Mat’s Investing Blog

The Mac shareware model is built around 3 important features for consumers:

1. Being able to try the software
2. Paying an upfront cost to continue to use the software
3. Paying an upgrade cost when the developer writes a significant update

The MacHeist deal allows you to try the software with ease as you can simply go to the developers website and play with a trial version. When you then proceed to purchase the bundle it also fulfils step 2 although you don’t have to pay the same upfront costs when you spread your initial expense across 14 applications. Now that the consumer has the bundle in their hand comes the developers dilemma: can they earn money off that sale in the future?

Simone has a superb post with some hypothetical breakdowns of how much developers will receive and I’m going to run with those numbers. Picturesque, made by two talented developers from my hometown, is currently part of the bundle and by my calculations they stand to make around $60k after tax and MacHeist fees. This is superb for two university students but as Simone rightly concludes, it was all money generated from tightwads. The challenge for Zac and Nik now is to turn these people, who wouldn’t pay $39 for their application by itself, into recurring revenue into the future. Will these “customers” pay $15 for an upgrade to Picturesque or any of the applications in the bundle? I highly doubt it but if they do it will be a very small number.

As an example, I was chatting to Dan, the developer of ShoveBox, about the reaction he received to the release of his iPhone companion which is priced at $3.99. The Mac application was given away at the start of MacHeist and he sent out an email to all the new users he acquired announcing the new release. He was shocked and dismayed to find that most of these new users wanted the iPhone version to be free as well. There’s no surprise here though as these are “customers” that expect to gain quality goods for free.

In conclusion developers who are distributing their applications via MacHeist are not only short-changing themselves upfront but could very well face the dilemma of supporting customers that will never pay them anything more into the future. That is not sustainable for anyone.

Really ARIA? You expect me to pay $2.19 for a single song? You’ve got to be joking. Don’t expect $2.19 songs to ever reach the number 1 spot in the top 100.

Update: And confirmation that sales have been impacted. I bet the slide is even worse in Australia! Great job recording industry!

When it comes to making a new product, and I’m going to use the Mac Indie shareware market as my example, there are only a few steps that you need to follow: define your niche, execute to your definition, and market your new product.

Define your niche

“Life is like a snowball. The important thing is finding wet snow and a really long hill” - Warren Buffett

New products either fulfil a need that a customer already has or introduce a need that the customer didn’t realise they had. This step is the hardest and most crucial as, without a well defined target in mind, you will produce a product that will require extensive reworking to achieve your financial aims. As an example, iPodRip fulfils a very simple need: people want to copy their songs off their iPod. As long as the application meets that goal then there’s no reason to make it flashy or overly feature laden.

On the flip-side, it is very easy to make a mistake and have your focus on the wrong thing. Acorn, Iris, and Pixelmator all started out with the wrong objective: they wanted to dethrone Photoshop. While an amiable goal, it didn’t define a consumer’s need and therefore, none of them have made a ripple on Adobe’s market-share. †

Execute to your definition

Now that you have planned out exactly which niche you are targeting, it is time for the fun part - building the product! Go nuts in designing your product by brainstorming every imaginable feature for several weeks. You’ll discover that you won’t be able to push the idea out of your mind and I find myself thinking of ideas at all hours, day and night. Make sure everything is physically recorded, no matter how foolish you may think it is.

Once you have exhausted all your feature ideas stop and cull. Adhere to the principle of KISS while taking a look back at your product goal, and remove everything that doesn’t fulfil the desired requirements as written by you. Once you have a small list then you can start planning and building. Fail to plan at your own risk.

Market your product

For me, marketing is the most enjoyable part as it allows me to use my imagination and experiment with ideas. While I wont go in-depth, I’ll outline a few things that must be played with.

Building an excellent website that quickly explains your product is vital. You need an elevator pitch, that is the ability to sell your product in the 10 seconds you have with someone as you descend in an elevator together. If you can’t explain your product succinctly then you are going to have an issue selling it.

Focus on the quality and reliability of your product alongside excellent customer support. If people are happy with your product, then they’ll tell friends and nothing beats free advertising. The flip-side is very much the case as well: a faulty product will leave an almost insurmountable obstacle in a customer’s mind. As for support, some people aren’t great at it or would rather focus on other things, so consider paying someone to take care of that burden as it is well worth it.

Experiment with Google Adwords while using Google Trends as a guide. Find the most searched for terms and use your elevator pitch to advertise. Make sure that the entry page to your website is navigable and that everything flows nicely towards a customer buying your product. Use the “Mom” test to assure this.

Where are the opportunities?

Very few people come up with unique ideas that will be successful and therefore it is recommended that most don’t pursue this option. However, there are plenty of niches in Mac shareware, where no product is currently the leader. It is these areas where opportunity abounds. As an example, the iPod was not the first but Apple clearly looked at the state of the mp3 player market, picked the best features from each and added their own unique touch to produce a market beating product. This approach both guarantees that there is a niche to tap and has the lowest risk of complete failure.

