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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Ken Livingstone says publicly what many are saying privately: tomorrow belongs to John McDonnell

The Shadow Chancellor has emerged as a frontrunner should another Labour leadership election happen. 

“It would be John.” Ken Livingstone, one of Jeremy Corbyn’s most vocal allies in the media, has said publicly what many are saying privately: if something does happen to Corbyn, or should he choose to step down, place your bets on John McDonnell. Livingstone, speaking to Russia Today, said that if Corbyn were "pushed under a bus", John McDonnell, the shadow chancellor, would be the preferred candidate to replace him.

Even among the Labour leader’s allies, speculation is rife as to if the Islington North MP will lead the party into the 2020 election. Corbyn would be 71 in 2020 – the oldest candidate for Prime Minister since Clement Attlee lost the 1955 election aged 72.

While Corbyn is said to be enjoying the role at present, he still resents the intrusion of much of the press and dislikes many of the duties of the party leader. McDonnell, however, has impressed even some critics with his increasingly polished TV performances and has wowed a few sceptical donors. One big donor, who was thinking of pulling their money, confided that a one-on-one chat with the shadow chancellor had left them feeling much happier than a similar chat with Ed Miliband.

The issue of the succession is widely discussed on the left. For many, having waited decades to achieve a position of power, pinning their hopes on the health of one man would be unforgivably foolish. One historically-minded trade union official points out that Hugh Gaitskell, at 56, and John Smith, at 55, were 10 and 11 years younger than Corbyn when they died. In 1994, the right was ready and had two natural successors in the shape of Tony Blair and Gordon Brown in place. In 1963, the right was unprepared and lost the leadership to Harold Wilson, from the party's centre. "If something happens, or he just decides to call it a day, [we have to make sure] it will be '94 not '63," they observed.

While McDonnell is just two years younger than Corbyn, his closest ally in politics and a close personal friend, he is seen by some as considerably more vigorous. His increasingly frequent outings on television have seen him emerge as one of the most adept media performers from the Labour left, and he has won internal plaudits for his recent tussles with George Osborne over the tax bill.

The left’s hopes of securing a non-Corbyn candidate on the ballot have been boosted in recent weeks. The parliamentary Labour party’s successful attempt to boot Steve Rotheram off the party’s ruling NEC, while superficially a victory for the party’s Corbynsceptics, revealed that the numbers are still there for a candidate of the left to make the ballot. 30 MPs voted to keep Rotheram in place, with many MPs from the left of the party, including McDonnell, Corbyn, Diane Abbott and John Trickett, abstaining.

The ballot threshold has risen due to a little-noticed rule change, agreed over the summer, to give members of the European Parliament equal rights with members of the Westminster Parliament. However, Labour’s MEPs are more leftwing, on the whole, than the party in Westminster . In addition, party members vote on the order that Labour MEPs appear on the party list, increasing (or decreasing) their chances of being re-elected, making them more likely to be susceptible to an organised campaign to secure a place for a leftwinger on the ballot.

That makes it – in the views of many key players – incredibly likely that the necessary 51 nominations to secure a place on the ballot are well within reach for the left, particularly if by-election selections in Ogmore, where the sitting MP, is standing down to run for the Welsh Assembly, and Sheffield Brightside, where Harry Harpham has died, return candidates from the party’s left.

McDonnell’s rivals on the left of the party are believed to have fallen short for one reason or another. Clive Lewis, who many party activists believe could provide Corbynism without the historical baggage of the man himself, is unlikely to be able to secure the nominations necessary to make the ballot.

Any left candidate’s route to the ballot paper runs through the 2015 intake, who are on the whole more leftwing than their predecessors. But Lewis has alienated many of his potential allies, with his antics in the 2015 intake’s WhatsApp group a sore point for many. “He has brought too much politics into it,” complained one MP who is also on the left of the party. (The group is usually used for blowing off steam and arranging social events.)

Lisa Nandy, who is from the soft left rather than the left of the party, is widely believed to be in the running also, despite her ruling out any leadership ambitions in a recent interview with the New Statesman.However, she would represent a break from the Corbynite approach, albeit a more leftwing one than Dan Jarvis or Hilary Benn.

Local party chairs in no doubt that the shadow chancellor is profiling should another leadership election arise. One constituency chair noted to the New Statesman that: “you could tell who was going for it [last time], because they were desperate to speak [at events]”. Tom Watson, Caroline Flint, Chuka Umunna, Yvette Cooper, Andy Burnham and Liz Kendall all visited local parties across the country in preparation for their election bids in 2015.

Now, speaking to local party activists, four names are mentioned more than any other: Dan Jarvis, currently on the backbenches, but in whom the hopes – and the donations – of many who are disillusioned by the current leadership are invested, Gloria De Piero, who is touring the country as part of the party’s voter registration drive, her close ally Jon Ashworth, and John McDonnell.

Another close ally of Corbyn and McDonnell, who worked closely on the leadership election, is in no doubt that the shadow chancellor is gearing up for a run should the need arise.  “You remember when that nice Mr Watson went touring the country? Well, pay attention to John’s movements.”

As for his chances of success, McDonnell may well be even more popular among members than Corbyn himself. He is regularly at or near the top of LabourList's shadow cabinet rankings, and is frequently praised by members. Should he be able to secure the nominations to get on the ballot, an even bigger victory than that secured by Corbyn in September is not out of the question.

Stephen Bush is editor of the Staggers, the New Statesman’s political blog. He usually writes about politics.