Smart Apartments

In today’s world we are surrounded by new technologies.  Research done by Felix Richter and published on statista.com shows that Americans ages 18 and older spend on average 11+ hours a day on electronic devices.  Such focus on smart phones, smart TVs, smart watches, etc. has helped make way for smart apartments.

In a recent Bloomberg article called, Putting the App in Apartment, Kyle Chayka discusses how the world of apartments is beginning to change.  One company called Common, is creating the future of apartments in New York.  From your IPhone or IWatch you can unlock your apartment door, turn the lights on and off, change the temperature in the room, etc.  Another competitive advantage of Common is the month-to-month rental contracts and the idea of co-living.  Co-living is the idea that you can stay a month in one of Common’s apartments in New York and then the next month live in one of their apartments in Los Angeles or another city.

Common is able to increase their profits by being one of the first-movers to this technology focused living.  By being the first to install innovative services, Common will have a leg up on the competition that is using outdated, inconvenient services.  This allows them to set a high price and develop a strong network with the suppliers of new technologies before competitors enter the market.

Common needs to be aware of the second-mover advantage.  New York has a $50 billion rental market with several large players that could potentially kick companies such as Common out with predatory pricing.  It will be important for Common to maintain their competitive advantage by capitalizing on their technology network strengths.


Dr. Tufte said...

SpencerM: 100/100

Hmmm. This is an interesting idea for a startup.

But I'm not sure I have too much to add. Clearly what the seller is doing here is adopting a lot of the buyer's fixed costs and then spreading them over high monthly payments. It's very much the story of cable TV or cellphone plans. And they're doing some bundling of the high tech features with housing.

I would strongly caution SpencerM (and others) for dropping in stuff about predatory pricing though. First off, competition isn't predatory pricing at all. That's just the definition. But more importantly from my perspective, "predatory pricing" is the ManEc version of the boogey-man. Everyone thinks they know about it, everyone repeats the stories, and no one has ever really seen it. I (and really, most economists) get especially annoyed at the way this term gets dropped by journalists and authors of pop-business books. To make it work you need a differentiated product, few competitors, inelastic demand, and barriers to entry (to keep the market from being contestable) ... and then you have to skillfully play a sequential game. When you write those out, and start to think about how difficult some of those ideas were to work through in the text, the idea that people are going to do this in the real world, with noisy data, fluid relationships, and imperfect skills is ... kind of ridiculous.

FWIW: I'm a little miffed that co-living wasn't around 25 years ago. I had a lot of fun when I was just out of graduate school moving to some new universities and trying out different locations. But it was an expensive way to live when you had to do it mostly on your own.

Jordan Johnson said...

I like the idea of this because it is so different. Also, each year technology plays a larger role in everybody's life. If they are able to find a market for them and can offer competitive prices, I think they can compete with the existing housing market. Their co-living feature could be a nice attraction as well.However, reading Doctor Tufte's response about playing a successful sequential game scares me. I know how big of a daunting task it was to work through those problems in the text. The idea sounds exciting initially, but the sequential game scares me.

Dave Tufte said...

Jordan Johnson: 50/50

Agreed. Absolutely.

It kind of drives economists nuts the way people just name drop "predatory pricing" all the time. Theoretically, it's not that easy to do. Empirically, it's hard to find evidence that it actually gets done successfully.

Maybe the one thing that sticks with all of you from this class in the years down the road is to stop asserting the predatory pricing is a good explanation for things.†

† In talking over the possibility of predatory pricing with various executives at large companies that I've known, the unifying feature of their responses is that they can't believe that the public actually thinks they'd have the free time to devote to such schemes. It's hard enough to just produce products, much less products that customers like.

Vickie said...
This comment has been removed by the author.
Vickie said...

Smart apartments – what a great idea! This would make life so much easier and more convenient. I wonder how long it will be until the majority of houses incorporate technology like this.

Although SpencerM points out that Common has a first-mover advantage, I don’t know if that’ll be enough. According to an article in The Wall Street Journal, The Lock Has Evolved: Open Doors With Your Phone, (you can check out the article here: http://www.wsj.com/articles/the-lock-has-evolved-open-doors-with-your-phone-1413291632) you can get a deadbolt that can be unlocked from your phone for as low as $180. It seems that the competitive pricing has already been initiated. This will likely continue until all firms in the market make zero economic profit, and no other firms want to enter.

However, the fact that Common has implemented product differentiation by including a co-living strategy may set them apart from their competitors. It seems like co-living would be a costly thing to accomplish; changing tenants every other month would not be cheap. But what young American doesn’t want to live in five big cities before settling down? If Common can make it affordable, they may be on to something.

Dr. Tufte said...

Vickie: 50/50

I actually think it's going to be a long time before even most houses incorporate stuff like this. There are two reasons for this. First off, home construction is a very decentralized industry, with little incentive for individual contractors to learn how to do new things. Second, what builders do want to include (and learn to do) is things that increase curb appeal. For home buyers, the killer apps are still neutral colors, new appliances, and so on.

FWIW: Where I grew up (the suburbs of Buffalo), there were lots of houses built in the early 1960's. The big high tech thing to include then was an intercom system. By the late 1970's, when I was old enough to notice these things ... all my friends with "newer" houses had intercom panels that no longer worked.

I think what you're driving at when you doubt that there's a first mover advantage is whether or not there's much of an advantage at all.

I agree that with co-living they might be on to something. I've lived in apartment complexes where there were a lot of people who were itinerant in that way, and for most of them their apartment was a waste of space. But they didn't have much choice. Co-living might give them some options.