Everyone has seen it. Take DVD players as an example. A few years back they were several hundred dollars for even an “entry” level unit. Now, you can get one for $50. A Top-Of-The-Line CPU would be pushing $1000 shortly after release, only to be $100 or so after a year or two. DVD Burners for your PC were almost $1000 a couple years ago, but now you can buy one for around $100.
Why is that? I understand that for CPUs, it can hinge on yields which will understandably increase as Intel/AMD/IBM have more experience, but does that account for an approx 90% difference in price? There must be a far larger margin of profit made on the “new” expensive CPU, correct? Make the $$$ on the early adopters?
How about the DVD/CD/Burners and other elctronics then. How do they become so cheap? Do the components in them drop so much just because of mass production? Is there any collusion between “competitors” to set pricing in the early stages of product launches so companies can maximize profits? Or is it genuinely just an example of the law of supply and demand and maturation of production techniques that account for massive price drops in a relatively short period of time?
I’d say it’s basic supply and demand you are looking at here. The latest/ fastest/ most capacity system comes out and lots of people want it, but there are few around, so prices are high.
Then competitors come out with “me-too” versions of the technology and (worse yet) a slightly better/ faster component comes out, and demand suddenly drops for the item in questions, such that the only way to get people to pay for it is drastically cut prices.
The fact that these components are cheap to manufacture, and have well established distribution channels only makes the price drop and technology cycle move faster…
Many product debuts rely upon a single technological advance.
DVD players required blue laser LEDs. The burners required high power blue laser LEDs. These were scarce as hen’s teeth during the introductory periods of those products.
Another simple factor is the price immunity of hyper-geeks who just have-to-have the latest and greatest. Companies have found this to be a great way of recouping NRE (Non Recurring Engineering) costs accumulated during the design phase.
Just as you never want to buy the very first year’s model of an entirely new type of car, you really should avoid buying first round technology. The cars have not gone through sufficient field testing and (especially in the case of the consumer electronics) they are milking you like the last cow on the farm.
The biggest reason for CPU price drops is that something better comes along. When a processor first comes out it is the fastest thing out there so a premium is attached to it. When the next one comes along that is faster people are not going to buy the slower one unless it is cheaper. The yields also really do improve dramatically maybe not by a factor of 9 or 10 but 3 to 6 seems pretty reasonable based on my knowledge of the yields that I have seem in the literature.
Like anything else, the first versions become available on the market following quickly upon a period of development by the maker. That period of development can cost a great deal of money. Naturally they want to recoup as much of that outlay as soon as possible, so they price the stuff as high as the market will bear. As the novelty wears off and their profits mount, there is less market pressure, from above or below, to support the inflated price.
Another factor is that ramping up production of anything essentially means bringing down the COG (Cost of Goods) to near zero. This maximizes profitability but also tends to flood the market, thereby resulting in severe price competition. The disk drive industry is a sterling example of this.
I believe blue lasers are only used on high-definition DVDs that became available this year. Some info here.
I think much of the price reduction is in the availability of special parts. When a new type of device is developed, it’s initially built with general-purpose chips connected and programmed for the task. As the device becomes more popular, semiconductor manufacturers start to develop specialized chips hard-coded for that task and can take the place of several general-purpose chips. The same is probably true for mechanical parts and even fabrication facilities.
The “early adopter” effect is significant too. It’s the same reason hardcover books are so much more expensive than paperbacks.
You also have to factor in competition. When a technology first comes out, only one or a small handful of companies will be making it, so they can charge whatever they think they can wring from the public. After more competition enters the market, they must price competetively.
I seriously doubt this has happened more than once or twice because (1) it’s illegal (given certain assumptions) and (2) it’s not necessarily the smartest thing to do from an economic perspective (because one of the competitors could always drop the price by a little bit and capture more market share).
I think there is a mentality issue as well. Just today in the Chicago Sun-Times there was a blip about DVDs which record. They said some company last spring (I forget which it said) dropped the DVD player (non recordable) below $100.00 and the “broke” the barrier and the cost fell.
