The Cheap Revolution

The price of electronic memory and computer storage and will continue to fall over the next several years. This will cause a significant revolution in the way many things are done. Your company can find growth through a cheap revolution.

 

The impact of cheap memory

 

If you've worked with computers for a decade (and who hasn't?), you remember the 360K floppy disk; and the standard PC with 640K of RAM, fully loaded. Then came the high-density floppy, which held 1.44MB; and RAM extensions to a few megabytes. And hard disks had as much as 50-100MB, which was considered to be huge! Bigger hard disks were connected only to mainframes, at tens of thousands of dollars.

 

Now, most PCs have about 250-512 Mbytes of RAM and cheap storage is everywhere. 700 MB CD-memory costs less than a buck – who uses a floppy anymore? And you can get 100-gigabyte hard disks (that's 100,000 megabytes) at a buck a gigabyte. Within a decade, the $100 hard disk will hold a terabyte – 1,000 gigabytes. Wanna bet?

 

Moore's Law (the doubling of computing power) and Gilder's Law (doubling of bandwidth) are being outpaced by mass storage for three reasons:

 

1.      Keeping pace with Moore's law in silicon is becoming more and more expensive, as the cost of a semiconductor fab rises beyond $3 billion.

2.      Because of the current business recession, telecomm capital and regulatory politics have slowed down the bandwidth explosion, far below Gilder's gilded projections.

3.      Mass storage is relatively simple: Writing and reading, magnetically or optically, with higher and higher densities.

 

In the future, the overwhelming cheapness of storage will cause anything and everything to be saved. But that is useful only when a specific saved item can be found, quickly and easily. This will continue to drive the importance of fast, smart search-engines. It is already much easier and faster to look up a telephone number on Google, than to look it up manually in a phone book. Google has become preeminent because of its valuable search algorithms. In an information-storage-based world, "search intelligence" attains major proprietary value to drive a knowledge-based economy.

 

During the next decade, cheap storage will be available to anyone and everyone, and its impact will continue to increase. There will be space to store whatever you wish to recall – pictures of people, words you hear, whatever you thought worth recording. Your life will be archived, and your archive will be your life.

 

The media copyright problem

 

Today, digital objects like e-books, MP3 music and digital movies can be duplicated quickly and easily, and each copy is as good as the original. So, the ability to digitize and transfer intellectual property from one PC to another is a serious problem that has authors, musicians, artists, photographers, software programmers and publishers at odds with each other and their customers.

 

An entire music library, several thousands of relatively high-quality MP3 files can sit on a relatively inexpensive disk or electronic memory. As disk space becomes cheaper, traditional media business models will continue to change. For media companies, revenue from recorded audio and video (DVDs) will continue to decrease as downloaded copies proliferate.

 

Most people recognize the value of authorship and intellectual property, but many do not see why the publishers, distributors and other intermediaries should get most of the money. There seem to be no clear ethical barriers against copying widely available media. And with storage becoming cheaper, the barriers continue to come down.

 

Declining prices bring problems – and opportunities

 

In the late 1990s, when INTEL-based servers dropped below $1 per MIP (millions of instructions per second), there was a paradigm shift – within a couple of years big, expensive servers were replaced by cheapie PCs. Then came Linux servers that replaced Unix servers costing hundreds of thousands of dollars apiece.

 

George Gilder calls this the Cheap Revolution, bringing serious decline and significant opportunity in its path. Will the technology leaders be able to survive this? Will IBM, EMC and CISCO be disappearing like Wang and DEC? Today they are walking the tightrope between yesterday's cash cows and tomorrow's uncertainties.

 

Many industrial Automation.companies are poised on that same delicate ledge. A PLC is simply a collection of microprocessors and memory, with firmware that is relatively easy to duplicate. Therefore, the functionality of a PLC that cost thousands of dollars a few years ago is now available at a fraction of the cost.

 

Similarly, a DCS or SCADA system today is a PC with widely available and easy-to-copy software. I/O and other hardware and firmware extensions are also becoming commodity products for the same reasons. Proprietary hardware and software designs are relatively easy to emulate, and the proprietary content is very difficult to protect.

 

How to win the cheap revolution

 

At the 3rd annual Gilder/Forbes Storewidth Conference, Clayton Christensen from Harvard Business School outlined 3 ways to escape the Cheap Revolution's unrelenting margin pressure:

 

  1. Improve your product offerings faster than anybody else. This tactic works for market leaders with a good brand name, a strong distribution channel and financial clout. It works as long as the market wants the added functionality and is willing to pay for it.

  2. Sell fast custom solutions that answer customer's needs. Despite its size, IBM has done this by going modular and bringing along a horde of third-party solutions providers, enabling it to move quickly.

  3. For smaller companies - find an un-served market and grab market share by selling cheap. The product or service must be so cheap that industry leaders think there's no money in it and walk away.

 

A good example of finding success in un-served markets is how Sony served teenagers with transistor radios in the '50s. The leaders (RCA, Philco) were selling pricey tabletop vacuum-tube radios, figuring that tinny-sounding transistors would never be competitive. By serving the un-served, Sony got a toehold in consumer electronics and never looked back.

 

Industrial Automation examples

 

Thirty years ago Action Instruments, the company I founded, pulled off a cheap revolution with Action Pak. When inexpensive low-drift DC op-amps became available, we built thermocouple and RTD signal-conditioners, sensor amplifiers, transmitters, limit alarms, PID controllers into small, low cost, plug-in relay modules. These replaced the bulky panel-mounted instruments offered by the larger instrument companies, costing several times as much. Within a decade, we had sold half-a-million Action Pak modules and generated leadership in a new business category called “auxiliary instruments”. Today, there are several clones, but Action Pak is still the undisputed leader.

 

In a tough, seemingly declining market, how can YOU make the Cheap Revolution work for YOUR Company?

 

Related links:

 

Wired magazine: Shifting into overdrive:

http://www.wired.com/wired/archive/11.05/view.html?pg=5

 

Forbes: The big cheap chance:

http://www.forbes.com/forbes/2003/0428/037.html?_requestid=1789

 

Jim Pinto is an industry analyst and commentator, writer, technology entrepreneur, investor and futurist. You can email him at [email protected]. Or look at his poems, prognostications and predictions on his website: www.JimPinto.com