The current situation:

early adopters of digital reading devices and multipurpose tablets mostly are already heavy readers. In numbers, they are more often men than women. They also describe themselves as more affluent than average and tend to be in their 20s and early 30s. This group values the flexibility of reading in different settings and the new devices’ ease of use

Their view of the future:

Readers who told us they are considering purchasing digital devices in the near future are mostly women and are older than 35 years of age.

and

Books won’t go away any time soon. Several indicators from the study show why. First, respondents who have adopted digital formats say they continue to read printed books. This attachment to paper formats also holds for younger generations, even though they were born in the digital era.

Some of this makes sense to me. Obviously my own direct experiences are of South Africa rather than the developed markets surveyed by Bain. I see more and more Kindles on JHB-CPT flights, exactly the demographic that can afford and most values the portability of the Kindle.

It’s fairly obvious that heavy readers will be more likely to purchase an e-reader since they would be more likely to purchase books, read books and ultimately see the value in an e-reader, so no surprises there. The youngish demographic also makes sense as early adopters are typically younger and less wedded to lifetime patterns. Affordability and competing devices (PSPs, iPads, iTouches etc.) with more game options and broader entertainment possibility limit teenage adoption of the devices.

And in South Africa?

My limited, ultra-informal sample from flights in South Africa showed a split between men and women not much different from typical air-travellers, but a demographic closer to 40 than 20 to 30. This might reflect an additional affordability filter in the South African market, but is clearly also a function of the filter of (mostly business) air travel.

The cost of the device, much-reduced ability to lend and resell books, generally low levels of education and thus book-consumption make the mass-adoption of ebooks in South Africa far less certain. On the other hand, the cost and time saving of avoiding physical delivery of books is significantly more valuable in South Africa than in the US, for example.

The Book is Dead. Long Live the Book.

I’m surprised at the confidence with which Bain state that books won’t disappear any time soon. Certainly, books are unlikely to disappear, but in developed markets I expect general printed fiction to go the way of cassette tapes in a decade. The cost of production per book is close to zero and the cost of the readers themselves will plummet as volumes pick up with the early majority hump of the product lifecycle. Reference books, textbooks, and books intended to be browsed rather than read from beginning to end may follow a different path.

Increased consumption, changed distribution and business models

First, the shift to digital publishing could boost book consumption.

My experience is also of increased content consumption via an ereader – the study supports this. Electronic books also have the potential to completely democratise the publishing business, boosting supply and thus further increasing consumption.

I’m sure lawyers will stick with books for another century or two, given their fondness for hard copies of everything.

3D TV eat your heart out, ebooks are the success you only wished you could be.

UPDATE  - some more coverage of stories about ereaders.

It’s based on US research, so the parallel to South Africa isn’t perfect. On the other hand, it may prove predictive for our population.

A few snippets (it’s a long article, but well worth reading the whole thing):

1. The median age at first marriage in the early 1970s was 21 for women and 23 for men; by 2009 it had climbed to 26 for women and 28 for men
2. Definitions of adulthood vary widely – people can vote at 18, but in some states they don’t age out of foster care until 21. They can join the military at 18, but they can’t drink until 21. They can drive at 16, but they can’t rent a car until 25 without some hefty surcharges. If they are full-time students, the Internal Revenue Service considers them dependents until 24; those without health insurance will soon be able to stay on their parents’ plans even if they’re not in school until age 26, or up to 30 in some states.
3. Definitions of adulthood are clearly not just a function of age. (and so our marketing to them should consider more subtle measures than simply age ~ David Kirk)
4. As “emerging adults”, young men and women are more self-focused than at any other time of life, less certain about the future and yet also more optimistic, no matter what their economic background. This is where the “sense of possibilities” comes in, he says; they have not yet tempered their ideal­istic visions of what awaits. “The dreary, dead-end jobs, the bitter divorces, the disappointing and disrespectful children . . . none of them imagine that this is what the future holds for them”. Ask them if they agree with the statement “I am very sure that someday I will get to where I want to be in life,” and 96 percent of them will say yes.
5. But despite elements that are exciting, even exhilarating, about being this age, there is a downside, too: dread, frustration, uncertainty, a sense of not quite understanding the rules of the game. More than positive or negative feelings, what Arnett heard most often was ambivalence — beginning with his finding that 60 percent of his subjects told him they felt like both grown-ups and not-quite-grown-ups.
6. The 20s are when most people accumulate almost all of their formal education; when most people meet their future spouses and the friends they will keep; when most people start on the careers that they will stay with for many years. This is when adventures, experiments, travels, relationships are embarked on with an abandon that probably will not happen again.

