The Need for Something New

January 20, 2015

You have probably heard the term ‘planned obsolescence.’ It’s also known as ‘shortening the replacement cycle.’  No matter what you call it, the strategy was developed by manufacturers to ensure consumers would buy products more than once. Rather than inspiring repeat purchases with the strength of their brands and the quality of their products, companies sold goods that were engineered to deteriorate, become out-of-date, or stop being useful after a specific period of time.1

Planned obsolescence can enhance corporate profitability; just think of the long lines that form when the latest model of a certain company’s smartphone comes to market. It also can lead to a consumer backlash in which companies’ products become less popular.2 Here are a few products that have lost market share, seen sales growth slow down, or gotten to the brink of extinction:

Incandescent lightbulbs:The Great Lightbulb Conspiracy described the birth of planned obsolescence in 1924. Representatives from major lightbulb manufacturers around the world (General Electric in the United States, Osram in Germany, Philips in the Netherlands, Compagnie des Lampes of France) met in Geneva, Switzerland, and formed the Phoebus cartel. The cartel divided the global market for incandescent lightbulbs, also known as lamps. They assigned production quotas and developed a manufacturing standard: pear-shaped lamps should last for 1,000 hours and no more. The previous norm had been 1,500 to 2,000 hours. It’s interesting to note the research and development required to build bulbs that reliably failed after 1,000 hours was considerable.3

How times have changed. Today, incandescent bulbs appear to be headed toward extinction. In the United States, the manufacture and importation of 40- to 100-watt incandescent bulbs has been prohibited as part of a much broader effort to save energy. Consumers now have the option to purchase fluorescent, LED, halogen, or other lighting options.4

School textbooks: For decades, textbook publishers printed new editions every few years even when there weren’t any significant new developments in a field of study. “…Each new edition is usually printed with the information shifted to different page numbers, making it difficult to follow along in class with a previous volume,” according to Popular Mechanics. Moving material around also suppressed the market for used textbooks.5 At the college level, textbook prices increased by 82 percent over the past decade; an increase that has many students trying to get by without a text. Recent studies found 65 percent of college students have chosen not to buy a textbook because it cost too much even though it hurt their academic performance.6

“By the end of this decade, digital formats for tablets and e-readers will displace physical books for assigned reading on college campuses... K-12 schools won’t be far behind, though they’ll mostly stick with larger computers as their platform of choice,” reported The publication also predicts schools may develop their own content on digital models, possibly in collaboration with other schools, and look for free online, open-source databases of information. If that proves out, traditional educational publishers may find their market share dropping precipitously.7

Smartphones: Some argue that planned obsolescence is a myth when it comes to technology. “The best way to render an older model effectively obsolete is not to make it self-destruct, of course, but to introduce a new product that people really want,” pointed out a blog article in The New York Times.8 While that may be true, anyone who has updated a smartphone operating system or upgraded software only to discover the new system makes the device a lot slower may be more skeptical about the issue.9

While it’s unlikely smartphones will disappear anytime soon, some expect that wearables – glasses, watches, and other wearable devices that offer functionality and convenience – will begin to gain popularity and become a substitute for smartphones.10 Others expect smartphones to become the engine in your pocket that drives wearable devices.11

You don’t have to think very hard to identify products and industries that may be replaced by new products and industries. For example, cable television and movie theaters are vulnerable to streaming media. USB memory sticks may go the way of floppy disks if cloud computing gains popularity. Remote controls (gasp!) may even become extinct if motion-sensing screens that read sign language become the norm.12
It’s important for investors to stay abreast of new product development and understand how products and industries may change current markets. In some cases, emerging trends may have the potential to improve the profitability of specific companies; in others, shifting market dynamics may derail companies that once were stalwarts of their industries. Whatever the outcome, it’s helpful for investors to understand how this planned obsolescence affects more than your living room lamp.

The above material was prepared by Peak Advisor Alliance. Peak Advisor Alliance is not affiliated with the named broker/dealer.