Some Definitions

This phenomenon of “faster, cheaper” computing is often referred to as Moore’s LawChip performance per dollar doubles every eighteen months., after Intel cofounder, Gordon Moore. Moore didn’t show up one day, stance wide, hands on hips, and declare “behold my law,” but he did write a four-page paper for Electronics Magazine in which he described how the process of chip making enabled more powerful chips to be manufactured at cheaper prices.G. Moore, “Cramming More Components onto Integrated Circuits,” Electronics Magazine, April 19, 1965.

Moore’s friend, legendary chip entrepreneur and CalTech professor Carver Mead, later coined the “Moore’s Law” moniker. That name sounded snappy, plus as one of the founders of Intel, Moore had enough geek cred for the name to stick. Moore’s original paper offered language only a chip designer would love, so we’ll rely on the more popular definition: chip performance per dollar doubles every eighteen months. (Moore’s original paper stated transistors per chip, a proxy for power, would double every two years, but many sources today refer to the eighteen-month figure, so we’ll stick with that—either way, we’re still talking about ridiculously accelerating power and plummeting costs.)

Moore’s Law applies to chips—broadly speaking, to processors, or the electronics stuff that’s made out of silicon.Although other materials besides silicon are increasingly being used. The microprocessorThe part of the computer that executes the instructions of a computer program. is the brain of a computing device. It’s the part of the computer that executes the instructions of a computer program, allowing it to run a Web browser, word processor, video game, or virus. For processors, Moore’s Law means that next generation chips should be twice as fast in eighteen months, but cost the same as today’s models (or from another perspective, in a year and a half, chips that are same speed as today’s models should be available for half the price).

Random-access memory (RAM)The fast, chip-based volatile storage in a computing device. is chip-based memory. The RAM inside your personal computer is volatile memoryStorage (such as RAM chips) that is wiped clean when power is cut off from a device., meaning that when the power goes out, all is lost that wasn’t saved to nonvolatile memoryStorage that retains data even when powered down (such as flash memory, hard disk, or DVD storage). (i.e., a more permanent storage media like a hard disk or flash memory). Think of RAM as temporary storage that provides fast access for executing computer programs and files. When you “load” or “launch” a program, it usually moves from your hard drive to those RAM chips, where it can be more quickly executed by the processor.

Cameras, MP3 players, USB drives, and mobile phones often use flash memoryNonvolatile, chip-based storage, often used in mobile phones, cameras, and MP3 players. Sometimes called flash RAM, flash memory is slower than conventional RAM, but holds its charge even when the power goes out. (sometimes called flash RAM). It’s not as fast as the RAM used in most traditional PCs, but holds data even when the power is off (so flash memory is also nonvolatile memory). You can think of flash memory as the chip-based equivalent of a hard drive. In fact, flash memory prices are falling so rapidly that several manufactures including Apple and the One Laptop per Child initiative (see the “Tech for the Poor” sidebar later in this section) have begun offering chip-based, nonvolatile memory as an alternative to laptop hard drives. The big advantage? Chips are solid state electronicsSemiconductor-based devices. Solid state components often suffer fewer failures and require less energy than mechanical counterparts because they have no moving parts. RAM, flash memory and microprocessors are solid state devices. Hard drives are not. (meaning no moving parts), so they’re less likely to fail, and they draw less power. The solid state advantage also means that chip-based MP3 players like the iPod nano make better jogging companions than hard drive players, which can skip if jostled. For RAM chips and flash memory, Moore’s Law means that in eighteen months you’ll pay the same price as today for twice as much storage.

Computer chips are sometimes also referred to as semiconductorsA substance such as silicon dioxide used inside most computer chips that is capable of enabling as well as inhibiting the flow of electricity. From a managerial perspective, when someone refers to semiconductors, they are talking about computer chips, and the semiconductor industry is the chip business. (a substance such as silicon dioxide used inside most computer chips that is capable of enabling as well as inhibiting the flow of electricity). So if someone refers to the semiconductor industry, they’re talking about the chip business.Semiconductor materials, like the silicon dioxide used inside most computer chips, are capable of enabling as well as inhibiting the flow of electricity. These properties enable chips to perform math or store data.

