Wednesday, October 03, 2007

The Cheap Revolution

The Cheap Revolution
Wall Street Journal; Page A19

Poor Steve Jobs. First he apologizes for dropping the price of the iPhone from $599 to $399 after just 10 weeks on the market and offers Apple customers a $100 rebate. Now he's being slapped with a $1 million lawsuit from a New York woman who says Apple violated price discrimination laws when her fancy new phone was suddenly worth $200 less.

What's going on here? Did Mr. Jobs gouge early technology adopters just for a couple extra (billion) bucks? I don't think so. After a long streak of successes, Mr. Jobs and Apple -- whose stock is up more than 20-fold since 2002 -- have collided with two forces stronger than they are: One is the cheap revolution; the other is the global economy. Together they forced Apple to drop the price of the iPhone and offend its geeky customer base.

Some background: The cheap revolution is a first-order effect of Moore's Law. If you don't know Moore's Law by now, you should probably hang it up. But in case the coffee is slow to stir you this morning, here is the short version: Fairchild Semiconductor cofounder (and later Intel cofounder) Gordon Moore formulated his famous law in 1965, six years after Fairchild had invented the silicon chip. Mr. Moore saw that the number of transistors that could be shrunk and baked into a silicon chip of constant size was doubling every year or so. Caltech professor Carver Mead dubbed this exponential trend of transistor density "Moore's Law" and soon everyone agreed that 18 months was the predicted interval of doubling.

For years, if you said Moore's Law, people presumed you were describing a future of ever more powerful computers. The personal computers of 1981, including the Apple II and the IBM PC, were punks by today's standards. They could run only rudimentary spreadsheets and word processing software. But soon, the dark green screens and white type were replaced by graphics during the mid-1980s, first in the Apple Macintosh and later in PCs running successive versions of Microsoft Windows. This was a terrific advance. But software could only evolve at the pace of Moore's Law.
Moore's Law delivered. By the early 1990s, the exponential gains had evolved to the point where microprocessors now ran fast enough in PCs and workstations to topple an entire industry -- in this case, all the minicomputer companies along Boston's fabled Route 128. Down they went -- Digital Equipment Corporation, Wang, Data General, all victims of a new and more powerful force.

By the early 2000s, Moore's Law had crammed enough zip into PCs so as to turn them into multimedia machines. Our PC became a base station for news, photos, songs and movies as well as manipulator of words and numbers.

But along the way, another, even bigger trend was in the works, if not seen as clearly. Call it the flipside of Moore's Law. If the frontside said chips and therefore computers would get twice as fast every 18 months "at the same price point," the backside said prices would drop 50% every 18 months "at the same performance point."

I am thumbing this column on Research In Motion's BlackBerry 8600. It's a 2006 model, almost ancient now. My BlackBerry is powered by an Intel 312 megahertz microprocessor, for which RIM pays Intel about $20 per chip in volume. Keep that price and performance in mind. Fifteen years ago, at the dawn of the Web age, Intel's hot seller was the Pentium family of microprocessors. In 1992, the Pentiums ran at about 312 megahertz, just like the Intel chip in my 2006 BlackBerry. The difference being that the 1992 Intel chip cost about $400, in volume. That's the cheap revolution at work -- the flipside of Moore's Law.

The second-order effect is hyper-charged global capitalism. Bestsellers have been written on the rapid rise of China, India, Southeastern Asia, Eastern Europe and so on. Of course, many factors from supply-side tax policies to open trade have contributed to the global boom. But cheap technology is at the center of it, first and foremost. That's because the ticket to entry into the global economy today is not a computer costing $2,000 running on a $400 chip. Rather, it is a Web-enabled phone costing $200 running on a $20 chip.

Think about it. If the average educated Chinese or Czech citizen had to pay $2,000 to enter the grid of the global economy, they'd still be sending faxes.

These are the twin forces blowing in Apple's face when it priced its revolutionary iPhone at $599. Cool as the iPhone is -- I'm buying one this weekend -- the price could not be sustained in the world of the cheap revolution, where Moore's Law drives the cost down and buyers in China and India will set the price.

Apple need not apologize for cutting prices. It had to. And as for that nutty lawsuit in New York, the court should delete it post haste.

Mr. Karlgaard is the publisher of Forbes.

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