Unbundling everything
The arrival of digital music in the form of iTunes turned the music industry on its head: it allowed the consumer to unbundle an album of music and obtain an individual song rather than accepting what the music industry and the artist believed to be a good song. The technology allowed the customer to choose and the result was lower prices for music. Meanwhile, the arrival of the e-book is having a similar disruptive effect: it is moving the publishing industry towards an agency model where agents (such as Amazon or Apple) collect a percentage of the selling price of each e-book downloaded by the consumer. It is overturning the vastly inefficient and marginally profitable model that has existed for years and it is also causing prices of books to fall. Once again it is the consumer who benefits. There is a great article in the New Yorker Magazine titled Publish or Perish that is all about this.
Although a bicycle is not an electronic form of entertainment, it can nevertheless be unbundled. One can obtain the frame, the parts and the wheels separately and then assemble them. However, this is not practicable because most consumers are not skilled bicycle mechanics. Consequently, manufacturers use the existing push model where they build up frames with components and wheels of their choosing at the factory and sell them wholesale to independent bike stores who then try to sell them to consumers. This model suits the largest segment of the market that wants to buy a bicycle and ride it out the door; however, it is not for the consumer who wants more choice and is willing to wait to get the bicycle a certain way. It is also wildly inefficient and expensive. Existing manufacturers are nevertheless hooked on this model because they have invested so much in it.
I met with Tim Brewer at Peak Performance soon after the store went out of business in late 2009. Mr. Brewer explained that consumers would come into the store and demand the prices that they saw from online retailers. Additionally, consumers would try out a bicycle to get the right size and then buy it online. These customers would return to the store later with the exact same bicycle and sheepishly ask for repair services. Some consumers apologized outright because they were violating the “contract” between the IBS and a consumer which tacitly promises discounts and preferential service if the consumer buys a bicycle from the IBS. Indeed, the urge to put these consumers at the bottom of the list was strong.
Mr. Brewer realized the significance of this trend and was planning on moving operations towards the showroom model where consumers try out sample bicycles and gear and then order the correct sizes, packages and colors etc from computers set up in the store. However, the financial crisis hit and demand for high end bicycles (Cervelo, Felt) vanished overnight. Mr. Brewer did not have the resources to buy more bicycles for 2010 and refused to buy from the manufacturers. This did not go over well with manufacturers who at the time were up to their eyeballs in bicycles and desperate to push them into the retail network; local representatives were asking Mr. Brewer to buy dozens of high end bicycles for 2010 in the midst of a serious economic downturn. There were other factors explaining the closure (such as the small size of the Portland market, high promotion expenses, etc.) but at this point the manufacturers were ready to drop Peak Performance and bring their brands to the competition.
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