Wednesday, October 30, 2002

Is technology maturing?

HP is on the record stating that the technology industry is maturing. While this may provide cover as Carly reduces the once great innovator into a Microsoft VAR, in these recessionary days it's worth pondering if the tech sector has any growth left. And what does "maturing" mean anyway?

Historically, demand for computing cycles has proven incredibly elastic. The cost of computing has gone down dozens of orders of magnitude from the 60s, but total real expenditure on computing has continued to rise. Note that this is quite remarkable -- if the price of gasoline went down we wouldn't drive around more because gas was cheaper, we'd take our savings from gas and spend them on other things. So I guess one good measure of maturity is "have we entered the inelastic part of the demand curve"? In other words, have we run out of new uses to put ever cheaper computing to or are we going to take our savings from falling computer prices and use them to buy other stuff?

A good way to think about this is to ask "is technology becoming more durable?" It may be strange to think of something both as immaterial and as hard wearing as "software" as a "durable" good, but we do decide whether the latest version of Windows or whatever is worth buying, and if the program just isn't improving much any more it makes sense to postpone the purchase.

Economists model durable goods as "stock and flow", and while I don't want to get into the maths I will say that "stock" is the amount of that good out there (installed base) and "flow" is the amount of new goods needed each year to cover growth and "depreciation" in the stock.

Growth is, well, new demand from increasing populations or whatever, but "depreciation" is what you need to make to replace all that existing stock that gets worn out. This include both physical wear and tear, and "Pt - Pt-1", which is how much the value of last year's product (Pt-1) has fallen compared to this year's (Pt). Another way of interpreting "Pt - Pt-1" is "how much better is this year's product compared to last year's?" If there has been alot of improvement, Pt - Pt-1 will be big -- compare the price of a new computer to a five year old machine on eBay.

If good depreciate very rapidly, like strawberries, they're non-durable. If goods depreciate less rapidly, they're more durable. If computers are no longer improving at the rate they were, Pt - Pt-1 is becoming smaller and computers are becoming more durable. This means the industry is maturing.

J Bradford Delong (U Berkeley) actually has some data on this stuff. It turns out that real investment in computers is at an all time high -- 21 time as much as in 1989. But nominal investment in computers is only 2 times what it was in 1989. So our total expenditure on computing continues to rise even as the price continues to fall. It looks like we are still in the elastic part of the demand curve and technology is not yet maturing.

I don't have information on particular sectors within "technology", but you might be able to mine eBay to see if the difference between a 2001 and 2002 computer is smaller or between a 2000 and 2001 computer. Remember: as Pt - Pt-1 become smaller, the good becomes more durable and the industry "matures".

(Here's a quick application: Before the return of Jobs, Macs held their price pretty well, meaning that they had "matured" and weren't getting any better (Pt - Pt-1 was small). People claimed this meant Macs were better value, but all it really meant was that they were stagnant, so it's unsurprising that people chose not to buy them. Once Apple began to improve its products again, the value of old Macs began to plummet. PCs, on the other hand, seem to be becoming more durable as people are opting not to buy the fastest and most expensive Intel chip any more and are buying cheaper systems, spending their savings elsewhere).


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