6 The Law of Inverse Pricing

Anticipate the cheap

One curious aspect of the Network Economy would astound a citizen living in 1897: The very best gets cheaper each year. This rule of thumb is so ingrained in our contemporary lifestyle that we bank on it without marveling at it. But marvel we should, because this paradox is a major engine of the new economy.

Through most of the industrial age, consumers experienced slight improvements in quality for slight increases in price. But the arrival of the microprocessor flipped the price equation. In the information age, consumers quickly came to count on drastically superior quality for less price over time. The price and quality curves diverge so dramatically that it sometimes seems as if the better something is, the cheaper it will cost.

Computer chips launched this inversion, as Ted Lewis, author of The Friction Free Economy, points out. Engineers used the supreme virtues of computers to directly and indirectly create the next improved version of computers. By compounding our learning in this fashion, we got more out of less material. So potent is compounding chip power that everything it touches – cars, clothes, food – falls under its spell. Indirectly amplified learning by shrinking chips enabled just-in-time production systems and the outsourcing of very high tech manufacturing to low-wage labor – both of which lowered the prices of goods still further.

Today, shrinking chip meets exploding net. Just as we leveraged compounded learning in creating the microprocessor, we are leveraging the same multiplying loops in creating the global communications web. We use the supreme virtues of networked communications to directly and indirectly create better versions of networked communications.

Almost from their birth in 1971, microprocessors have lived in the realm of inverted pricing. Now, telecommunications is about to experience the same kind of plunges that microprocessor chips take – halving in price, or doubling in power, every 18 months – but even more drastically. The chip’s pricing flip was called Moore’s Law. The net’s flip is called Gilder’s Law, for George Gilder, a radical technotheorist who forecasts that for the foreseeable future (the next 25 years), the total bandwidth of communication systems will triple every 12 months.

The conjunction of escalating communication power with shrinking size of jelly bean nodes at collapsing prices leads Gilder to speak of bandwidth becoming free. What he means is that the price per bit transmitted slides down an asymptotic curve toward the free. An asymptotic curve is like Zero’s tortoise: with each step forward, the tortoise gets closer to the limit but never actually reaches it. An asymptotic price curve falls toward the free without ever touching it, but its trajectory closely paralleling the free is what becomes important.

In the Network Economy, bandwidth is not the only thing headed this way. Mips-per-dollar calculations head toward the free. Transaction costs dive toward the free. Information itself – headlines and stock quotes – plunges toward the free. Indeed, all items that can be copied, both tangible and intangible, adhere to the law of inverted pricing and become cheaper as they improve. While it is true that automobiles will never be free, the cost per mile will dip toward the free. It is the function per dollar that continues to drop.

For consumers, this is heaven. For those hoping to make a buck, this will be a cruel world. Prices will eventually settle down near the free (gulp!), but quality is completely open-ended at the top. For instance, all-you-can-use telephone service someday will be essentially free, but its quality can only continue to ascend, just to keep competitive.

So how will the telcos – and others – make enough money for profit, R&D, and system maintenance? By expanding what we consider a telephone to be. Over time, any invented product is on a one-way trip over the cliff of inverted pricing and down the curve toward the free. As the Network Economy catches up to all manufactured items, they will all slide down this chute more rapidly than ever. Our job, then, is to create new things to send down the slide – in short, to invent items faster than they are commoditized.

This is easier to do in a network-based economy because the criss-crossing of ideas, the hyperlinking of relationships, the agility of alliances, and the nimble quickness of creating new nodes all support the constant generation of new goods and services where none were before.

And, by the way, the appetite for more things is insatiable. Each new invention placed in the economy creates the opportunity and desire for two more. While plain old telephone service is headed toward the free, I now have three phone lines just for my machines and will someday have a data “line” for every object in my house. More important, managing these lines, the data they transmit, the messages to me, the storage thereof, the need for mobility, all enlarge what I think of as a phone and what I will pay a premium for.

In the Network Economy, you can count on the best getting cheaper; as it does, it opens a space around it for something new that is dear. Anticipate the cheap.

Рубрики: | Дата публикации: 12.07.2010

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