The final word

When you’ve completed all the steps satisfactorily you may not see immediate results but don’t fret, while the snowball may be small it has started rolling. Not every product will sell 40 copies in its first day like iPodRip did back in 2003 due to its fantastic niche or $54k in a day like Delicious Library due to their superb product and great word of mouth. However, with patience, you will see results.

† I don’t feel having the goal of making a simpler or cheaper image editor will do either as that still doesn’t fulfil a customers need. If they wanted it cheaper, and I hate to say it, they’d simply steal Photoshop.

Number of times in 2008 that the S&P 500 closed up or down 5% in a single day: 17

Number of times between 1956 and 2007 it did this: 17

source: Harper’s Index

So far this year we’ve added two to the tally including today’s stupendous 6.37% rise and several more above 4%. While these bear market rallies and falls don’t worry me too much I am concerned that too many people are trying to time the market bottom with what could be disastrous consequences for their finances. I especially hope that people have not been buying on margin.

They are now recommending you buy Qantas.

I recommend that if you want minimal returns with a high probability of losing all your money. The airline industry is a terrible business no matter which carrier you are.

Update: Qantas announce a substantial fall in profits and job cuts.

Fairfax (ASX:FXJ) advertises on its Commsec page that it “publishes 240 regional, rural and community publications, has a significant presence in New Zealand, an agricultural publishing business in the US, 9 radio licenses in Queensland and South Australia and metro newspapers in Sydney, Melbourne and Canberra”. This would be quite an astounding achievement if it was the 1960s. Unfortunately in this day and age with targeted advertising from Google, superb auction and job websites like eBay and Seek and a continually discredited and biased media the empires of old are dying beasts, especially the printed variants.

Financially things just aren’t pretty. One look at the balance sheet would cause any investor to do a double take. Cash flow is negative to the tune of $270 million and it’d be worse without the $350 million of new debt. Current liabilities are larger than the net worth of the listed vehicle with 75% of the current assets being of the intangible variety. As I don’t value intangibles in the slightest the current net worth of the company is negative to the tune of $1.5 billion. With $2.5 billion of debt and little cash left in the coffers it’ll be tough for the company to grow the book value for the foreseeable future. Instead expect more capital raises which will dilute shareholders positions and an expanding debt base with the obvious interest payments.

As a value investor the stock is terrible. Basically all you would be buying is the hope that it can turn a mountain of debt and a few key assets, like RSVP, into global vehicles. I feel sorry for employees who are making an investment in the company as at this moment it is worth nothing. The only thing they can be certain of is the money that has been placed in their bank accounts previously.

Now is Fairfax special in this regard? I’d suggest not. Magazines are being shuttered all over the world as advertisers find more effective mediums for their message. Newspapers and news stations are finding it harder to entertain while shaking the dogma of being politically biased. This is of course alienating advertisers and causing people to switch off in droves as the internet provides instant gratification. But what about the portals like bbc.co.uk, smh.com.au or washingtonpost.com? Unfortunately there has yet to be tangible proof that any of them can be profitable unless they truly get advertising right while keeping their overhead to a minimum. The latter will be the hard part though as staff demands are heavy and it will only get worse over time.

Sadly the heydays of the 60s and 70s where the newspaper was the only method of advertising your goods in a city are long gone.

In light of recent events, it would benefit all CEOs to be aware of who they are in fact working for: their shareholders. Management are, after all, only meant to divert the companies capital in such a way as to provide a maximum return for their shareholders for as long as they remain shareholders. Therefore, when any decision is made the management should consider whether the most dire of consequences will cause a loss of capital. If there is a possibility for such a crippling loss, then the decision should automatically be rejected with no further consideration required.

There is an old maxim that states “with greater risk there is a greater reward” but I no longer feel that is fundamentally sound. In cricket the safest shots are the ones where the bowler has strayed the most and with that safety comes the ability to collect oversized rewards. Similarly with companies the greatest rewards are gained when others have strayed the most; when the failures of the over-leveraged and unintelligent decision makers leads to their destruction and the ultimate rewards for the safe and strong competitors who are left standing in a now less competitive market.

Management should therefore focus on growing at a rate that never puts the company in a position where their shareholders may end up with worthless paper the next day. Ultimately the rewards, while not as thrilling as the quick growing over-leveraged companies will be bountiful, while at the same time allowing shareholders and management to sleep soundly at night.

It was a little earlier than I expected but the All Ordinaries has achieved the 50% fall in 1 year and 18 days. Here’s to hoping for another 50% from here!

3436.6 is the magic number whereby the All Ordinaries will have fallen 50% from its high on the 1st of November 2007. My prediction: we hit it this week.

When the stock market is rising the cautious few, the value investors and their kin, are allowed to be pessimistic without fear of hurting other stock markets players as no one is losing money. However, due to being cautious the value investors are also labelled as out of touch and are generally derided for not reaping the easy profits that are at hand. 

Unfortunately when things switch around, when the stock markets falls and the other players lose big, then the value investors must hide their euphoria as it would too easily offend. Every time the stock market falls we cheer on and all the while thousands of people are losing everything they have. If we speak out we are lampooned for being inconsiderate and cold but it is simply the way we play the game.

As a value investor it always pays to keep our emotions to ourselves.