This is thought-provoking stuff.

Marketing to this demographic must factor in South Africa’s demographic, social, economic and political changes over the last 40 years (and continuing development).

Further, marketers and communicators must consider how this changing pattern of early adulthood will affect these adults later in life. How it will affect their views and preferences, the goods they demand, who they listen to and what marketing works.

(Incidentally, Eskom tariffs are currently 68 cents for residential, 28 cents for big industrial)

From the moneyweb interview:

PAUL O’FLAHERTY: What is one of the myths of this industry is that the key industrial user does subsidise the residential user – that’s a fact. And the reason for it, even though it seems on the tariff that you quoted, that can’t be – it is true because the cost of delivering electricity to someone living out in the sticks is a lot more than delivering it to a transmission station right next to a mine, for example. So there’s a significant cost differential in actually getting electricity out there, and therefore the key industrial users do actually subsidise the residential users.

The hype and hoopla around this topic is fueled by our feelings as consumers of being charged too much big big monopoly companies. So I should start by saying that I’m not saying that we are paying too much. I’m not saying that because I don’t know enough about the costs of providing cellular services in South Africa. Maybe we are, maybe we’re not. Also, I’m not saying there aren’t monopolistic practices in the market – again I simply don’t know. Given the other stories torn from inside companies by the sharp teeth and salivating jaws of the Competition Commission, it’s understandable that many suspect consumer-unfriendly play by most large South African companies, particularly those in industries with a small number of players.

What I am saying is that most of what you read in the news about interconnect is horribly misguided.

The biggest misconception is that interconnect fees are an expense for cellular providers, and that the removal of this expense would allow them to reduce tariffs to consumers. Well, it is an expense, but it is also a source of revenue. Every time one company pays an interconnect fee, another company is receiving it.

Interconnect does not change the total amount of profit within the cellular industry. It may redistribute it a little, and there may be negative medium term competitive implications arising from interconnect, but lower interconnect won’t automatically increase profits that could allow competitive price lowering for the benefit of consumers.

TechCentral has an interesting article: Bain warns consumers not to expect cellular price cuts.  Of course, it also include some done-to-death flawed statements (whether from Bain or inserted by the zealous staff writer) such as:

Because new players have few customers at first, most calls on their networks will be to networks of other operators. High interconnection fees make it difficult for them to enter the market.

It’s not that this statement is incorrect (it is in fact correct) it’s just that it is horribly misleading because it only presents one side of the story. I’ve reworded it to provide the stunning insight:

Because new players have few customers at first, most calls to their networks will be from networks of other operators. High interconnection fees make it profitable for them to enter the market.

If you are a small cellular operator, most people calling your customers won’t also be your customers. You get to charge them an interconnect fee for most calls. You can model this in a spreadsheet (I’ve done it) and provided two basic assumptions hold, interconnect is irrelevant as a primary force. Fees in and expenses out equate .

1. “Cellphone users must make calls, on average, equally to all other subscribers independent of network.” If Cell C customers are more likely to call Cell C customers rather than a random cellphone user in South Africa, the numbers start to change. Although I don’t have info to back this assumption up, it feels reasonably robust.
2. “Customers on all networks must, on average, make the same number of calls.” This is actually where the problems arise and the true cost of interconnect exists.

Why is assumption #2 a problem? Think about the goal of competition for consumers: “Profit maximising companies see to increase volumes by lowering prices, gaining market share and thus making more profit. Provided Marginal Revenue is above Marginal Cost, companies should cut prices.”

So, what happens with interconnect fees above “true” cost of completing the call? When a company seeks to lower its prices, below that of the competition, its customers will make more calls than average. (This is intuitive and also expected from a downwards sloping demand curve.)

Company A reduces its call rates. Company A’s subscribers will make more calls (incurring interconnect expenses for Company A paying to Companies B, C and D) but customers of Company B (and C and D etc.) won’t be making more calls into Company A. Thus, Company A pays more interconnect and receives no more interconnect. Its costs have just gone up, pushing up Marginal Cost to a point where it doesn’t make sense to lower prices.

