4: FOLLOW THE FREE
Because prices move inexorably toward the free...
...the best move in the network economy is to anticipate this cheapness.
So reliable is the arrival of cheapness in the new economy that a person can make a fortune anticipating it. One of the classic tales of counting on the cheap comes from the information era's Big Bang--when the semiconductor transistor was born.
In the early 1960s Robert Noyce and his partner Jerry Sanders--founders of Fairchild Semiconductor--were selling an early transistor, called the 1211, to the military. Each transistor cost Noyce $100 to make. Fairchild wanted to sell the transistor to RCA for use in their UHF tuner. At the time RCA was using fancy vacuum tubes, which cost only $1.05 each. Noyce and Sanders put their faith in the inverted pricing of the learning curve. They knew that as the volume of production increased, the cost of the transistor would go down, even a hundredfold. But to make their first commercial sale they need to get the price down immediately, with zero volume. So they boldly anticipated the cheap by cutting the price of the 1211 to $1.05, right from the start, before they knew how to do it. "We were going to make the chips in a factory we hadn't built, using a process we hadn't yet developed, but the bottom line: We were out there the next week quoting $1.05," Sanders later recalled. "We were selling into the future." And they succeeded. By anticipating the cheap, they made their goal of $1.05, took 90% of the UHF market share, and then within two years cut the price of the 1211 to 50 cents, and still made a profit.
In the network economy, chips and bandwidth are not the only things headed toward the asymptotic free. Calculation is too. The cost of computation--as measured by the millions of calculations per second per dollar--is headed toward the free. Transaction costs also dive toward the free. Information itself--headlines and stock quotes--plunges toward the free, too. Real-time stock quotes, for instance, were once high-priced insider information. Lately they have become so widely available that they must conform to a stock quote "spec" so that generic web browsers can read them uniformly.
So how long was Noyce selling transistors below cost before the business turned profitable? How far in the hole was the company at the bottom? If it had taken ten years instead of one to get the cost down, how would the industry be different today?
A lot of dot-com businesses in the late 90's assumed things would be free, and that if they waited long enough they'd go from losses to profit, but they ran out of capital and perished. As they say in stock trading, the market can stay wrong a lot longer than you can stay solvent. Making assumptions about the future is risky even when you're extrapolating hundred-year trendlines.
More to the point, something's got to be non-free or you don't have a business. As your core business falls towards free pricing you have to move up the stack to the next hard problem that still has margin in it. Like IBM moving from hardware to software to services to outsourced service management.