Outside the Bike: the frame set as a cell phone

Demand for cycling is inelastic

Frame and Wheel reads that demand for bicycles and bicycle equipment remains relatively strong despite tough economic conditions and speculates that this is because for many people, riding a bicycle for health, competition or transportation is an important part of their daily lives and something that they cannot do with out. An economist would say that demand for cycling is inelastic. Frame and Wheel observes that demand for telecommunications is also inelastic: individuals want very much to be able to communicate and are unlikely to terminate their cell phone subscription when times are hard. They will more likely stop going out for dinner and movies. People pay for cell phones so that they can have access to others in the form of voice calls or emails, which for most people is very important. 

It is about the experience

Cyclists pay for their bicycles and gear so that they can have access to new and existing experiences on their bikes, stay fit or get to where they want to go. Frame and Wheel has always thought that cycling is about many things including the experience that occurs when you are on the bike: the reverie, the camaraderie, the freedom, the sunrise, the fox, the idiot driving the SUV while talking on the cell phone, the climb, the field sprint, the drama. In a funny way, we communicate when we are on a bike ride: we communicate with ourselves, with others and we actively or passively absorb the surroundings. Frame and Wheel has been caught thinking many times that a bicycle is very much like a communications device and believes that the Internet of Things will transform how we own our bikes, pay for our bikes, ride our bikes and dispose of our bikes. Indeed, Frame and Wheel's mission is to facilitate that change.

Please elaborate in a post

Frame and Wheel asked visitors to the blog if they would ever pay for their bicycles based on the number of hours they used it. Sixty percent of the 35 respondents said no, 20 percent said please elaborate in a post, 14 percent said yes and the balance said maybe. Frame and Wheel believes that the responses suggest that consumers cautiously open to the idea, but very much against the idea of paying an hourly rate for  using a bicycle, perhaps because they want to own it. Frame and Wheel also asked blog visitors if they would pay for their bicycle the way they pay for a Netflix subscription. Seventeen percent of the 36 respondents said yes, forty-four percent said please elaborate in a post, 20 percent said no and another 20 percent maybe. The responses suggest that the market is curious about this idea, and prefers the option of paying a monthly sum rather than an hourly sum. 

iTronski

This summer, Frame and Wheel made the mistake of leaving an Android smart phone on the beach below the hight tide mark. In the few minutes that the smart phone was astray, it was completely soaked and ruined (This earned Frame and Wheel an iTronski). Frame and Wheel discovered that this smart phone, an HTC Incredible, which had been given to Frame and Wheel free of charge by the cell phone operator at the beginning of a two year contract, retails for $700. The service provider informed Frame and Wheel that the only available options were to buy another new Incredible or buy one second hand somewhere. The experience crystalized for Frame and Wheel the fact that the cost of smart phones are loaded into the monthly cost of a calling plan, and shattered the warm and fuzzy perception that cell pone operators just hand out these beautiful smart phone for free. This experience also allowed Frame and Wheel to obtain a better understanding of how mobile phone contracts are structured and Frame and Wheel will digress for a moment on this topic.

High costs low usage

Cell phone operators have huge fixed costs. The largest one is the network of cell phone towers, exchanges and other equipment that allows calls to be made and delivered. Add to that the labor, the trucks and the offices and it becomes clear that running a mobile phone network is very expensive. The only way cell phone operators can cover these costs is by charging airtime to cell phone users, and the only way they can charge users airtime is by getting them to sign up and pay a for cell phone. In the early days, the subscriber had to buy the phone at retail (sometimes from the cell phone operator) and then pay for the airtime based on the number of minutes they used it. The trouble with this approach was that the phones were very expensive (as well as cumbersome), and those who could afford to pay them used their phones for only a few minutes each day because the batteries for the cell phones didn’t last long, the air time charge was expensive and by the minute and there were plenty of perfectly fine or better fixed line phones still available, Cell phones operators were in a situation where subscriber growth was slow, usage was low and network expenses were high and getting higher. 