Voila – a perfect pricing system to force prices higher and higher. If Company B raises it’s prices, its subscribers will receive more calls than they make, resulting in more interconnect revenue than expenses for Company B. If the interconnect fee is sufficiently above the true cost, the reduction in profit form lower call volumes will be more than offset by the much  higher profit from interconnect fees being greater than interconnect expenses.

So interconnect fees need to come down to true cost plus a fair profit margin. It has little to do with interconnect being an expense factored into retail tariffs, but rather a function of the competitive pricing actions it encourages.

What Fin24 readers had to say

Nolulamo Matutu from Fin24 writes:

Acting CEO of the CMA Patrick Matshidze told MPs 18 schemes have fallen below the prescribed solvency ratio of 25%.

Clearly, these 18 schemes cannot pay all the claims we all would like in an ideal world.

However, more interesting to me than the article itself (fairly balanced and factual) were some of the comments written below. Clearly the misconceptions are still strong!

Fed Up had some strong views:

I’d like to see them look at medical aids the other way and see how many of them are making huge profits, some make billions are rands profit which in my opinion is really just ripping people off, medical aids should be non-profit as the less they pay out the more people suffer. Also medical aid is such a bad word, it should be called what it is medical insurance.

I wonder who be the one to break the news that medical aids are non-profit?

pdbphoto has a useful perspective, but still gets confused about “profit” versus surplus for the non-profit schemes:

I am sure that the high expenses that all medical aids incur are due to the huge amount of fraudulent claims being made by members and the large amount of unnecessary procedures prescribed by many in the medical profession. If all were honest Medical Aids could probably halve their fees to their members and still make a profit.

As I mentioned in my previous post, fraud is a serious problem for medical schemes.

Debbie lays the blame solidly at the feet of medical practioners:

It is time Specialists and Doctors who do not charge medical aid rates are investigate. Most of them live well above what most of us could hope for even in the best of situations. They are fleecing the average patient. One simply has to calculate their hourly rate to see that there is something wrong. I also dont buy into the argument that they have studied for so many years and work very hard, there are many other professions that also require years of study and equally hard word

But is countered by a rather unsuccessful sounding doctor (“doc“) highlighting the costs of running a practice that often aren’t appreciated. I’m not convinced his result of R35 per hour reflects average incomes though!

I sold my practice 7 years ago, no money in it for eithical doctors. I was busy but earned less than 15 k per month even though working more than 17 hours per day seven days per week. one must realise there are staff to pay, the vat man takes 14% off the top and then the equipment and room rentals, insurance, etc. when these are all added up then talled to an hourly take home rate it comes to about R 35 per hour a doctor earns after taxes and expenses if he practises ethically!!!!

I have a great deal of sympathy for doc, especially the point about ethics  amongst doctors. Inappropriate claims allowed by doctors turning a blind eye, or outright fraud by doctors are problems.

National debate on NHI?

With this level of misunderstanding commonplace, and personal interests at the forefront of most people’s minds, how can we hope to have useful, rigorous and informed debate around the proposed National Health Insurance?

photo credit: richardmasoner

It’s been widely reported that the Competition Commission has been proving an alledged bicycle cartel. Retailers alledgedly agreed to increase prices to improve margins. This is not a strongly competitive market, which makes it quite an attractive market and good margins and profits should be available.

photo credit: shareski

Vodacom  and Cell C have joined MTN in offering discounted calls in a pre-paid price war. The was the result expected from Virgin with their rather unsuccessful foray into our market, with promises of shaking up the industry and cutting prices. I don’t know how much credit they deserve, but this shows that strong competition is brewing in this market.

Cellphone penetration in South Africa is very high by any standard. Thus the market growth from here on out will be moderate. With increasing competition, decreasing margins, limited growth prospects, the significant barriers to entry don’t seem like enough to keep strong returns to this sector.

As an aside, Vodacom  reported increased spend per subscriber on their prepaid book, but more cautious spending on the postpaid or contract base. It will be interesting to see how this develops over time as our market characteristics change.

So, in spite of regular complaints from forum posters (not this website) that cellphone companies (along with banks and motor distributors) aren’t competitive, it seems there is at least some clear evidence of intense competition in the mobile telephone market.

photo credit: pablo/T

Chavez is promising to take over rice processing plants in Venezuela because they have been refusing to sell rice at the price set by government.

Hyperinflation is starting to show it’s head, as a function of government policies around money supply. The article I referenced claimed that that is the reason for supply shortages and queues, although I don’t quite understand the direct link. Chavez’s response is to impose price controls to ensure citizens can purchase staples such as rice at an affordable price.

