Moore’s Law Changes Everything

Moore’s Law specifically refers to year over year increases in transistor density (roughly doubling every two years), but the implications are for improved system price/performance. The effect, however, extends beyond integrated circuits and the systems that use them. It ultimately impacts the business models for almost any vertical market including the services that are provided in that market. This connection is often overlooked by business owners.

With increased power density in commodity computing devices, the need for purpose built hardware is reduced. The result is a lower cost per seat for a given application. This, one would think, would be a boon for a business as reduced capital expenditure should equate to higher margins. However this benefit is short lived if it exists at all. The problem is that the end user equates value with the physical devices not the intellectual property behind the application. The result is, much like service and support contracts, there is a perceived value ratio of application to hardware that remains relatively constant. At least within an order of magnitude. So when the piece of gear needed to perform a certain function comes in a specially designed system that costs 1M$ and that price drops to 10K$, the perceived value of the software drops proportionally. This in spite of the fact that the software is more complex, has more features and adds more value. Taking this one step further to the service end of the business and you can see how someone walking into an establishment that is shown a monstrous piece of hardware that will be used in the service can intuitively accept a high price for that service. When that service only appears to require the very same commodity computer they have at home, they can’t seem to associate the appropriate value of the application, nor the specialist who runs it.

So, in the case of both the solution supplier and service provider, it becomes more difficult to charge premium rates for the product/service. In fact it becomes difficult to charge rates that cover costs, resulting in a downgrading in the overall level of service. The effect of this downward pressure is greatest on mid market products and services. The business gets forced down market where they meet competitors from the low end reaching up with new capabilities. The irony is that the key differentiator, level of service, also becomes a burden as providing that service eats into the remaining margin.

The net effect is that, as the fine print says on any investment prospectus, past performance is no guarantee of future results. For those who run their business based solely on experiential knowledge, the results are typically disastrous. Only continual quantitative assessment of current technologies and market dynamics, can insure competitive positioning going forward.

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