Since the mid-’90s, I’ve been asking myself a question: who in their right mind would want to be in the computer hardware business?
The ultimate futility of it was driven home for me this weekend when I bought a DVD player for less than $60. If you’re like me, you can remember when you first saw DVD players on the store shelves selling for over $500 per.
Hah. I was right. Being the prescient guy I am, and having seen the rapid drop in prices for VCRs and TVs and satellite dishes, when they first came out, I predicted that DVD player prices too would drop like a stone.
I was only partly kidding when I said they’d soon be giving DVD players away with a tank of gas.
And assuming that this pattern of rapidly copied, rapidly commodifying, rapidly price-dropping hardware applies as much to computer hardware as it does to consumer hardware, I ask again: who’d want to be in the business at all?
If you must be in it, I suggest that there are two operating models to deal with the undeniable reality of plummeting, commodity hardware prices:
You can operate the business by model number one — the Dell model — the model that admits you’re in a commodity business, acknowledges that everyone will only pay the lowest price possible for that which they see as equal alternatives, and deliberately leads the race to the bottom in pricing.
Faster? Cheaper? Megahertz and Megabytes have long been commodity items, so you’ll have to cut, cut, cut costs, and cut again. Outsource whatever you can as fast as you can, move all your manufacturing overseas (what am I saying? It’s already all overseas), and reduce staff to a minimum. Fire yourself if you have to. Hope to make your money on volume alone, imagining that the cheaper you make stuff, the more stuff people will buy. Sometimes it even works.
I know someone who works for a custom manufacturer that makes components for big outfits like Nortel. Its stated objective, the measure by which Nortel evaluates and pays them, is to reduce the costs of the components they supply by 25 per cent per year, year over year.
Run this model for a while, and soon everything you supply will be cheap like cabbage, but you’ll have lost all the good stuff, all the stuff that used to be fun about your job. There used to be enough money in the business for you to take your clients golfing once in a while; now your margins are so thin you can’t afford anything beyond lunch at your desk.
Maybe this model works for you, but it sounds depressing to me, and I wouldn’t want to be a part of it.
Or you can operate by model number two — the Apple model — which seeks to differentiate products enough that customers are willing to pay a premium price for them. It worked for a while with the Macintosh.
Model two assumes that you can come up with cool hardware that distinguishes you from your competition, and that as your competitors rapidly copy and evolve your hardware designs, and then move manufacturing somewhere cheap overseas, you can repeat your distinguishing brilliance again and again.
Unless you’re brilliant with a, and then repeat with b, you’re back in model one.
So I ask again — who’d want to be in the hardware business?
In The Graduate, young Dustin Hoffman was advised to go into plastics. My advice? Stay the hell out of the computer hardware business unless you’ve got nerves of steel and the stomach to handle plummeting prices every year. Stick with the software, my boy.
Hanley is an IS professional in Calgary. He can be reached at [email protected].