What, like price restrictions haven’t been analytically and empirically proven to increase shortages? Chavez is just another in a line of South American leaders to draf their countries into poverty and economic malaise. For all his popular support, he will ruin Venezuela.

There are some interesting points to discuss here, and I’m certainly not saying the industry could not do more. However, there are some fairly fundamental social, pyschological and technical reasons that need to be overcome first. I’ve repeated some comments on the article below. I don’t claim this to be an exhaustive list, but I suggest that it lists some more likely suspects for the causes of imperfect penetration of the insurance market.

Sorry Felicity, but this article doesn’t even get into the details and shows a lack of understanding of the drivers of the need for insurance, and the perceived need for insurance.

Life Insurance
Comparing insurance to banking is disingenuous. Transactional banking makes your life easier, now. Basic savings account can work towards short-term goals. Life insurance will always seem less pressing.

1. Savings products will not work for lower income policyholders through an insurance policy because of the assumed average tax rate of 30%. It is a good deal for welathy investors in high marginal tax brackets, but awful for poor people. This is a function of the tax system not the insurers.
2. Life insurance requires payment of a premium now for a possible future benefit to dependents. There is no way this will ever be a priority need. This is human nature. Even if policies are sold, they will be lapsed very quickly and “better” uses are found for the premiums.
3. Lower income market segments typically have greater reliance on extended family for support. Thus, the need is lower for insurance. This is typical of developing countries, and declines as wealth and education increase (along with smaller families, later first children and less support from the extended family).

4. Funeral insurance may be sold through non-traditional outlets, but it is still exactly life insurance. Just that here the need is better appreciated and understood. Therefore it sells. Or do you want insurers to sell products for which there isn’t a need. (hey, easy on the comments that they already do… I don’t think insurers are angels!)
5. Credit life is required to protect the lenders from the death of the borrower. Again, there is a clear need and this form of insurance is quite widespread. Incidentally, funeral insurance and credit life are, unfortunately, typically quite profitable business lines. This might be a better line of attack against the insurance industry.
6. Insurance in South Africa has remarkably high penetration as measured by insurance premiums as a percentage of GDP and compared to other countries. This shows the succes of the industry, and also explains the limited growth prospects. Life insurance is typically less prevalent than short-term insurance in developing economies – if the problem isn’t restricted to South Africa maybe we should look for broader reasons?

7. I know several insurers who are targeting lower income markets with mixed success. The typical complaint against insurers is that they are overly profit-seeking. If (if!) this is true, then one can’t also complain that they aren’t following up on profitable opportunities? Again, maybe the reason is broader than you’ve implied.

Short-term insurance
Several other commentors have already described valid reasons for why short-term insurance take-up is lower than might be hoped. In many countries, third party liability cover is a legal requirement to drive a vehicle, and with good reason. This is the case in Lebanon, another country where I understand a bit about the insurance industry.

Losses on equity portfolios for our short-term insurers don’t really translate to a requirement to provide insurance to new markets. Maybe it suggests a requirement for less reliance on equity bull markets for performance in good years.

Short-term insurance in South Africa would be considered competitive by most standards. If there were large, profitable, untapped markets out there (with sufficient volumes, limited fraud and low enough claims frequencies and severities to make the premiums affordable to the target market) I expect they would be aggressively pursued. The thing about third party liability cover is that it isn’t greatly a function of the value of your vehicle. That makes it relatively expensive compared with the value of a car typical of a lower income target market. Being insured against someone else’s costs, when you would have no way to pay them otherwise and therefore it would be pointless to be sued, doesn’t sound like a very likely expenditure item.

The expenses of adminstering a policy are also not related to the size of policy or the value of insured property. One can argue whether current efficiency levels are right, but that is a separate argument (and one likely to suggest job cuts…).

The propotion of South Africans with short-term insurance should also be compared against those with sufficient assets to make it sensible. Direct comparisons against the populatio as a whole are close to meaninless.

Ok, I think I have done more than enough rambling and ranting. However, let me conclude with one observation on a quote from the article:

“And the plain fact is that local insurers have done way too little to develop products that offer value for the vast majority of South Africans. This is self-evident; precious few South Africans use insurance products.”

