Tuesday, 17 July 2012

What's so special about Tech?

This blog is about technology, finance, and the clash of eco-systems.


What's so great about technology? Why are technology companies different from ones which make lighting, rubber boots or typewriters?* How is it that Google (founded 1998) can have a market value three times that of Boeing (founded 1916).

The chips are down

The answer, in one word, is Silicon.

What modern technology companies have in common is they are driven by silicon chips. Software runs on silicon, smartphones are built around silicon, chip companies (obviously) build silicon. The products provided by a technology companies are overwhelming built around microprocessors.

What's so great about that? Ask Gordon Moore, the co-founder of Intel. He famously observed (please note that Moore's Law is strictly speaking an observation, not an empirical Law!) that the transistor count on a silicon chip doubles every 18 months.

This is revolutionary, because it means that every year and a half a technology company has twice as much horsepower to play with for their new products as they did before. Imagine if Boeing could make its planes half the size, or Starbucks could make its frappucino's twice the size (OK they sort of do that). We'd be commuting  in 747s and drowning in iced milk. Well that's what Apple does with the chips in its iPhones and Google does with the functionality of its software. Twice the horsepower = twice the fun.

Of course in the real world it isn't quite as tidy as this, but you get the point. Every two-odd years technology companies can bring an entirely new product to market that's way better than the previous model. Guess what? Because its new people are prepared to pay up for it. In essence technology companies have structural pricing power.

iPhone's versus microwaves

So compare microwaves to iPhones. Today's microwave does pretty much the same as one from ten years ago (heats food, melts chocolate, remains a VERY bad way to dry off a soggy cat). Microwave ovens are pretty much a commodity - one is much like the other. The only way to differentiate is to be cheaper than the next guy. Essentially the market becomes a race to the bottom.

Contrast it with an iPhone. Last year's smartphone could sing, this year's can sing and dance, next year's will do the macarena whilst cooking you Turkish Breakfast Eggs (try em, they're great). Guess what? People are willing to pay ridiculous amounts of money and walk away happy. Remember, Apple makes a c40% gross margin on its kit, i.e. it charges you more than 60% for an iPhone than it costs to manufacture. Contrast that to the microwave where the more you pay, the less happy you are.

That's the miracle of modern technology.

* Observant readers would, of course, have noticed that Indian IT Services company Wipro makes lighting, Nokia used to make rubber boots and IBM typewriters. Which just goes to show the great thing about tech it that its always changing.

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