The Virtuous CIO  

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June 1, 2010 — Discerning Trends — Part 2

Continuing our discussion of trends in the technology industry we have been looking at the drivers of these trends. As new technologies come to the forefront, vendors and manufacturers are torn between the desire to maximize the return on their investment by holding tightly to their intellectual property and keeping prices high, or driving economies of scale in making up their investment in volume.

As is typical with new technologies early adoption is by those who need the rapid improvements in performance, scalability, reliability, or size. As volumes increase manufacturing costs decline and this facilitates adoption by more price sensitive market segments. If we imagine a graph describing the cost of new technology over time, the price nearly always declines through the life of the individual technology or product. The cost curve may also hasten the obsolescence of now current technology, although this is not always the case.

A good example of this trend is in transatlantic communications systems. In 1956 cable capacity was measured at 24 channels. The shift from coaxial cable to optical fiber resulted in a growth of capacity to well over 100,000 channels per physical circuit by 1992. Costs also dropped from over $7 million per channel in 1956 to about $6,000 in 1992. An interesting side effect of the decline of undersea communication link costs was that using orbital satellites for communications links is now no longer competitive. It seems odd to characterize a space technology as being obsolete, but it is certainly true in this case.

We also have to look at how the regulatory environment affects technology trends, although this is often in the negative sense. Traditionally regulatory requirements have acted as a brake on technological advancement; in fact regulation is more often a characteristic of mature technologies. Regulation is traditionally regarded as a means of countering the more destructive side effects of technology, as well as the free market. As technology advances and opens new opportunities for commerce, the government naturally looks to this for potential revenue.

As a given technology matures, dominant companies within a given arena will sometimes attempt to influence regulation (through the courts, legislation and government agencies) in an effort to maintain their competitive position. The Digital Millennium Copyright Act (DMCA) can be considered a good example. The enforcement mechanisms of this law are widely used by businesses to threaten competitors and raise barriers to entry into the market.

The one lesson business people never seem to learn is that the market is efficient. It is like trying to fix a leaky basement. Attempting to stop competitors from entering the market will, in the long term, lead to paradigm shifts which completely sidestep the roadblocks which mature companies put in place to protect their positions.