“There’s definitely, definitely, definitely no logic to human behavior.” — Bjork. Human behavior. Debut.
These observations are probably obvious to an economist. I’m not an economist (and I don’t even play one on TV). Please excuse the naivete.
I believe we are at an inflection point in the history of computing. We have commoditized computing to the point that it has become ubiquitous. That means we need to look for a different kind of differentiator than just TCO (Total Cost of Ownership). Thanks to commoditization, many items that were once considered luxuries have become cheap enough that pretty much anyone can afford them. Once that happens in an industry, we need to find something else to get customers excited; that something is often a better experience.
Apple is an obvious example of this trend. Steve Jobs so brilliantly realized this — as simplicity, as usability, as “luxury”, as natural interfaces like touch and speech — that he revolutionized several industries in a few short years — not just laptops but also phones, music, and movies.
While the Wintel platform commoditized the computing industry for several decades, Apple bucked that trend by offering a “richer” experience for which it could charge a premium. That trend continues today in the smartphone market, where Android-powered phones have 85% market share by volume but Apple’s iPhone enjoys over 90% of the profits.
I’m not stating anything new here. The “reach” vs. “rich” approaches to market domination have always competed against each other for supremacy, the former opting for the broadest possible footprint at the lowest cost while the latter is an attempt to charge a premium for a better, richer end user experience.
More broadly speaking, you can see the same trend materialize in many parts of the computing industry. Computing and the web have literally changed every aspect of our lives over the past twenty years, making our lives dramatically easier, richer, and more connected. Each of us has unlimited computing capacity at our fingertips. Look around you and I bet you’ll find dozens of “computers” around you: not just your phone, your iPad, and your laptop, but also the microwave oven, your DVR, and the GPS in your car (not to mention the computer that controls the brakes and the other one that controls the radio or the one that controls the parking sensors).
Even your run of the mill home thermostat has a tiny processor and a primitive user interface. As these devices become commoditized, however, vendors start adding more functionality, for example offering a Nest thermostat that connects to the web and offers a better experience. Suddenly, they can charge $250 for a thermostat that used to cost $10 last year.
There is a second force at play here. In 2010, a record breaking ten million people around the world were millionaires. Compare that number to about three thousand millionaires a century ago. As the world gets richer by the year, more and more people have disposable income that they’re willing to spend on a little bit of luxury. You might argue that a million dollars today is not worth a fraction of a million dollars in 1900, but I hope you agree that the majority of the world population has a much better standard of living fueled in part by technology and commoditization.
The pattern I’m describing is not, however, unique to computing. If I were to plot the history of many industries as a graph with time on the x-axis and price on the y-axis, it would result in an inverted bell curve starting at the upper left (expensive and niche) initially, moving down and to the right (becoming cheap and abundant) over time. Once this happens, however, margins erode and industry leaders look to offering a “better experience” at a higher cost, thus resulting in an inverted bell curve — up and to the right.
I’ve used computing to illustrate my point but the same rules apply to many other industries. That’s what Apple, Starbucks, and Restoration Hardware have in common, by the way: they each attacked commoditized markets and rejuvenated their respective industries by offering a better, richer experience. Here are a few more examples:
- Nespresso sells their espresso capsules, containing roughly five grams of coffee, for about 75 cents each. Do the math and you realize you are paying $75 for one pound of coffee! Of course, those capsules are useless unless you also buy their espresso maker for roughly $400. Compare that to the prices we used to pay for a pound of top notch coffee ($15) or a coffee maker ($30) just a few years ago.
- Airline travel was insanely expensive for many decades, then it became so ridiculously cheap that you could fly to Europe for $99. In turn, airlines are now making money by catering to the rich, with ever more glamorous business and first class offerings. We (or our corporations in many cases) don’t seem to mind paying a little more for a better experience.
- Headphones used to be a luxury, then they became so cheap that you get one for free every time you fly. Suddenly, high end headphones are a fad and we’re willing to pay $400 for a pair of noise-cancelling headphones.
- Light bulbs were once a rarity, then they became so cheap that the Earth now shines when viewed from outer space. So now that you can get a light bulb for ten cents, we don’t seem to mind splurging for the luxury of halogen lamps with $30 bulbs.
- IKEA helped commoditize the furniture industry, offering everything from sofas to tables and chairs at rock bottom prices. Then Restoration Hardware came along and offered basically the same things for orders of magnitude more money.
- Cars were once viewed as a luxury, but are now so cheap that we can afford to splurge on luxuries like $2000 Bi-Xenon headlamps or seats that give us a massage.
- Internet access was once upon a time slow, unreliable, and expensive. It is now so cheap and ubiquitous that we are willing to pay more for higher bandwidth rates and Fiber and LTE: basically a better “experience”.
- Refrigeration used to be so expensive that only the rich had refrigerators a century ago. Then, through technology and commoditization, it became so cheap that anyone could buy one for $200. Suddenly, now we are paying $15000 for a top of the line Sub-Zero.
- Televisions were once a luxury. It was only forty years ago that most of the world had to huddle together as a family or village to watch Ali defeat Frazer. Ten years ago, TV’s were so commoditized that even a top of the line one was no more than a few hundred dollars. Today, we have hit the knee of the curve and are on the upswing. Now we pay $2000 for 3D 70-inch super ultra-thin luxury curved screen OLED TVs and expect to have one in every room.
- Photography was once an exclusive and expensive hobby for the rich. Today, cameras are so cheap and abundant that you have not just one, but two, in your smart phone and you can get a $5 disposable one at the neighborhood pharmacy. Suddenly, digital SLR’s costing $1000+ are a fad — because they offer superior quality.
- Whole Foods vs. Safeway.
- Starbucks vs. Dunkin’ Donuts.
- Tesla vs. Toyota.
- Robert Mondavi (or your favorite winery) vs. Two Buck Chuck.
Note that there is more to this than “better quality”. Toyota has great quality as does IKEA.
It’s interesting to watch how far some vendors are willing to push this trend. I wonder how many of these umbrellas Restoration Hardware has managed to sell. No, it’s not a typo. They have several models available at similarly outrageous prices. As a wise person once proclaimed, there’s definitely definitely definitely no logic to human behavior.