Information Technology – Economic Forces at Work
Have you ever wondered why technology is so expensive? Why does the technology repairman charge more per hour than what many attorneys charge? Why does it feel like you get nickeled and dimed to death with technology costs?
There are many forces at work in this industry that make it an expensive component of administration for just about any business. The greatest impact upon cost has been the changes in hardware. The hardware changes affected software abilities and capacity. In addition to hardware and software changes, other forces including the internet, health care, and entertainment impacted the cost of doing business. All of these forces have an bearing in the market today. Each works like a cog in a sophisticated clock to move business forward in time. The following sections provide a brief description of the influence each of the underlying forces play in the economic change with information technology.
I have a vivid memory of my brother buying a computer back in 1988. It was an IBM 80286 and had 256kb of RAM and about 10Mb of hard memory. It had two 5 ¼” floppy drives and ran with DOS 3.0. It cost over $2,700 for the computer and the operating system. By the time he purchased a printer and other software, the price tag exceeded $4,000. It was pretty much one third the price of a new car. Now 26 years later, you can own a computer that is literally 1000 times more powerful with a basic software package for half the price. To compare, the modern computer is about 1/20th of the price of a new car. In effect, hardware is getting more powerful and the price per unit of measurement is decreasing. Below are some timelines of certain hardware characteristics and the corresponding price:
Year Item Value Price/Unit
1995 RAM 4Mb $30
2005 RAM 1Gb $1
This graph illustrates the remarkable decrease in hard drive (storage) cost per unit over the last 35 years.
The above graph says it all. The scale is logarithmic which drives home the point about the cost per unit decreasing at such a phenomenal rate. Thank you Matt Komorowski for this informative graph. His article is located here: Cost per Gigabyte.
If the above is true, then how is hardware impacting the increasing cost of technology? Answer: Many other outside forces influence hardware costs. These forces include the frequency of replacement, national trend towards systems, the strong desire to access information from remote locations and using technology to increase production. The following subsections further elaborate on these four cost drivers for hardware.
- Refresh Policy – because hardware changes so frequently, computers can’t keep up the same pace. Right now, the computer generation is less than 18 months between groupings. This means that most of us cannot compete with technology this is more than 2 generations old. This relates to the ability of an aged system to operate more modern software and of course attach the related auxiliary components.
- Local Computing to Network to Cloud Computing – in the 90’s and into the early 2000’s, most offices ran their computers as stand alone machines. However, communication between departments required a network. Today, that network concept has moved to the Cloud. Basically, you pay a subscription for access to your data files at a remote location. The primary benefit is access from anywhere (office, home & travel). Other benefits include regular backups and lower hardware costs within the office environment. However, the actual hardware at the Cloud is paid via a monthly subscription fee.
- Mobility – the modern day trend is to communicate instantly and access information on demand. In the past, phone communications were limited to mobile phones, but beginning in the mid 2000’s, hardware technology was miniaturized allowing us access to informative via so called ‘Smart Phones’. Basically a computer in your hand. This hardware technology changes rapidly requiring continuous capital outlays to keep up. Furthermore, to properly use these devices, the hardware must access the internet which is paid via data plans (pay for data in gigabytes of information).
- Integration with Production Systems – production is the life blood of any operation. Technology allows the business to access production at various points along the process. This information is essential to understanding the throughput. However, to achieve this, the production system has to be modified to send an electronic signal that is then converted to a language that is then fed into a software program that produces results for the reader. These inputs are hardware related and the more accurate your need for information the more input points are required. Hardware inputs include:
- Sensors – magnetic, angular, weight and speed/direction
- Switches – key types, rockers, counters
- Optical – readers, counters
The key to the hardware issue is that integration is now required to keep up. Although the actual cost of the core computer technology is a lot less expensive, the expanded hardware requirements has raised the overall cost of hardware thus driving the overall cost of technology higher. To complicate matters, this expanded hardware realm requires more sophisticated software to maximize the hardware capabilities.
In the late 80’s, the only software you needed was a DOS to run the computer and a few basic programs such as a word processing and spreadsheet. Today, software is involved in every detail of our lives. It exists in the cars we drive, the refrigerator in the kitchen and in our entertainment systems at home. The expanded hardware capacity works hand in hand with the software to give us information in a way we desire. To complicate matters the software engineers generally require the consumer to update the software regularly or they will not support the aged software. In effect, you as the consumer must upgrade or risk losing support.
A good example of this is my accounting software. The provider requires me to update no less than every three years. In the past I was driven to update because there were significant gains in ability within the software, today those gains are marginal at best but the company still requires me to update. My tax software is new every year which correlates to the changes in the tax code.
In highly specialized industries such as manufacturing or energy generation, the software is unique due to the high customization requirements. Therefore, the company is figuratively engaging a permanent software engineer to design, build and maintain this software. Thus there exists a high demand for technology folks in the market.
There are other forces that push costs higher still. A good example is the ever changing internet. In the past, connection to the internet was a hard wire requirement. This changed in the 2000’s as devices could communicate via wireless connection (additional hardware costs). Now we have ‘Hot Spots’ nationwide and access to the internet is no longer just cable based. Many homes access the internet via satellite communications (more hardware) especially those in remote locations.
In my opinion, one of the greatest changes in technology has occurred in medicine. This industry has modified itself dramatically as it has shifted away from invasive surgery when resolving medical issues to using chemical and noninvasive surgery techniques. I remember writing one of my Master Papers about the magnitude of this industry as it relates to the Gross Domestic Product. In the 90’s, medicine had reached over 9% of the Gross Domestic Product and based on the calculations and the sources of funding, I wrote that it will reach 14% of GDP by the year 2007. Today, it exceeds 16% of GDP and most of this is driven by the increase in technology medicine uses to further the patient’s quality of life.
The Market Today
On June 29, 2007 the iPhone was first introduced. Now, seven years later, we have the iPhone 6. In seven years, this one device has renewed itself six times. Apparently, they can’t get it right. I have yet to get one and actually have zero desire. This is driven by the associated cost to own these highly advanced smart phones. I believe they cost in excess of $400 for the hardware piece alone. This $400 device can do more than the computer my brother bought back in the 80’s.
Notice a trend here? Although the cost of hardware in comparison to the historical cost is way down, the frequency of updates continues to drive the overall cost of technology higher. This doesn’t include the software aspect of all this.
This is just in the area of communication. If you begin to talk about the office environment, well, this same problem is magnified. You not only have the computer network but there is a printing and data storage system to maintain too.
The market today for technology is constantly evolving and this fast paced change is the driving economic force for what really pushes the overall cost of technology higher. In a later article, I will provide tools for you to use to keep these costs down and under control. This article is written to identify the cost drivers of technology. Act on Knowledge.
Do you want to learn how to get returns like this?
Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.
There are four key principles used with value investing. Each is required. They are:
- Risk Reduction – Buy only high quality stocks;
- Intrinsic Value – The underlying assets and operations are of good quality and performance;
- Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
- Patience – Allow time to work for the investor.
If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above.
Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:
- Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
- Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
- Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.
Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:
- Lessons about value investing and the principles involved;
- Free webinars from the author following up the lessons;
- Charts, graphs, tutorials, templates and resources to use when you create your own pool;
- Access to existing pools and their respective data models along with buy/sell triggers;
- Follow along with the investment fund and its weekly updates;
- White papers addressing financial principles and proper interpretation methods; AND
- Some simple good advice.