and the big guys are able to hang-in, though, I should at least make some money on my investments. I take a lot of ‘basis risk’ (my investment is an imperfect hedge due to possible fraud, companies I never considered might take down an incumbent, the market just vanishes, etc.) but I’m comfortable with that risk.

I currently own some Cisco stock, and a good friend has been trying to get me to buy Frontier Communications (these are not recommendations, btw- just disclosure). I think that these are the kind of places you should be investing if you are working in the space. The main reason not to is because these companies are still within the tech sector, but I don’t think that’s a major driver: correlation is high across all stocks now, and (some) old companies are at such low valuations that, if their sales hold up, even some shrinkage in their multiples shouldn’t hurt too bad.

But anyways: as to whether the Walkman or iPod sold faster, Apple conveniently lists its annual sales figures- you can grab them off Wikipedia. Sony’s a little tougher, as they don’t even report Walkman sales as its own unit. I grabbed this graph and estimated the values using engauge (which is great but I don’t love- if anyone has a digitizer they like more please let me know). This only gave data up through 1999, so I made educated guess about the years after based on sketchy cumulative sales numbers and 20-F filings: if you want my numbers just email me. Also, let me know if you can locate annual sales data on Discman products.

Year 1 for the iPod is 2002, for the Walkman it’s 1979. The iPod has been far more successful than the Walkman was in terms of raw numbers. But its fall may be faster: already competitors and better phones are eating into the market. The iPod already defines an era like the Walkman did, but I don’t think that era is going to last as long.

As a parting thought, I can’t think of a more amazing business victory than Apple’s win over Sony in this market. Sony owns a ton of the content in the market and their product was ubiquitous. Apple had no experience in the portable consumer goods market. When was the last time you used a Walkman or Discman? Boggles the mind.

I should note, in the spirit of disclosure, that Sony is a client of my employer. I did not obtain any info in this post from them and I have not received any compensation. That’s probably obvious, but it warrants mentioning.