Strictly speaking, Moore’s Law does not apply to other technology components. But other computing components are also seeing their price versus performance curves skyrocket exponentially. Data storage doubles every twelve months. Networking speed is on a tear, too. With an equipment change at the ends of the cables, the amount of data that can be squirted over an optical fiber lineA high-speed glass or plastic-lined networking cable used in telecommunications. can double every nine months.Fiber-optic lines are glass or plastic data transmission cables that carry light. These cables offer higher transmission speeds over longer distances than copper cables that transmit electricity. These numbers should be taken as rough approximations and shouldn’t be expected to be strictly precise over time. However, they are useful as rough guides regarding future computing price/performance trends. Despite any fluctuation, it’s clear that the price/performance curve for many technologies is exponential, offering astonishing improvement over time.

Get Out Your Crystal Ball

Faster and cheaper makes possible the once impossible. As a manager, your job will be about predicting the future. First, consider how the economics of Moore’s Law opens new markets. When technology gets cheap, price elasticityThe rate at which the demand for a product or service fluctuates with price change. Goods and services that are highly price elastic (e.g., most consumer electronics) see demand spike as prices drop, whereas goods and services that are less price elastic are less responsive to price change (think heart surgery). kicks in. Tech products are highly price elastic, meaning consumers buy more products as they become cheaper.As opposed to goods and services that are price inelastic (like health care and housing), which consumers will try their best to buy even if prices go up. And it’s not just that existing customers load up on more tech; entire new markets open up as firms find new uses for these new chips.

Just look at the five waves of computing we’ve seen over the previous five decades.M. Copeland, “How to Ride the Fifth Wave,” Business 2.0, July 1, 2005. In the first wave in the 1960s, computing was limited to large, room-sized mainframe computers that only governments and big corporations could afford. Moore’s Law kicked in during the 1970s for the second wave, and minicomputers were a hit. These were refrigerator-sized computers that were as speedy as or speedier than the prior generation of mainframes, yet were affordable by work groups, factories, and smaller organizations. The 1980s brought wave three in the form of PCs, and by the end of the decade nearly every white-collar worker in America had a fast and cheap computer on their desk. In the 1990s wave four came in the form of Internet computing—cheap servers and networks made it possible to scatter data around the world, and with more power, personal computers displayed graphical interfaces that replaced complex commands with easy-to-understand menus accessible by a mouse click. At the close of the last century, the majority of the population in many developed countries had home PCs, as did most libraries and schools.

Now we’re in wave five, where computers are so fast and so inexpensive that they have become ubiquitous—woven into products in ways few imagined years before. Silicon is everywhere! It provides the smarts in the world’s billion-plus mobile phones. It’s in the throwaway radio frequency identification (RFID) tags that track your luggage at the airport. It’s the brains inside robot vacuum cleaners, next generation Legos, and the table lamps that change color when the stock market moves up or down. These digital shifts can rearrange entire industries. Consider that today the firm that sells more cameras than any other is Nokia, a firm that offers increasingly sophisticated chip-based digital cameras as a giveaway as part of its primary product, mobile phones. This shift has occurred with such sweeping impact that former photography giants Kodak and the now-merged Konica-Minolta have exited the camera business.

One of the most agile surfers of this fifth wave is Apple, Inc.—a firm with a product line that is now so broad that in January 2007, it dropped the word “Computer” from its name. Apple’s keen insight on where trends in computing power and performance are headed is captured in this quotation by the firm’s co-founder, the late Steve Jobs: “There's an old Wayne Gretzky quote that I love. ‘I skate to where the puck is going to be, not where it has been.’ And we’ve always tried to do that at Apple. Since the very very beginning. And we always will.”H. Mittchell, “Steve Jobs Used Wayne Gretzky as Inspiration,” Los Angeles Times, October 6, 2011. The curves above aren’t perfect, but they can help managers see where the puck is headed, helping the savvy manager predict the future, plan for the impossible to become possible, and act as the disruptor rather than the disrupted.

Apple’s breakout resurgence owes a great deal to the iPod. At launch, the original iPod sported a 5 GB hard drive that Steve Jobs declared would “put 1,000 songs in your pocket.” Cost? $399. Less than six years later, Apple’s highest-capacity iPod sold for fifty dollars less than the original, yet held forty times the songs. By that time the firm had sold over one hundred fifty million iPods—an adoption rate faster than the original Sony Walkman. Apple’s high-end models have morphed into Internet browsing devices capable of showing maps, playing videos, and gulping down songs from Starbucks’ Wi-Fi while waiting in line for a latte.