The virtuous circle

Everything changed when cell phone operators began to subsidize or absorb entirely the cost of the cell phone and integrate that cost into a two-year monthly calling plan. Suddenly, cell phones became much more affordable. Additionally, the monthly calling plan eliminated the perception of air time usage being expensive. The only wrinkle was the requirement to sign a two year contract with the cell phone operator, but consumers were fine with the commitment because they viewed a cell phone as a necessity (or their demand for telecommunications was inelastic). Subscriber growth and penetration increased, usage surged and cell phone operators were able to invest in expanding their networks, which led to a virtuous circle of growth and profitability. Frame and Wheel quantifies just how profitable the cell phone subsidy arrangement is for a cell phone operator below:

Rate of return for a subscriber paying $60 per month

	Net cost of a phone ($)	Annual revenue ($)	Annual revenue ($)
Cash flows	(200)	720	720
Internal rate of return	342%
Required rate of return	10.0%
Net present value of subscriber	$954

Very high IRR

Frame and Wheel estimates that the internal rate of return on a single subscriber that pays $60 per month ($720 per year) for basic cell phone access is 345%. The rate of return is so high because the cell phone operator pays a wholesale price for the smart phone that it gives to its new subscriber. For some popular smart phones, the subscriber pays a token sum of say $99, which serves to lower the wholesale cost of the phone even more (Frame and Wheel arbitrarily estimates that the cell phone operator pays $200 whole sale for the smart phone in this example). 

Smart phone cost earned back quickly

This cost is earned back in just three months, and the rest of the revenue for the two year period and beyond is pure gravy. Additionally, the cash flows are stable and predictable and the chances are very good that the subscriber will come nowhere near the monthly limit which is good for keeping the network clear for those who do (even if the limit is exceeded, the subscriber pays the per minute rate). Of course, the operator has to pay operating expenses and continually invest in the network, but this example shows just how profitable combining subsidized cell phones with monthly calling plans has been for the industry.

Nationwide calling plans AT&T

	Plan 1	Plan 2	Plan 3
Cost per month ($)	$60	$80	$100
Minutes of talk time per month	450	900	1,350
Hours of talk time per month	7.5	15.0	22.5
Cost per minute	$0.133	$0.089	$0.074
Cost per hour	$8.00	$5.33	$4.44
Cost per year	$720.00	$960.00	$1,200.00

Could it work for a frame set?

If a bicycle is a communications device, could this model work for a frame set? Frame and Wheel believes it could. Frame and Wheel looks at monthly calling plans available in the market today and translates them into hours as that is how Frame and Wheel and other cyclists track how much riding they are doing each day. Plan 1 costs $60 per month and allows the subscriber 450 minutes of talk time per month. This works out to $0.13 per minute. In terms of hours, the plan allows the subscriber 7.5 hours of talk time at a cost of $8.00 per hour. Plan 2 costs the subscriber $80 per month and allows for 15 hours of talk time per month at an hourly rate of $5.33 per hour. Plan 3 costs the subscriber $100 per month and allows for 22.5 hours of talk time at a cost of $4.44 per hour. Plan 1 cost the subscriber $720 per year at a minimum; Plan 2 cost $920 per year and Plan 3 cost $1,200 per year. A key point to note is that the subscriber pays the per minute rate on any minutes in excess of the monthly threshold. For example, if a Plan 1 subscriber exceeds the 450 minute threshold by 10 minutes, the subscriber is billed $13.30 in addition to the $60 monthly cost.

Hypothetical monthly subscription plan for a performance frame set

	Monthly subscription plan
Cost per month ($)	$59
Minutes of ride time per month	1,800
Hours of ride time per month	30.0
Cost per minute	$0.03
Cost per hour	$1.95
Cost per year	$702.00

$59 per month for three years

Frame and Wheel believes that most cyclists consider telecommunications to be more of a necessity than cycling, but not by much, and thus estimates that a monthly subscription plan for a performance carbon frame set that retails for about $1,500 would be $59 per month. This plan assumes that the subscriber rides the frame set about 30 hours per month and thus targets dedicated cyclists. The key difference is that if the rider rides the frame set for more than 30 hours in a given month, there is no per minute charge in excess of the monthly cost. This is intended to incentive the the rider. The annual cost of this subscription is $7o2 per year.

