In the endless ebb and flow of markets and new businesses there are constantly casualties along the way. It’s estimated that approximately 50% of businesses fail in the first five years. Many, if not all of those businesses ever gain any real national brand recognition and thus, very few even know when the company has closed its doors. Each year however, there are a handful of well-known established companies who are either forced out of the market or are required to make dramatic changes in their image. There are a plethora of reasons why this happens but, almost without exception, the root cause is embedded in simple economic principles. This blog post (based on a 24/7 Wall St. article) will expose two companies likely to close their doors in the coming years and will discuss the likely economic principles behind why.
First, let’s briefly explore the camera industry and in particular, Olympus. Years ago, when the concept of putting a camera on your cell phone first emerged, this idea was a very low threat to the digital camera industry. Not only was the quality of the image horrible, but there was virtually no easy way to extract the image from the phone. As a result, demand for digital cameras soared, providing ample room in the industry for a number of competitors. The passage of time however, has brought with it more sophisticated technology which allows users to both capture and share images anytime, anywhere. As a result, worldwide unit sales of digital cameras are down 18% in 2012. Ironically, Olympus seems to not have seen this coming (actual sales were less than two-thirds of what they forecasted). While the phone camera’s image might not quite match the quality of a comparable digital camera, it has gotten good enough to act as an adequate substitute thus dramatically decreasing demand for digital cameras. The digital camera market is currently reacting to this shift in demand but we currently still see companies trying to decrease their supply and find viable ways to stay in business. This adjustment will ultimately result in companies (or at least product lines) being forced out of the market. In order to survive, Olympus is going to need to make drastic changes.
Next, there is a high likelihood that the WNBA (Women’s National Basketball Association) might take a major hit in the next twelve to eighteen months. “The Chicago Sun Times reported back in 2011 that ‘The majority of WNBA teams are believed to have lost money each year, with the NBA subsidizing some of the losses.’” These losses are likely attributable to the very low attendance at each game. The NBA average attendance is around 18,000 fans while average attendance for WNBA is less than half that. Economically speaking, this means that some percentage of every ticket purchased for an NBA team is helping pay for and sustain the WNBA. Because the demand clearly isn’t there, from an economic perspective, the company should go away. It’s simply not a sustainable venture. The article suggests that the primary reason the WNBA has lasted as long as it has is because the commissioner of the NBA (David Stern) has been a “champion and protector” of it. He however, is set to retire in early 2014. The jury’s out on whether the WNBA will survive the change in commissioner.
These two examples illustrate different ways in which demand (or the lack thereof) can have a dramatic impact on businesses and their longevity in the marketplace. Companies unwilling to adapt to the marketplace, or find a niche within the market are likely to disappear along with the vast number of startups who never make it to their five year anniversary.