The original iPod has also become the jumping-off point for new business lines including the iPhone, Apple TV, iPad, and iTunes. As an online store, iTunes is always open. ITunes regularly sells tens of millions of songs on Christmas Day alone, a date when virtually all of its offline competition is closed for the holiday. In a short five years after its introduction, iTunes has sold over 4 billion songs and has vaulted past retail giants Wal-Mart, Best Buy, and Target to become the number one music retailer in the world. Today’s iTunes is a digital media powerhouse, selling movies, TV shows, games, and other applications. And with podcasting, Apple’s iTunes University even lets students at participating schools put their professors’ lectures on their gym playlist for free. Surfing the fifth wave has increased the value of Apple stock sixteenfold six years after the iPod’s launch. Ride these waves to riches, but miss the power and promise of Moore’s Law and you risk getting swept away in its riptide. Apple’s rise occurred while Sony, a firm once synonymous with portable music, sat on the sidelines unwilling to get on the surfboard. Sony’s stock stagnated, barely moving in six years. The firm has laid off thousands of workers while ceding leadership in digital music (and video) to Apple.

Amazon’s first Kindle sold for nearly $400. Less than four years later, Amazon was selling an updated version of the Kindle for one-fifth that price. Similarly, Apple offered 5 GB of music storage in the original iPod (also priced at roughly $400). By the iPod’s tenth birthday, Apple was giving away 5 GB of storage (for music or other media) for free via its iCloud service. Other factors influence price drops, such as being able to produce products and their components at scale, but Moore’s Law and related price/performance trends are clearly behind the price decreases we see across a wide variety of tech products and services.

While the change in hard drive prices isn’t directly part of Moore’s Law (hard drives are magnetic storage, not silicon chips), as noted earlier, the faster and cheaper phenomenon applies to storage, too. Look to Amazon as another example of jumping onto a once-impossible opportunity courtesy of the price/performance curve. When Amazon.com was founded in 1995, the largest corporate database was one terabyte, or TB (see Note 5.14 "Bits and Bytes") in size. In 2003, the firm offered its “Search Inside the Book” feature, digitizing the images and text from thousands of books in its catalog. “Search Inside the Book” lets customers peer into a book’s contents in a way that’s both faster and more accurate than browsing a physical bookstore. Most importantly for Amazon and its suppliers, titles featured in “Search Inside the Book” enjoyed a 7 percent sales increase over nonsearchable books. When “Search Inside the Book” launched, the database to support this effort was 20 TB in size. In just eight years, the firm found that it made good business sense to launch an effort that was a full twenty times larger than anything used by any firm less than a decade earlier. And of course, all of these capacities seem laughably small by today’s standards. (See Chapter 11 "The Data Asset: Databases, Business Intelligence, and Competitive Advantage".) For Amazon, the impossible had not just become possible; it became good business. By 2009, digital books weren’t just for search; they were for sale. Amazon’s Kindle reader (a Moore’s Law marvel sporting a microprocessor and flash storage) became the firm’s top-selling product in terms of both unit sales and dollar volume. The real business opportunity for Amazon isn’t Kindle as a consumer electronics device but as an ever-present, never-closing store, which also provides the firm with a migration path from atoms to bits. (For more on that topic, see Chapter 4 "Netflix in Two Acts: The Making of an E-commerce Giant and the Uncertain Future of Atoms to Bits".) By 2011, Amazon (by then the largest book retailer in North America) reported that it was selling more electronic books than print ones.M. Hamblen, “Amazon: E-Books Now Outsell Print Books,” ComputerWorld, May 19, 2011.  Apple’s introduction of the iPad, complete with an iBook store, shows how Moore’s Law rewrites the boundaries of competition—bringing a firm that started as a computer retailer and a firm that started as an online bookstore in direct competition with one another.

Here’s another key implication—if you are producing products with a significant chip-based component, the chips inside that product rapidly fall in value. That’s great when it makes your product cheaper and opens up new markets for your firm, but it can be deadly if you overproduce and have excess inventory sitting on shelves for long periods of time. Dell claims its inventory depreciates as much as a single percentage point in value each week.B. Breen, “Living in Dell Time,” Fast Company, November 24, 2004. That’s a big incentive to carry as little inventory as possible, and to unload it, fast!

While the strategic side of tech may be the most glamorous, Moore’s Law impacts mundane management tasks, as well. From an accounting and budgeting perspective, as a manager you’ll need to consider a number of questions: How long will your computing equipment remain useful? If you keep upgrading computing and software, what does this mean for your capital expense budget? Your training budget? Your ability to make well-reasoned predictions regarding tech’s direction will be key to answering these questions.