Internal rate of return on a frame set subscription

	Net cost of frame set ($)	Year 1 revenue ($)	Year 2 revenue ($)	Year 3 revenue ($)
Cash flows	(650)	702	702	702
Internal rate of return	93%
Required rate of return	10.0%
Net present value of frame set	$996

Internal rate of return of 93%

The internal rate of return on a frame set subscription is estimated to be 93 percent.  The net present value of the frame set is $996. At the end of the three year period, the frame set can be returned to the brand for a cash or credit payment. This mechanism keeps the rider on the road and keeps the frame set out of the land fills. Would there be a three year contract? Perhaps, and perhaps there would be a built insurance plan so that if the frame is damaged, it can be replaced at no cost to the rider. Another critical element of this model is how to implement it and monitor it. Frame and Wheel believes that subscribers will obtain this service through an existing on-line application provider. Frame and Wheel appreciates that this all sounds pretty outlandish, but the same could have been said ten years ago about the idea of uploading rides to the Internet moments after you finished them. Frame and Wheel will continue to refine this idea and think outside the bike.

Outside the Bike: How much value your bike loses each year

Frame and Wheel eBay Store transactions: 2011

Item	Purchase price ($)	Selling price ($)	Change ($)	Years owned	Value per year ($)	Value per year (%)
2009 Colnago EPS 11-Spd Campy Bora Ultra wheels	15,000	5,500	9,500	2	4,750	32
2009 Time RXR Campy 11-speed EC90 Power Tap wheels	10,000	4,500	5,500	3	1,833	18
2010 Parlee TT frame set	3,500	1,200	2,300	2	1,150	33
2011 Specialized S-Works Tarmac SL frame set	3,000	2,125	875	1	875	29
2008 Cervelo P3C Zipp 404 clincher 650c	6,000	2,791	3,209	4	802	13
2010 Parlee Z5 frame set	3,500	2,082	1,418	2	709	20
2010 BH G5 frame set *	3,000	1,225	1,775	2	888	30
2008 Cervelo Soloist Ultegra Mavic Ksyrium wheels	4,000	1,250	2,750	4	688	17
2008 Specialized Epic marathon DT Swiss wheels	3,000	1,405	1,595	3	532	18
2008 Cervelo P2C Ultegra Shimano WH-R500 wheels	3,000	1,900	1,100	4	275	9
2008 Lemond Poprad Cyclocross bicycle *	2,000	720	1,280	5	256	13
Average	5,091	2,245	2,846	3	1,160	23

Frame and Wheel sold the bikes listed above on the Frame and Wheel eBay Store over the past 12 months. All of the auctions were reserve price auctions, with the exception of two offerings: the BH G5 frame set and the Lemond Poprad. The Colnago EPS did not sell for the price asked by the seller; the highest bid was $5,500. The average purchase price is $5,100. The average selling price is $2,200. The average holding period is three years. The data implies that these items lost an average of 23% of their value each year. The fact that a performance bicycle loses so much value so quickly is shocking for some sellers. But this is the nature of the industry: demand is created by brands pushing new models into the market each year, some of which have real innovative improvements to them while others simply have new paint jobs and graphics. Brands obtain their economies of scale only by executing huge production runs in Asia, thus they have a strong incentive to deliver as many units to the distribution network as quickly as possible. Indeed, retailers are buying in October inventory for the following year. This characteristic explains why retailers discount so much at the end of each year, and it is the reason why performance road bikes lose value quickly. 

Frame and Wheel will explore finally a business model that changes the industry from a push model of demand to a pull model of demand in a series of posts titled Outside the Bike. Frame and Wheel has been making oblique references to this idea in posts and in person for over a year now and now has the time to quantify it more thoroughly. Indeed, the question “Would you consider paying for your bicycle like a Netflix subscription” on the Frame and Wheel blog resulted in 5 Yes, 6 No 7 Maybe and 16 Please elaborate in a post responses. So there is interest and Frame and Wheel will oblige.

