How Technology Is Deflationary
When the first iteration of consumer electronic products hit the market, do you get that initial impression of how expensive it is? If you do, you are not the only one complaining. However, if we roll back time the first release is usually the most expensive, (with the exception of premium and flagship brands) yet not many people realize this.
Let’s look at a few examples of how expensive things were in the beginning of the computer and digital electronics revolution. This was the transition to the Digital Age of computing. With so many new products hitting the market, consumers had more options but it could hit the wallet hard.
Back in 1977, a complete desktop computer system will cost you $5,995.00. Aside from a giant monitor and keyboard (no mouse yet), you get a 10 MB Hard Disk with a 5 1/4" floppy drive, 65 KB of RAM and an 8-bit CPU. This was considered state of the art back then, but in 2022 this would be super sub-standard for anyone’s taste.
You can now go to any electronics or computer store and buy a complete standard computer system for under $1,000. That includes a high capacity 256 GB flash drive (SSD), 24" touchscreen monitor, keyboard/mouse, 64-bit CPU (AMD Ryzen 3) and 8 GB of RAM (DDR). That is way more powerful than any computer system back in the 70’s. It also takes up less space and consumes far less power.
What is even more amazing is the standard computer systems of 2022 are way less than that of high-end systems from 1977. The price of a 1977 computer system is even more than a high-end MacBook Pro system ($3,000+) which have an even much higher specification than a standard computer system. If you travel back in time that 1977 computer would be way too over priced.
Building The Hype
The first high capacity hard disk drives were also expensive, but that was due to the cost of storage. As a result, it adds to the overall cost of a computer system. Technology in its infancy is not cheap, because of labor and production. When vendors created the first 10 MB drives, the price reflected the complexity of production.
A typical high resolution JPEG can fit in that entire drive 10 MB drive. Storage systems are now at a minimum GB for typical entry level computers. TB-sized hard disk drives are fast becoming the norm. You can also buy a 1 TB SSD for $100.
People bought it because it was necessary. There was also some hype behind it to get consumers more excited. It was like along the lines of:
“Get your 10 MB Hard Disk Now! You have more space for your word and spreadsheet files without stacking floppies!”
When cellular phones first came out in the middle or late ‘80’s, it was not your typical consumer product. They were the size of bricks and were very expensive.
Most of the early adopters of cellular phone users were professionals and executives. It was not a device that was made available for the general retail market. It was a niche due to the cost and there were not many providers who could provide service. They were willing to pay the price for being the first users, but they did not get the best features.
Things changed when production ramped up, and vendors like Motorola (North America), Nokia and Ericsson started to produce more cellular phones. It would eventually expand when service providers like AT&T, Sprint and Verizon entered the market. Economies of scale brought the prices of cellular phones down and more service providers created affordable plans.
The smartphone revolution, which started with the iPhone, further increased competition. Thus the best features in a product arrive later, at lower cost and higher utility. Imagine how it seems over priced when you have the first version of a smartphone only to realize it becomes cheaper over time.
Why do these products have to be so expensive?
It is mostly due to the cost of production to research and develop the product, when first produced. Then eventually prices go down with economies of scale and mass production. Further increase in competition keeps the market tight and prices are offered at a level that can attract the most customers.
The reason you have first adopters is to test the market. These are the users who are not much affected by the price, and are willing to pay for the product no matter how much it costs. Vendors recover their costs through early sales, but they need to now ramp up production at scale to maximize their profits.
Technology makes prices deflationary because it increases efficiency when producing at scale. It makes more sense to invest capital to increase revenues, rather than increase the cost of labor to maximize output. This is due to automation, which is what increases efficiency. It does not decrease the value of the product in terms of price, but decrease the price to add more value for consumers. More value means better design, features and quality. This is can be made cheaper when produced at scale.
Next time you wonder why the first generation of a game console or TV is so expensive (especially when it is a new type of technology like 8K LCD TVs), wait until the next production cycle and the prices become cheaper as production costs decrease for vendors. There should also be great demand and utility for the product, otherwise vendors will have no reason to produce. This makes products more affordable, while offering the maximum utility in terms of features and functions.