Saturday, November 15, 2008

Why buy a computer? When a $200 phone will do more?

We are living during through a time of deflation -- something that has rarely occurred in America. The five-year inflation protected note yields about 1% more than the standard five-year treasury note. The bond market is projecting that prices will decline an average of 1% per year over the next five years.

We all know how the excess supply of houses has created a down draft in home prices, a decline that is all but over, however, I don't believe the public is as fully aware of the magnitude of the Moore's Law Deflation that is in progress. The housing "problem" will be gradually fixed as the unsold supply is gradually absorbed by new household formation, however, the computer story is different. Moore's Law says roughly that computers will do double the work at half the cost every 18 months. Because we now have billions of computers doing huge quantities of work, the doubling of work capacity has gotten to be a number of gargantuan proportions. Lower costs are circling the globe at fiber optic speeds. The computer story is becoming one of why buy an expensive and massive server -desktop computer for work and a desk top for home when a $200 mobile phone in proximity to a monitor will do much more?

In 1968 good quality pocket calculators sold for $1,200 dollars, more or less. In just a few years, the price dropped to $7, more or less. Billions more have been sold at $7 but the business of selling $7 calculators has not been much fun. Of course, there are fancy calculators that cost more than $7 but most of us buy the $7 ones and make do. We generally use computer software to replace the extra functions available in the most expensive calculators.

The "free with two years of service" mobile phones are becoming very powerful. As multiple desk top computers are replaced by mobile phones, it is understandable why Intel is selling for $13 per share and why the prices of commodities are dropping so much. Ten ounce telephones are replacing multiple 50 pound desktops and whole racks of servers.

Last week, Microsoft bragged about spending $3 Billion to beef up it cloud computing services. A day or two latter, Google announced that a large company signed-on to replace its Microsoft Exchange Server network with Goggle hosted Gmail. There are many cloud computer services battling for leadership. It does not matter which ones grow the most, consumers of computer services will be the big winners.

The company that switched to Google will pay $50 per year per user to have its own Google hosted domain and the extra conveniences that offers, while it's net annual savings will be $750,000. Millions of individuals and small businesses are gradually replacing tons of hardware and multiple copies of expensive software with low cost NetBook computers or with Mobile Phones, all very powerfully connected to efficient, well utilized cloud computers.

Verizon and AT&T are each rapidly expanding their Mobile Services, including mobile TV service. In scores of cities across the US, one can pay from $13 to $30 per month for ten or more Mobile TV Channels. Two major TV Networks recently expanded their Internet and Mobile availability. Is broadband wired service about to go the way of the land line telephone? Who needs a separate land line if you can set your phone next to your big screen TV and watch what you want, when you want?


Newspapers, magazines, bloggers, radio stations, YouTube and many others have struggled to find a profitable Internet business model. The struggle is about over. The big Internet Service change underway is the conversion of unlimited access plans to wheelbarrow load access plans, somewhat similar to the way we pay for cell telephone with text messaging access. The person who routinely downloads HD movies will pay for wheelbarrow loads whereas the person with limited needs will pay much less. One irony is that AOL once revolutionized the industry by switching from the per minute model to the unlimited time model. Now there are scores of people with unlimited Internet access to lots of junk. Much great content has been kept off the Internet due to the abundance of cheap stuff. People are funny about free stuff. They will waste a lot of time and energy to collect free stuff when the great stuff is cheap but not free. In the past, those who wanted to read a recently published best selling book or hot movie, had to go off line. Today, the low cost way to buy a book is through Kindle and similar eBook services.

We now have more than enough "junk" available. The public is not interested in adding another 500 cable TV channels filled with advertising or another 10,000 bloggers writing about not much. Some people want to read their local newspaper, watch prime time shows and read the latest books but some do not. Some want to read US News and World Report, but delivered newsprint, even if it were blank, is expensive stuff relative to digital print. US News is a rare example of an information provider which has made the unforced decision to stop selling hard copies, many more will follow. While the subscription model and unlimited access do not go hand in hand, the wheelbarrow model and the subscription model fit.

If the New York Times asks for a fee to read a story, under the unlimited plan, it is too easy for readers to Google the idea and find others sources. When thousands of premium items are subscribed to for a fee, the service provider can offer standard, limited access at a very low price. All the routine stuff, such as email and web surfing can be included at one low price. When users select a fee for service item, such as an i-Tunes .99 cent song download or a $5 per month subscription to the Stars Movie Network, the provider can revenue share with i-Tunes and with the Stars Network. Some folk will choose a high minimum per month plan that includes unlimited HBO but others will choose to only occasionally pay to watch a certain HBO series or special.

Pay per view has been around for ages but it has been very limited and relatively expensive. High price has been a function of limited supply. AT&T advertises the availability of 8,500 movies, not as many as available through NetFlix but they are catching up quickly. The new system will bring new revenues to countless older films, TV shows and books. The new system will dramatically reduce delivery costs. Hand delivered newspapers and DVD's will go the way of the horse and buggy; rather quickly when the momentum gathers.

Please understand that the current deflation is not a sign of another Great Depression, but rather a sign of great productivity gains. In a few years, we will include stories of the mail man when we tell our children of the days of the Pony Express. We will wonder why it took so long to do away with newsprint, postage stamps, DVD's and trips to the rental and book stores and the libraries. The savings of trees, copper, glue and gasoline will be just part of the total savings. The number of garbage trucks needed is going to decline substantially. The foolishness of spending time to separate cans from newsprint will be more obvious and these wasteful programs will cease.

The directions the majority of Americans and Obama want to go are generally the wrong directions, but most of Obama's programs are in relative terms the size of a gnat on the backside of an elephant. Obama plans to spend $150 Billion to develop alternative energy. The money being spent by industry to provide new high speed mobile connections to cloud computers is many times $150 Billion and both the earnings of the industry and the savings of the public will be 100's of times larger than $150 Billion. Most of Obama's $150 Billion will be wasted, while nuclear power plants are built around the world. No matter how much money Obama pays researchers to grow elephant grass, the stuff is not likely to be relatively productive for many years. Together, India and China will spend more than $150 Billion on nuclear power while Obama "invests" primarily in other alternatives. The difference is that we are 99.9% certain that India and China will produce large amounts of low cost electricity while most of Obama's money will go to inefficient systems.

The probability that Mobile-Phone-TV service will be available to you in a year or two is much higher than the probability that congress will go along with Obama's spending plans. With billions of barrels of oil new oil coming online and the price of gasoline falling rapidly, does it really make sense to spend billions to build windmills that will sit idle 75 to 85% of the time? The math has changed dramatically over the past several months but Obama's rhetoric has not changed.

This coming February, the old analog TV bands will be taken over by AT&T, Verizon and others. The availability of high speed wireless broadband is going to soar. The relative cost of broadband service is shrinking. A new age is is upon us.

My words are not written to diminish the current economic "crisis". Banks are still paying stiff premiums for 6 month CD money but the premiums are coming down rapidly. The incredible influx of reserves from the FOMC is having the desired effect. The market inflation forecast is likely to jump when consumers start spending their gasoline savings elsewhere. Many will buy a $200 computer-tv-phone.