One client wondered why he should pay $5,000 on a bicycle when it is going to sell for only $1,000 four years later. The reasons are intangible and emotional, but Frame and Wheel’s practical philosophy on purchasing performance road bicycles given the industry’s current model was crystalized in response to the question. Here it is: 1) Do not spend wild amounts on a bike. A very light and fast road racing bike with fine wheels can be had for about $6,000. A good rule of thumb is buy last year’s model. 2) Purchase a standard package that will appeal to the secondary market. Go for main stream brands with a single group. Avoid elaborate customization and group mixing. 3) Hang on to the bike for two years or three years at most. If its any longer than three years, hang on until it falls apart. 4) Concentrate all time, effort and resources on that one bike. The bicycle is losing value wether or not you ride it; might as well enjoy it and extract as much value out of it for yourself as you can. Get rid of the winter bike, the group ride bike the spring weather bike, etc. 5) Take comfort in knowing that the bicycle can be sold for something on eBay when you are done. If you spend $5,000 on a bike and sell it for $1,000 after four years, take the view that you are only spending $4,000 and then ride the bicycle like mad.

Vittoria Tires exposed to floods in Thailand

Frame and Wheel reads with great interest about the flooding in Thailand. The flood waters are apparently on their way towards Bangkok after having flooded already much of the land in the northeast. The authorities are scrambling to clear the canals and put up barriers to divert the encroaching waters. Friends and family living in Bangkok report that all is well so far, but somehow Frame and Wheel cannot believe that this is true. The floods have already done $4.8b in damage and that is expected to increase if the flooding reaches Bangkok where forty percent of Thailand's economic output is concentrated. 

Frame and Wheel notes that Vittoria Tires is one of the many tire manufacturers that produce their tires in Thailand. This is because of lower costs and better access to rubber markets. Should the flooding swamp Bangkok, it could very well disrupt production. Additionally, Bangkok's infrastructure and ports could be affected to the point that it becomes difficult for the factories to ship goods out of the country. These bottlenecks could make some types of Vittoria tires harder to obtain or more costly.  Hopefully, this will not be the case, but better order your EVO Paves now while there is still some inventory kicking around.

Frame and Wheel rode to the soccer tournaments on Sunday. Temperatures were in the 80s. It felt like mid June, but the air was cool and the shadows were long, a subtle reminder that winter is on its way. The route out to Waterboro is familiar territory. Today, Frame and Wheel heads south on Route 202 and 4A over to Sanford in order to make the games on time. A more challenging and far more scenic route is to push east through to Shapleigh and then drop down into Sanford. There are some great climbs and the roads are peaceful. This area is the beginning of the more mountainous territory of western Maine, but it is at the edge of Frame and Wheel's maximum range which makes it hard to push to far into this area.  The way forward is to drive to Waterboro and set out from there, but then if there are multiple flats or a serious mechanical, it becomes difficult to call for help. This was perhaps one of the last warm weekends of the year.

Frame and Wheel will migrate the Internet of Bikes to its own page on the website sometime soon. Once that is done, all the rides will be automatically uploaded to that page. This will save a lot of time. Frame and Wheel will use the blog for posts that require tables and more thought. 

The Mount Cadillac Century Challenge was indeed that because of the wet and cool conditions. In the past twenty years, there have been only two times that it has rained. Nevertheless, 120 riders turned out this year for the ride. Frame and Wheel rode with Richard and Ben, who are nearby residents, for the first three hours. The final two hours were solo.

Frame and Wheel discovered that with Di2, when the battery is getting low, the front derailleur goes out first. Frame and Wheel had to ride two thirds of this ride in a small chain ring which actually worked out fine. If it had been a race it would have been a problem, and if the front derailleur had been stuck in the big ring, there would have been a problem getting up Mount Cadillac in a 53 x 27. Otherwise, the Austro-Daimler Superleicht rode very well and was very comfortable. This was its first long, wet ride.

