Ciciora's Corner: Technology needs rich people

Wed, 03/06/2013 - 5:31pm
Walt S. Ciciora, Expert on cable and consumer electronics issues

In some quarters, wealth has received a bad name.

A little thought reveals that our industry and our careers strongly depend on there being “rich people.” Anyone who has studied the history of technology would come to this conclusion by considering what would have happened if there were no “rich people.” To begin with, all start-up endeavors need investors, people with at least a little excess money they can put at risk in hopes of making a return. Sometimes the founders of start-ups turn to close relatives in what has been termed “friends, families and fools.” (It may be foolish to get into a debt situation with people close to you.) Other sources of early funds are “angels,” people who take an interest and fund the start-up even when others stay away. After that, the venture capitalists (or “vulture capitalists”) come in with serious money for a serious level of control. The more professional sources of funds consider patents to be critical in protecting their investment. As mentioned in previous columns, getting patents is expensive. Without these folks having extra money, the start-up would be stuck in a permanent holding position.

It’s important that these initial investments be “patient capital,” because it might be a while before revenue starts and the investment can be paid back.

Advanced technology has an even more important need for “rich people.” We need them to be customers, early adopters while the price is quite high. When a new technology goes into production and sale, it is almost always very expensive. The most important reason is because we don’t yet know how to make the product inexpensively. And we have development costs that need to be supported. Also, those early investors are eager to get some of their money back. So we need customers with extra cash who are interested in trying something new, maybe even something with rough edges, not fully ready for primetime.

Technologists are familiar with “the learning curve.” One form of the learning curve is expressed as a percentage. Every time the number of units produced is doubled, the unit cost reduces by a percentage. So a 30 percent learning curve means that each time the number of units produced is doubled, the cost per unit goes down 30 percent.

Another version of this learning curve is the well-known “Moore’s Law,” named after Gordon Moore, one of the founders of microcomputer maker Intel. Moore observed that every 12 to 18 months, the cost of a given number of digital transistors on an integrated circuit dropped by half. Or, to put it another way, every 12 to 18 months, the number of transistors on an integrated circuit for a given price doubles.

This is a wonderful phenomenon. But it has one major problem. The first units are extremely expensive. Only “rich people” who are early adopters of technology can afford the first units. Once the number of units produced doubles, the engineers have the opportunity to learn how to make the product less expensively, and the price comes down. Then more people can afford the product, further driving the price down.

Eventually, a point of diminishing returns is reached, but the price is low enough for most people to afford the purchase. Examples of this phenomenon are limitless. Large flat-screen TVs are a dramatic recent example. Computers, cell phones and color laser printers are also relatively recent examples. Air transport, automatic transmissions, air conditioning, and even indoor plumbing all started out expensive, for the relatively well-off. Now we all have these wonders.

The learning curve phenomenon is so well understood and predictable that some well-established high technology companies engage in “forward pricing.” They initially produce the products at a loss to access a larger layer of people, who are still relatively well-off, and can afford the price. This facilitates advancement down the learning curve to where ever-larger numbers of customers can afford the product. And, from a strategic standpoint, this makes it tough on the competition. There might be little to no competition if they don’t have the resources to absorb losses while traversing the learning curve.

We live in a world where only a few percent of the population provides all of the food the rest of us need. This is in sharp contrast to only a few generations ago, when more than half of Americans worked on the farm to feed themselves and a few others. If there is to be employment and opportunity for the rest of us, it has to be in areas considered non-essential to life: that is, luxuries. These depend on well-off customers, at least initially.

Be grateful for “rich people,” and try to become one yourself! We need more of you to become “rich people.”



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