If the products are similar enuff people buy the cheaper one. Thus once a price war starts its hard to go back.
The companies make less profit but they sell more. For example I don’t own a DVD. I own a VCR but I don’t really watch movies, BUT I record a lot of the TV. So it makes NO sense for me to buy a DVD. But at only $50.00 I may buy a DVD for the one or two movies I rent a month.
Building the first new CPU costs hundreds of millions of dollars. Making the second one costs 10 bucks. R&D, infrastructure, etc. all cost a lot of money. Chip Fabs are the most expensive private construction projects in the world. No one would buy the $100M chip and you’d go broke selling them for $10. So you compromise. Given the uncertainty of the the tech future, you have to make back the cost of developing the chip in a short period, e.g., a year. After that, you drop prices to hurt the competition. But only slowly, you’d like to make some more money off of it.
The point about reducing the number of components is also key. A 20 year old VCR has 4-6 major boards with hundreds of parts on them. A modern VCR only has one major board that looks naked by comparison. The real work has been pushed into a small number of chips. (It’s also a cheap piece of crap that won’t last 2 years, but if you guys like wasting money, they’ll be extremely happy to sell to you.)
The later effect is what really caused the big drop in prices in the early days of PCs (CPU prices were fairly stable). Build a MB where all the IO was done by 2 chips instead of dozens, presto, you’re a major computer maker, for a couple months anyway.
Another significant effect, especially in the long term is that fancy, new technology often requires OTHER fancy new technology to build and fabricate. For example, the first generation DVD players might have been so expensive because they had expensive, first generation decoding chips that cost $100. As they managed to reduce the price of decoding chips, they could reduce the overall price of the player.
But they are. I can pick up a 42" Samsung for about $3.500. A couple of years ago, they were inmpossible to find for less than $20k.
These things wortk the same as car racing. Many car makers get into racing to build recognition for their brand. Honda does well in F1 and of course US automakers compete in Indycar. Hyundai and Mitsubishi has been succesful with this, leading to more average consumers thinking that maybe buying a Korean car is not a bad idea. No one would hyave bought a Hyundai ten years ago, now they’re quite common.
With consumer electronics, it’s the same. You bring out something really cool, that the early adopters use and which create a buzz. The trade mags write about it, your brand name is getting recognition, and now for the benefits: It’s better for Dell to sell a
million units with $100 profit, than 50k units with $300 profits.
Thank you. I guess I just can’t take a television price with a comma in it seriously. I immediately estimate the cost as a percentage of the probably resale value of my house, and shake my head in bafflement.
I just bought a DVD player for half the (very reasonable) price I paid for my VCR during the first Gulf War. THAT’s the type of price drop I’m interested in.
Just wait. Plasmas will be under $1k around 2006.
My first pc was a 286, 40MB hard drive, 1mb ram, 16MHz. It was about $3.500 in 1991. The friggin’ mouse was $175.
O.K., I should have the house finished by then, and I can make the little room the t.v., so the big room can be the entertaining room.
Now the question is, should I invest in an electronic amoire for only three years? Or will it just be as obsolete as one of those commodes people use as planters?
DVD’s have the distinction of being the MOST rapidly adopted technology EVER so its not fair to compare anything else with it. Plasma TV’s haven’t taken off for a variety of reasons, for one thing, the continued delay of digital HDTV means theres less need for a high res screen, lack of volume in a typical house to mkae it worth while and several cheaper solutions that have many advantages and are also missing some important drawbacks (like screen life).
Even despite that, they’ve dropped nearly 10 times in price since they first came out.
DVD’s have the distinction of being the MOST rapidly adopted technology EVER so its not fair to compare anything else with it. Plasma TV’s haven’t taken off for a variety of reasons, for one thing, the continued delay of digital HDTV means theres less need for a high res screen, lack of volume in a typical house to mkae it worth while and several cheaper solutions that have many advantages and are also missing some important drawbacks (like screen life).
Even despite that, they’ve dropped nearly 10 times in price since they first came out.