I am certainly not the first person to notice the peculiar “race to the bottom” that happens when products are commoditized. But it is been much in my thoughts recently as I observed the annual tragedy of holiday price wars. How can a company economically produce a DVD player, tablet computer, or even a string of Christmas lights at the prices we see today? Working conditions, quality, environmental protection, and reliability have all gone out the window. But how can a business resists joining this downward spiral?
Consider the lowly lightbulb. Once a subject for great national pride, with intense research and development and patent battles, today’s incandescent light bulbs are utter garbage. Standard 40 W bulbs sell for under a dollar and last just a few months. Burned out bulbs are chucked and replaced without a thought, yet they were once prized and protected. Once upon a time, companies even specialized in refilling lightbulbs!
Over the course of 150 years of development, the technology of incandescent lamps became sufficiently mature that the main differentiator between bulbs was price. This led to an industrywide crash, with production moved and outsourced and quality falling away. Today, with the technology on its last legs, the once proud lightbulb has become worthless trash. The same effect is rapidly taking over the CFL bulb market.
The same phenomenon happens with television sets (witness Sony’s recent decision abandon mainstream television production to ODMs), DVD players (and Blu-ray on the way), and PC computers (especially consumer laptops). Differentiation and quality fall by the wayside as consumers focus entirely on price. Before long, companies decided they can no longer compete for ever smaller margins and give up the market entirely.
There is one antidote to the downward spiral: Consumers must choose to spend more wisely. The greatest modern example is Apple, which refuses to do battle on price and focuses instead on innovation, quality, and (yes) fashion. In this way, Apple is indeed the BMW of computers, since both companies have long since given up competing on price yet both still find mass-market success.
But is it possible to continue producing successful, innovative, high-quality products in the face of a flood of trash? Sadly, consumers will likely always respond to mind bogglingly low prices. Fashion and features do offer some protection for premium producers, but nothing can stave off “nearly free” pricing. The only way to truly weather the storm, as demonstrated by the iPod, is ever tighter integration with ecosystems that differentiate the product.
But change will come regardless. Android smartphones and tablets are eroding the iPhone and iPad market, though Apple has held on to the lions share of profits. Chinese automobiles will eventually arrive in the West with good design and well-known brands like Volvo. Real innovation will move on in new directions as the downward spiral continues.