The last section through the park road is very nice and there are some striking vistas. Frame and Wheel would like to return and spend more time looking and hiking around. Visibility on the way up Mount Cadillac was very limited and there were quite a few buses going up and down. Coming down the mountain was very wet and cold, and the traffic coming up the road was over the yellow line to get around bikes going up. For this reason, the organizers were quite wisely recommending riders to think twice about making the ascent. Frame and Wheel thanks to the Downeast Cycling Club and the supporters and volunteers who organizer this ride. Next year the weather will be drier, hopefully.

The Internet of Bikes: Strava Cycling application

Frame and Wheel discovered the Strava Cycling Android application and gave it a test run. It seems to work well.  It captures key data and presents it neatly and clearly. One of the main problems with Google My Tracks is that it requires a lot of work to post a ride. Sometimes it is not worth the effort if the ride is a featureless ride around the neighborhood. However, Google My Tracks has plenty of space for comments and images. Readers inform Frame and Wheel that the detail of the Internet of Bikes posts is very entertaining. Strava Cycling has a short comment box and not much room for elaboration. Perhaps Frame and Wheel will use Google My Tracks for races and Strava for rides.
The key difference is that the Strava application has a social network element to it such that users can follow the exploits of other riders.  Frame and Wheel likes the way the application can be integrated into the blog and will try that so that the blog stays fresh. This application may be the way forward for the Internet of Bikes column.

The Internet of Bikes: 2011 Maine State Time Trial Championships (Maine State Time Trial Series #12)

View Maine State Time Trial Championship in a larger map

The Maine State Time Trial Championships is the twelfth and final race of the Maine State Time Trial Series. This year the race was 12.6 mile out and back held in Vassalboro, Maine. The course features long straight roads, a tough climb at mile two and false flats. Conditions were dry and breezy with temperatures in the mid seventies. Forty-seven riders turned up to race. Frame and Wheel intended to track the event with an Android smartphone but discovered ten minutes before the start that the Google My Tracks application was not on the phone (this could qualify as an iTronski, if the consequences were more dire). Frame and Wheel realizes that there are many drawbacks to the Internet of Bikes and forgetting to upload an application is one of them. Frame and Wheel posts a basic map from Google Maps, which has labels and terrain, but no data from the ride.

Frame and Wheel gets up to speed and arrives at the mile-two hill with plenty of momentum. A big effort is required to get over the last section of this hill. Frame and Wheel gets out of the saddle and pushes a big gear, which is hard work, but recovers a bit on the gradual downhill that follows. Frame and Wheel arrives at the golf course and spots two golf carts coming up the road in the right lane. The marshal waves one of them to a halt and Frame and Wheel gets through safely (add golf cart to list of things encountered in time trial: duck, dog, cat, father pushing infant in stroller, pick up truck). 

Frame and Wheel arrives at the turnaround and manages to avoid some deep sand. The bikes slides around a bit, but Frame and Wheel is conservative in this turnaround. Frame and Wheel recovers speed on the following downhill and begins the perpetual false flat that characterizes most of the inbound section of the course. Frame and Wheel is feeling the effort by the golf course and must work hard to get over the highest point of the course by the driving range. The following downhill allows for some recovery. Frame and Wheel crosses the finish line with a time of 22:27 which is fast enough to win the day, but had the course been longer or included more hills, Frame and Wheel would have been further down in the rankings. OA Cyclemania team mate Ron Bourgoin is 15 seconds back with a time of 22:42 

Frame and Wheel congratulates all the riders on their efforts and thanks the Central Maine Bicycle Club for organizing the race. Frame and Wheel  also congratulates all the riders who participated in the series and thanks the Maine Bicycle Coalition for organizing it. The series is a unique event and an excellent venue for improving time trial and cycling skills. Frame and Wheel is very pleased with the day's result and the series result, but is very aware of the many levels of cycling excellence that exist above Frame and Wheel's level. Thus, Frame and Wheel's goal in each of these races is to try to ride faster than the previous year. Frame and Wheel encourages all riders to do the same.

