As part of the discussion of my previous post on the “free parking” business model, a reader asked for a blog post on “wholesale transfer pricing.” The rise of free parking as a business model has made wholesale transfer pricing more important than ever.
Wholesale transfer pricing power is a term I heard John Malone use in a conference room circa 1995. You won’t find the term in textbooks. Simply put:
Wholesale transfer pricing = the bargaining power of company A that supplies a unique product XYZ to Company B which may enable company A to take the profits of company B by increasing the wholesale price of XYZ.
As an example, John Malone made himself rich by owning the cable systems and saying to new channels, “I will be glad to give you distribution on our cable system as long as you issue us AB% of the equity in your company.” The wholesale transfer price of getting distribution on his cable systems was AB% of the equity. On the flip side, John Malone always made sure there were at least two suppliers of set-top boxes for his cable business so he was not on the ugly side of wholesale transfer pricing.
The term “wholesale transfer pricing power” is similar to, but not the same as, a “hold up problem”: http://en.wikipedia.org/wiki/Hold-up_problem The best lens to look at the wholesale transfer pricing power/supplier hold up set of issues is Michael Porter’s “Five Forces” analysis, specifically “bargaining power of suppliers.” https://en.wikipedia.org/wiki/Porter_five_forces_analysis
As an example of avoiding the problems of wholesale transfer pricing power, the iPod/iPhone business model was a work of genius in that the wholesale transfer pricing power of the music labels is 100% neutered because Apple makes all its profit on the device and not the music. If Apple sold the device at a loss and tried to make profit on the music, Apple would be doomed by the wholesale transfer pricing power of the music owners.
As an other example, the owners of Wild Ginger started their wonderful restaurant in a rented space on Western Avenue in Seattle. The restaurant was a huge success. When lease renewal time came up for Wild Ginger the landlord wanted a massive rent increase. The ability of the landlord to demand that increase is wholesale pricing power. It was not absolute, but wholesale transfer pricing power in that case was significant. The owners of Wild Ginger had a lot of brand and other value tied up in that location. The rent increase request was so big that the Wild Ginger owners brought in up investors and bought their new building in a new location and did the huge investment required to refurbish it. The restaurant owners had to completely change their business model by bringing in the outside money from investors. The owners of Wild Ginger are is now in the restaurant business *and* the real estate business. The whole thing was kicked off by the wholesale providing power of the original landlord. Another restaurant moved into the old Wild Ginger space on Western Avenue and went bust, probably because the rent was too high compared to the many other restaurants in Seattle. Now that restaurant space on Western Avenue sits empty.
As yet another example, Anthony Bourdain in his former TV show “No Reservations” did a profile of old school restaurants in one episode on “Lost Manhattan” and pointed out that the old school restaurants that are left own their own buildings. They are able to stay “old school” in the restaurant business only because they are their own landlords. If they had just been tenants, they would have been priced out of business in Manhattan long ago. This raises the important question that each business owner must ask on a regular basis: exactly what business are you in? Has the business you are in changed due to the rise of the free parking business model? If you formerly sold just A, must you now sell an integrated bundle of A, B and C since that is what your competitors are offering? In many cases A and B will both be free parking and only C directly monetized.