Consumer Issues and Investors

One for five.

That was my record for tech purchases during the 2004 holiday season.

My wife’s laptop arrived in perfect shape, worked great right
out of the box. That was pretty much where the streak ended — at one. The G5
iMac arrived with a thin pink stripe down the screen. A few calls to tech
support, and it was declared DOA, and shipped back to Apple. The replacement
had a white pinhole in the screen mask (that one pixel is dead for ever — and I didn’t bother to swap that one).

My wireless WiFi 802.11g Router didn’t work (hardware problem). The Bluetooth wireless keyboard had trouble connecting with the computer (but
the wireless mouse was fine). And the 40Gig iPod my wife gave me to replace my
first gen 5Gig iPod was great — but it came without the ordered inscription (Jim Cramer had the same problem).

As disappointing as the order problems were, I had (mostly) good
experiences dealing with tech support on replacing everything. Apple gave me a
choice of replacing or refunding my money on the iMac. A new wireless router
was shipped, along with a tag to send back the old one. They were less
cooperative on the iPod, however, telling me I would need to pay a 10%
restocking fee because I opened it. Perhaps someone at Apple explain to me how
else could I have found out there was no inscription before I opened the box?

These experiences intrigued me – I just had to laugh at 1
for 5 – so I started asking around. What I heard from friends, family, and
several hundred readers from Real Money and Dave Farber’s Interesting People list was that I wasn’t the only one having a
“funky” time with consumer tech orders. More than a few of you had horror
stories, which you gladly shared.

I got quite the earful from you guys. After reading hundreds of
emails (you can see them all here), I discovered a few interesting
things. For a guy with a mostly technical/quant predilection, I did a lot of
pure fundamental research.

This is an admittedly unscientific survey.

Perhaps we can glean
a few tidbits that are applicable to stocks. We might even be able to derive an
investable thesis or two. Indeed, there are a few lessons here for the
companies themselves to learn. With the 2005 holiday season only a few months
away, I wanted to revisit some of these issues that you, the reader, raised
about consumer tech companies this past holiday season.

Here’s what I discovered:

1) Some Productivity Gains Are Illusory

Since the late 90s, output per hour has improved dramatically.
But the measure of productivity is a quantitative one, a numerical reading of
total output per hour worked per employee. The problem with this measurement is
that it relies only upon easily quantifiable data; it ignores the qualitative side.

Example: Many tech companies have outsourced tech support. They now
handle more calls per hour than they were handling previously, and at a lower
cost. That appears terrific – if you rely on the quantitative data. But if my
mail was anything to go by, this cost savings approach is hemorrhaging clients
and damaging hard won reputation. Its approaching what I’d call "anti-productivity."

Outsourcing seems to work better for coding than it does for
telephone customer service banks in the competitive consumer products markets.
I haven’t been able to quantify the exact cost of lost customers versus saved
salaries, but if RM readers complaints are anything to go by, it is quite
significant.

All this suggests that at least some of the enormous
productivity gains (quantitative) are perhaps less significant (qualitative)
than we have been led to believe.

2) Dell generates a lot of furious emails

Dell is now the best selling brand of PC. They move so many
units, one has to expect some bad experiences here and there; that’s merely the
law of large numbers. I do not have sufficient data to draw a statistically
reliable conclusion that quality control is an issue for the PC giant. I
have a sneaking suspicion that many of
the issues are Microsoft Windows problems, and not Dell issues — but that’s
another column entirely.

But I was really shocked at how many complaints I heard about
Dell, and how serious the tone was. After you hear the 3rd person tell you “I
will never buy another Dell for as long as I live” — you take notice of it.

These emails were all post holiday season, 2004. More recently,
Jeff Jarvis (of Buzz Machine) had a big problem with his Dell. What’s so
fascinating is that a blogger kvetching about a tech problem has spilled over
into the mainstream to the point where the issue has been overheard in a mall food court.

All this implies to me that Dell’s award-winning service may not
be winning that many awards in the near future.