The top five finishers in the 2011 Maine Time Trial Series take to the podium: Herb Coolige (5th place), Ron Bourgoin (4th place, not pictured), Seth Brooker (3rd place), Andy Haskell (2nd place), Frame and Wheel (1st place).

The Internet of Bikes: 2011 Mount Desert Time Trial (Maine Time Trial Series #11)

View Mount Desert Time Trial in a larger map

The Mount Desert Time Trial is a 13.7 mile out and back time trial held in Tremont, Maine, which located on the southern tip of Mount Desert Island. It is the eleventh race in the Maine Time Trial Series. The course features sharp and short climbs, fast descents and some rough pavement. Conditions were calm and cool and temperatures were in the 70s. About 35 riders turned up to race. Frame and Wheel tracked the event with a smartphone and posts some of the details of the ride in the labels on the map above. Total distance (including rolling around the start area) is 16.2 miles, total moving time is 48 minutes, average moving speed is 20 miles per hour, maximum speed is 39 miles per hour, maximum elevation is 42 feet, total elevation gain is 688 feet and maximum grade is 6 percent.

The officials and all the riders are savaged by clouds of mosquitos during staging, such that it is a relief to get going. Frame and Wheel negotiates the Fairpoint work site without trouble, but has a close call with a truck emerging from a driveway further up the road. The pavement is rough and Frame and Wheel concentrates on holding on tight and choosing a smooth line. The hills are tough and recovery opportunities are short and limited. There is one section where there is a long, gradual downhill, and Frame and Wheel is able to push a big gear here and make some time. Frame and Wheel avoids a cat that dashes across the road.
The turnaround goes smoothly, but the section right after it is a gradual uphill. Frame and Wheel is not  in the right gear here and loses some time here. There are no more 30 second riders for Frame and Wheel to chase. The final hills are hard and sap momentum. Frame and Wheel pushes through to the fast finish and is pleased with a time of 30:42 which is fast enough to win the day. Frame and Wheel spends the rest of the day being a tourist in the shops of Bar Harbor and the wharves of Barnard, features that make this event a pleasant one to attend. Frame and Wheel congratulates all the riders on their efforts and thanks the Downeast Cycling Club and Bar Harbor Bicycle Shop for organizing and sponsoring the event.

Bass Harbor is the real deal

Bar Harbor display boats

The one on the right looks pretty fast

The Internet of Bikes: 2011 Tour of Islesboro (Tour de l'Isle)

View 2011 Tour of Islesboro in a larger map

The Tour of Islesboro (Tour de l'Isle) is a new Grand Fondo or Sportif event located in Islesboro, Maine. The route is a 25.3 mile loop that features rolling terrain, dramatic views of Penobscott Bay, narrow but generally peaceful roads and the Sprague's Beach climb. Riders can ride one lap (beginning at 9 am) or four laps (beginning at 6 am). Conditions were dry and calm with temperatures in the 70s. About 30 riders turned up to ride the single loop. It was indeed a "stacked" field and included young children, parents, cycling enthusiasts, juniors, masters, one pro and Deval Patrick, the Governor of Massachusetts. Frame and Wheel joined two other riders for the century ride and brought along the Android smartphone to record the event. Total moving time is 330 minutes, total distance is 102 miles, average moving speed is 19 miles per hour, maximum speed is 36 miles per hour, total elevation gain is 5,288 feet, maximum elevation is 144 feet and maximum grade is 16 percent. 

Frame and Wheel's primary observation about this century ride is that it would be very difficult to do solo. There is a lot of repetition and doubling back, and although the scenery is very nice, its novelty begins to fade at around mile sixty. Having other riders to talk to and then rotate with makes all the difference. Frame and Wheel congratulates all of the riders who turned out for the event and thanks Bikes and Java of Rockland for providing mechanical support, and thanks Chirstopher Choa and his family for organizing and championing the ride. Frame and Wheel looks forward to participating in 2012.

 Race official outlines the course

 Father and son category at the finish

Recovery