Forever Upward!

downwardSo, I was reading an article over at paidContent by way of The Passive Voice, and one quote leaped right out and punched me in the face:

What was once triple-digit growth has fallen to the double digits.

The context is that Amazon won’t win the e-book market because their growth is slowing.

Let me make this as simple as possible. Lets say every day a group of three people buy 10 bananas and split them. On the first day, person A gets 1, person B gets 1, and person C gets 1. 7 of them turn out to not be bananas. On the second day, they buy 10 bananas again, and due to a change in the way they buy the bananas, person A gets 4, person B gets 2 and person C still gets 1. 3 of them are still not bananas. Going from day 1 to day 2, person A sees 300% growth, person B sees 100% growth, and person C sees no growth. On the third day they get 10 actual bananas, person A gets 7 bananas, person B gets 2, and person C gets 1. Person A has seen a 600% growth since the first day, and their growth in raw numbers is the same from day 2 to day 3, they gained 3 bananas each day. However, the growth from day 2 to day 3 is … 75%.

That’s right, person A has seen their triple-digit growth fall to the double digits.

The main thing to note here is that in my example, there are three people and ten bananas every day. Despite what many people involved with the stock market will try to sell you on, growth cannot be infinite unless there is at least one infinite factor by which it can grow. There would need to be either infinite people to buy bananas (demand would exceed supply and drive the price up) or infinite bananas to sell (supply exceeds demand bringing the price down), or both. When it comes to ebooks, or any retail good, like it or not the limit is the number of people in the market (or the availability of the good – but we are going to stick to the market size going forward).

The population of the US as determined by census in 2010 was 308 million people. Assume in the first year of the Kindle, Amazon saw an initial buy in of 10 million people in the US on Kindle and start buying ebooks. Now, I’m guessing here, I don’t need actual figures to prove my point. Let’s say the next year 20 million more people in the US buy a Kindle and start buying ebooks. That growth is 200%, triple digit. There are now 30 million Kindle owners in the US, so in order to maintain triple-digit growth, more than 30 million people will need to buy Kindles. Let’s assume they do, let’s say the next year 50 million buy Kindles in the US and we get 167% growth. Now we have 80 million Kindle owners, and to maintain triple-digit growth, more than 80 million people will need to buy Kindles. Let’s say they do, 100 million people buy a Kindle in the US the following year,  125% growth. There are now 180 million people in the US who own a Kindle. Do you see the problem?

308 – 180 = 128

Even if Amazon were to manage to sell a Kindle to every person in the US who doesn’t own a Kindle already at this point, that would only be 71% growth. Double digit. The year after that would be even worse as Kindle sales would have to be tied to population growth, which since 2010 is estimated at 1.7% over 2 years. Single digit growth.

Growth is a nice number when you are a little guy, a small business. Growth is great when there are lots and lots of market space to grow into. But growth is a terrible number to use in a vacuum for judging a company slipping into failure. Saturation? Sure, but since Amazon is in the business of selling e-books, not Kindles (seriously, the Kindle is a loss leader for book sales), Saturation is actually good because it means your entire market is capable of buying your goods.

And my numbers are complete bullshit, because the market for Kindles isn’t the population of the US. There are plenty of people who don’t buy books at all and probably have less than zero interest in the Kindle. Those people are going to buy iPads, or cheaper tablets, because they want games and the Internet. Sure, the Kindle does those things too, but it is primarily marketed as an e-book reader. The Kindle’s growth HAD to fall eventually. Had to. Because at a certain point it becomes mathematically impossible for it to continue climbing.

Mostly, this irritates me because of the increasing presence of “doom-casting” that goes on in the media. Face it, bad news gets more attention. People don’t slow down their cars to gawk at kids playing with puppies in a safe environment. Because consumers consume it, the writers seek it out. They look for ways to twist and phrase things to make them look bad… well, unless they are writing about the underdogs. The only thing that tracks better than bad news is news about the “little guy” sticking it to “big guys”. Of course, how it is people continue to see Apple as a “little guy” is beyond me – a company with a hundred billion in cash reserves doesn’t seem little to me.

Anyway, that’s my ranting for today…

One comment

  1. Jeanne says:

    nice example.

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