Just saying something is a fact doesn’t make it a fact. And please don’t abuse “self-evident”. Just because one item could be a cause of something does not make it the cause, or the only cause, or the primary cause. Especially not when you have just laid out a few of the reasons I also covered as to why insurance is a hard sell.

I wonder whether I should have mentioned the bad debts on house and car loans that are stacking up based (only partially!!) on pressure to lend to households with little wealth for large deposits and strained financials?

Why SEO is necessary

A large percentage of web traffic is directed by search engines. After all, this is how Google has become the giant company that it is. I tried to track down some hard statistics on this, but they varied widely and didn’t seem all that credible. Nevertheless I think it is clear that this traffic is signficant.

Search engines use algorithms and automated scripts (“spiders”) to understand the importance, quality, relevance and popularity of content on the web. A radiographer takes xrays without being able to see directly the same picture as the xray will produce. A photographer taking black-and-white photographs needs to ignore the colour in the viewfinder and imagine the light and shadows and shapes of the final photograph.

If your website has excellent content, but structures it in a way that is not readily accessible to a search engine’s spiders, then the spider will pass on by without sending humans to visit your site. Two easy examples may help:

1. Flash content – the content may look great and be ground-breaking and useful, but since most spiders don’t currently “understand” Flash content, it will be ignored.
2. Login, registration and forms – if large parts of a website are accessible only after filling information in a form or registering and logging in, the spiders won’t get in the door.

There are other considerations that are postulated to be relevant:

• Duplicate content “dilutes” the scores of any individual page
• Many links to irrelevant, poorly rated pages can suggest that your site is not providing useful info to the user. This effect is stronger since search engines try to separate “link farms” and rings and other methods to make a collection of websites appear more connected than they are in reality.
• Poor choice of keywords that searchers may often use, or targeting terms that are widely targeted by a range of other websites.

A typical SEO strategy is quite complex and takes times, effort and money

A typical SEO strategy would cover analysing the target audience of a site, understanding the site content, understanding the site structure, doing keyword analysis, checking out competitors, generating a few good quality inbound links if applicable, possibly generating some linkbait content, installing appropriate tools (e.g. Google Analytics) to monitor traffic and then repeating the cycle once the customer behaviour is better understood. Key metrics are site traffic generated, low bounce rates, long time on the site, repeat customers, higher sales (or more contacts if online sales aren’t part of your service) and higher search rankings.

All of this takes time (both from the SEO but also from the website owner). There are many fly-by-night organisations claiming to do SEO with neither the knowledge or the business ethics to get it right. It is probably because it is a poorly understood, sometimes arcane speciality, that these companies get into business with low starting capital costs.

How not to do SEO in ten easy steps

I received an unsolicited email from Zenteq recently. I’m not providing a link to their website as I have no reason to believe they can deliver anything useful.

1. Sending unsolicited email (aka SPAM). This is typically a bad idea. Best case scenario you get a few new customers. Worst case scenario you irritate a huge block of potential customers, have your mail server and/or IP blocked as a source of spam, have your ISP close down your website for abuse and so on.
2. Use bright (as in reflective safety wear) green text and truly ugly formatting. Not a professional image by far.
3. Offer to “SEO” the website by submitting to 600,000 search engines monthly. This is irrelevant and a giant waste of money.
4. Charge R350 per month. In the short-term, this is far too little. The work involved at the outset of optimising a website for search engines requires several full days of work. However, in the long-run, this may well be too much. Since there appears to be no reason for the client to stay with Zenteq, we have a familiar problem where the business model doesn’t make sense for a serious operator and thus it’s likely that it isn’t a serious operator. (on trawling their webpage I see there is a R1000 upfront fee as well. Nice not to include this in the email. It still isn’t enough for serious upfront work)
5. No description of other components of SEO strategy, or examples of prior successful work.
6. “From” email is marketing@fire-equipment.org, “Reply to” is newheights70@telkomsa.net but the content directs the reader to info@zenteq.co.za. So which is it?
7. Structure your email so that it gets stopped by the spam filter built into both Thunderbird and Apple’s Mail application.
8. Include icons on their site claiming valid XHTML code, but then fail the test when the button is clicked.
9. Analysis of google results shows no links to zenteq.co.za.
10. And my favourite – a search on google for “seo site:za” which searches for the top websites relating to “seo” within the “za” domain doesn’t have zenteq listed in the top ten pages. A first-page listing is almost an requirement if you expect any number of click-throughs.

So who guards the guards, and who optimises the optimisers?