Deflation in the tech industry

Bitcoin fans, take note.

Deflation is bad.

This is not, normally, a controversial thing to say. The idea that low and stable inflation is a good thing is one of the few maxims of economics which is widely held.

Except if you like Bitcoin.

My piece last month looking at how Japan and Bitcoin are both hamstrung by their deflationary economies was meant to highlight the similarity between the two, but it also brought out a difference: whereas Japan is trying to change their economy, Bitcoin fans are trying to change economics.

By far the most common example that they cite is that of the technology sector. That's unsurprising, given people with a lot invested in Bitcoin (both figuratively and literally) tend to be pretty techie. So I'm not being unfair by pointing to Brent McCulloch's comment from last week as typical (I've cleared up the formatting a bit):

Great Article! Your arguments about deflation highlight the exact reason I never buy technology. The whole sector is deflationary!

For example, why would anyone spend their money on an iPad2 now? If they just hold onto their money a bit longer and wait for the iPad3 to come out, the same amount of money will have so much more purchasing power! Why even spend it on that iPad3 at that point, we know the iPad4 is just a year away, right? If they save their money for just 12 more months, for the iPad4, it’ll have so much more effective purchasing power.

This is why no one ever buys technology, their currency is deflating relative to technological products. Don't believe the sales figures from these tech companies, it's all smoke and mirrors I tell you! Smoke and mirrors!

Biting sarcasm.

But the thing is, deflation – or a phenomenon like it – is actually pretty evident in Apple's sales figures. This chart, via Benedict Evans, shows the cyclicality in Apple's sales:

What you're seeing is the company making an ever greater proportion of its sales in the fourth quarter. Not only is that the quarter where the most products are released (the iPad 4 was released in Q4 2012, iPhone 5 one quarter earlier but suffered crippling supply problems until Q4 2012), it's also the one where sales can't be delayed any further. No matter how sure you are that Apple's going to bring out an iPad 5 soon, if you need to buy your dad a present for Christmas, you need to buy it by Christmas.

In other words, the effect of deflation in the market for Apple's products is to bunch all of the sales into the quarter when new products are released and time-sensitive purchases are made.

But there's an even better example of deflation to pick on in the IT industry. In fact, it's one of the most famous business case studies of all time.

In 1981, the Osborne Computer Corporation launched the Osborne 1. It was, by all accounts, a great piece of kit for the time: 64k of RAM, a 5-inch screen and two whole floppy-disk drives, all for just $1,795. What's more, it came packaged in with a collection of software worth almost as much as the entire computer. Sales were fantastic: the company grew from two employees to 3,000 in just a year, and made revenue of $73m.

Then, in early 1983, the "Osborne Executive" was announced. With a 7-inch screen, almost twice the RAM, and even more bundled software, the Osborne 1 was clearly obsolete overnight, and orders fell through the floor. Despite price cuts, unsold inventory piled up, and, by 1983, Osborne declared bankruptcy. The Osborne Executive was never delivered.

That story has come to be known as the Osborne Effect, illustrating to business leaders worldwide the perils of pre-announcing replacements to their own products. But it's also a very literal demonstration of the effects of deflation.

What Osborne announced was a rapid deflation in the cost of an Osborne computer. "Soon," customers were told, "you will be able to get vastly more computer for your money." And customers responded in the only sensible way: they stopped buying Osborne 1s. Starved of cash-flow, the company couldn't even live long enough to release the product which they had touted, and so everyone was worse off.

Deflation does hit the tech sector. Apple may not be going bankrupt as people wait til the iPad 5, but it's losing more and more sales in the early quarters of each year; and other companies have suffered exactly that fate. Bitcoin fans, take note: your favourite counterexample is my favourite example.

Photograph: Getty Images

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

Photo: Getty
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The rise of the green mayor – Sadiq Khan and the politics of clean energy

At an event at Tate Modern, Sadiq Khan pledged to clean up London's act.

On Thursday night, deep in the bowls of Tate Modern’s turbine hall, London Mayor Sadiq Khan renewed his promise to make the capital a world leader in clean energy and air. Yet his focus was as much on people as power plants – in particular, the need for local authorities to lead where central governments will not.

Khan was there to introduce the screening of a new documentary, From the Ashes, about the demise of the American coal industry. As he noted, Britain continues to battle against the legacy of fossil fuels: “In London today we burn very little coal but we are facing new air pollution challenges brought about for different reasons." 

At a time when the world's leaders are struggling to keep international agreements on climate change afloat, what can mayors do? Khan has pledged to buy only hybrid and zero-emissions buses from next year, and is working towards London becoming a zero carbon city.

Khan has, of course, also gained heroic status for being a bête noire of climate-change-denier-in-chief Donald Trump. On the US president's withdrawal from the Paris Agreement, Khan quipped: “If only he had withdrawn from Twitter.” He had more favourable things to say about the former mayor of New York and climate change activist Michael Bloomberg, who Khan said hailed from “the second greatest city in the world.”

Yet behind his humour was a serious point. Local authorities are having to pick up where both countries' central governments are leaving a void – in improving our air and supporting renewable technology and jobs. Most concerning of all, perhaps, is the way that interest groups representing business are slashing away at the regulations which protect public health, and claiming it as a virtue.

In the UK, documents leaked to Greenpeace’s energy desk show that a government-backed initiative considered proposals for reducing EU rules on fire-safety on the very day of the Grenfell Tower fire. The director of this Red Tape Initiative, Nick Tyrone, told the Guardian that these proposals were rejected. Yet government attempts to water down other EU regulations, such as the energy efficiency directive, still stand.

In America, this blame-game is even more highly charged. Republicans have sworn to replace what they describe as Obama’s “war on coal” with a war on regulation. “I am taking historic steps to lift the restrictions on American energy, to reverse government intrusion, and to cancel job-killing regulations,” Trump announced in March. While he has vowed “to promote clean air and clear water,” he has almost simultaneously signed an order to unravel the Clean Water Rule.

This rhetoric is hurting the very people it claims to protect: miners. From the Ashes shows the many ways that the industry harms wider public health, from water contamination, to air pollution. It also makes a strong case that the American coal industry is in terminal decline, regardless of possibile interventions from government or carbon capture.

Charities like Bloomberg can only do so much to pick up the pieces. The foundation, which helped fund the film, now not only helps support job training programs in coal communities after the Trump administration pulled their funding, but in recent weeks it also promised $15m to UN efforts to tackle climate change – again to help cover Trump's withdrawal from Paris Agreement. “I'm a bit worried about how many cards we're going to have to keep adding to the end of the film”, joked Antha Williams, a Bloomberg representative at the screening, with gallows humour.

Hope also lies with local governments and mayors. The publication of the mayor’s own environment strategy is coming “soon”. Speaking in panel discussion after the film, his deputy mayor for environment and energy, Shirley Rodrigues, described the move to a cleaner future as "an inevitable transition".

Confronting the troubled legacies of our fossil fuel past will not be easy. "We have our own experiences here of our coal mining communities being devastated by the closure of their mines," said Khan. But clean air begins with clean politics; maintaining old ways at the price of health is not one any government must pay. 

'From The Ashes' will premiere on National Geograhpic in the United Kingdom at 9pm on Tuesday, June 27th.

India Bourke is an environment writer and editorial assistant at the New Statesman.

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