3) Amazon delights their customers

The overwhelming consensus from shoppers is that Amazon does an
excellent job. People who are customers become repeat customers. This is
reflected in the continued 25% year over year growth of ecommerce. As Amazon’s
most recent quarter reflects, they are doing an outstanding job of attracting
and retaining customers. Ever since my college roomate gave me a gift
certificate in 1997, I’ve been a big fan. A special thanks to the reader who
gave me their public – but very well hidden – customer service number – U.S. and Canada: 1-800-201-7575 !

Also on the big box retail side, Best Buy got very high marks —
while Circuit City did not. A glance at their stock charts reveals that
customer attitudes towards a company get reflected in their share prices.

The lesson for investors is that when you hear a few customers complain
about a given store, pay attention.  That doesn’t
mean run out and short the stock instantly — but do not ignore these anecdotal
warnings. At the least, pay attention to what they might be suggesting.

4) The iPod economy continues

This is simply a phenomenon that shows no sign of slowing down.
With all the ink (pixels? electrons?) spilled on this subject, I won’t spend
too much time on it. According to your emails, Apple’s ongoing development of
this product continues to leave everyone else in the dust. And that was before
podcasting and video.

Can anyone catch up to the iPod? So far, the answer is a
resounding No.

5) Consumers hate Rebates

This was the single most written about topic amongst RM readers.
The phrase: “rebates suck” came up time and again. The consensus was that the
rebate process is simply a giant time sink — and a rip off to boot. Some
readers did manage to get their rebates in a timely fashion, but it seems the
vast majority of emails about rebates involved high levels of dissatisfaction.
Your tone ranged from bemused annoyance to outright fury.

Some representative comments:

“No longer will I consider buying a product of any kind because
of a rebate. ”

“My general beef is with all the stupid rebate games. I wish all
the sellers would just cut the crap and set the price and be done with it.”

“I have given up on them. I would rather eat the money than fill
out a thousand pieces of paper only to be rejected because I was supposed to
fill out a thousand-and-one.”

Some of your stories were shocking: One reader purchased
two Pioneer 50” hi-definition plasma TVs — at $8,000 per — from Best Buy,
with a $1,000 rebate. He got one check for one thousand dollars, but was told
“only one rebate per customer.” No one had told him that before his purchase.
Pioneer may have saved $1,000, but they guaranteed this customer will never buy
another Pioneer product – ever. That’s a pretty dumb marketing strategy. And I
have a sneaking suspicion I am not the first person this consumer has told
about his Pioneer occurrence. My experience suggests that he will repeat it
many times to his circle of 250 people.

Another reader noted that rebates actually work as a tax
increase. I hadn’t considered this, but it make sense. A consumer pays more
state sales tax on the higher gross sales price. The rebate lowers the price –
but doesn’t refund the sales tax. On that Pioneer plasma set mentioned above,
in NY it would cost an additional $87.50 in sales tax. You get the rebate on
the purchase, but tax is not included. Perhaps there is a way to obtain a tax
refund from the retailer or the state tax department, but really, who wants to
do even more paperwork!?

My two favorite reader comments on rebates:

“I’ll bet a state AG could make a small career going after this
scam.”

            and

“I think the fraud of the "rebate" programs tries to
shake loose a large  number of applicants with "incomplete
paperwork" and is a payday waiting to  happen for the class-action
lawyers — who will easily penetrate the rebate center shield and reach the
originating businesses.”

So much for tort reform!

My advice
to the companies that issue rebates: You spend hundreds of
millions of dollars in advertising to win clients. You lose them over a $20
check — its penny wise and pound-foolish. Not only is the process horrifically
annoying, but you alienate your hard won clients. Wise up, and price items
fairly.

As to our readers, they had some advice for the firms that
process the rebates:  Go to hell
(and that’s the clean version; we cant print what they actually wrote). In the spirit of full disclosure, my own rebate experience is here)

You can see the complete list of reader emails here