Debt Free

There’s a race going on. It’s been termed by industry analysts as the “Race to Zero”. What it refers to is the headlong attempt by consumer electronics manufacturers to cut each other’s throats by cutting prices to the point where margins evaporate. As they do this, consumers become jaded to the point where their concept of value almost disappears. As feature sets get larger, and performance becomes greater in a wide variety of consumer electronics, consumers have come to expect they’ll also receive more for their dollar (or Yen, Yuan, Peso, Euro, Ruble) every year.

Almost nowhere else in the marketplace does the race to zero paradox exist. Sure, our cars and homes have far greater content than they did 15 years ago, but they are commensurately more expensive. Consumer electronics, on the other hand, offer consumers more of everything; screen size, performance, features, and functionality, at prices that have been lowered to the point where products are experiencing price compression. Soon consumers will make their choices more on application than price, because the incremental cost of changing in sizes or adding features will be comparatively small.

If you were to shop for a home, and the incremental cost of adding 1,000 square feet was only $10,000, and the larger home cost little more to operate, many consumers would reside in 10,000 square foot McMansions. So it is with consumer electronics. This holiday shopping season, consumers will be treated to an embarrassment of riches and one they have come to expect. As manufacturers and retailers destroy the value proposition of their goods, they will have only themselves to blame when it becomes difficult to make a profit.

Consumers have come to expect lower prices every few months, and they expect innovation to continue unabated. Consumer electronics manufacturers are therefore forced to spend huge sums on R&D. On the flip side, many of the products are now so good that if new technologies and functionality were not developed, manufacturers would find themselves hard pressed to sell replacement products to existing customers. Few outside the enthusiast niche would see the need to upgrade.

The great thing for consumers is that the increased hardware capability has opened the doors for a flood of new applications. I attended a talk by futurist Ray Kurzwiel a few years ago, and he predicted the pace of change would actually accelerate in a geometric fashion, spurred on by the power of innovation to facilitate additional innovation. We’re witnessing such a period now.

A 42” flat screen HDTV that you can hang on your wall for less than a month’s rent is only the beginning. (Rent will rise, TV prices will fall) Soon the size of the TV will be limited more by the size of your wall than the size of your budget. We’re seeing that now to an extent, as equal quality sets in the 37” – 50” range are within a $1,000 of each other. New technologies will render current ones passé and the cycle will begin anew, albeit at a lower price point. This holiday season should be a great one to fortify your entertainment, navigation, or information system. Then again, if you wait a few years, maybe you’ll be able to have all that, and more, for half the price. If you play that waiting game in this market, you’ll be waiting forever.

Have a great, Debt Free, weekend.