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
Show Hide image

After Richmond Park, Labour MPs are haunted by a familiar ghost

Labour MPs in big cities fear the Liberal Democrats, while in the north, they fear Ukip. 

The Liberal Democrats’ victory in Richmond Park has Conservatives nervous, and rightly so. Not only did Sarah Olney take the votes of soft Conservatives who backed a Remain vote on 23 June, she also benefited from tactical voting from Labour voters.

Although Richmond Park is the fifth most pro-Remain constituency won by a Conservative at the 2015 election, the more significant number – for the Liberal Democrats at least – is 15: that’s the number of Tory-held seats they could win if they reduced the Labour vote by the same amount they managed in Richmond Park.

The Tories have two Brexit headaches, electorally speaking. The first is the direct loss of voters who backed David Cameron in 2015 and a Remain vote in 2016 to the Liberal Democrats. The second is that Brexit appears to have made Liberal Democrat candidates palatable to Labour voters who backed the party as the anti-Conservative option in seats where Labour is generally weak from 1992 to 2010, but stayed at home or voted Labour in 2015.

Although local council by-elections are not as dramatic as parliamentary ones, they offer clues as to how national elections may play out, and it’s worth noting that Richmond Park wasn’t the only place where the Liberal Democrats saw a dramatic surge in the party’s fortunes. They also made a dramatic gain in Chichester, which voted to leave.

(That’s the other factor to remember in the “Leave/Remain” divide. In Liberal-Conservative battlegrounds where the majority of voters opted to leave, the third-placed Labour and Green vote tends to be heavily pro-Remain.)

But it’s not just Conservatives with the Liberal Democrats in second who have cause to be nervous.  Labour MPs outside of England's big cities have long been nervous that Ukip will do to them what the SNP did to their Scottish colleagues in 2015. That Ukip is now in second place in many seats that Labour once considered safe only adds to the sense of unease.

In a lot of seats, the closeness of Ukip is overstated. As one MP, who has the Conservatives in second place observed, “All that’s happened is you used to have five or six no-hopers, and all of that vote has gone to Ukip, so colleagues are nervous”. That’s true, to an extent. But it’s worth noting that the same thing could be said for the Liberal Democrats in Conservative seats in 1992. All they had done was to coagulate most of the “anyone but the Conservative” vote under their banner. In 1997, they took Conservative votes – and with it, picked up 28 formerly Tory seats.

Also nervous are the party’s London MPs, albeit for different reasons. They fear that Remain voters will desert them for the Liberal Democrats. (It’s worth noting that Catherine West, who sits for the most pro-Remain seat in the country, has already told constituents that she will vote against Article 50, as has David Lammy, another North London MP.)

A particular cause for alarm is that most of the party’s high command – Jeremy Corbyn, Emily Thornberry, Diane Abbott, and Keir Starmer – all sit for seats that were heavily pro-Remain. Thornberry, in particular, has the particularly dangerous combination of a seat that voted Remain in June but has flirted with the Liberal Democrats in the past, with the shadow foreign secretary finishing just 484 votes ahead of Bridget Fox, the Liberal Democrat candidate, in 2005.

Are they right to be worried? That the referendum allowed the Liberal Democrats to reconfigure the politics of Richmond Park adds credence to a YouGov poll that showed a pro-Brexit Labour party finishing third behind a pro-second referendum Liberal Democrat party, should Labour go into the next election backing Brexit and the Liberal Democrats opt to oppose it.

The difficulty for Labour is the calculation for the Liberal Democrats is easy. They are an unabashedly pro-European party, from their activists to their MPs, and the 22 per cent of voters who back a referendum re-run are a significantly larger group than the eight per cent of the vote that Nick Clegg’s Liberal Democrats got in 2015.

The calculus is more fraught for Labour. In terms of the straight Conservative battle, their best hope is to put the referendum question to bed and focus on issues which don’t divide their coalition in two, as immigration does. But for separate reasons, neither Ukip nor the Liberal Democrats will be keen to let them.

At every point, the referendum question poses difficulties for Labour. Even when neither Ukip nor the Liberal Democrats take seats from them directly, they can hurt them badly, allowing the Conservatives to come through the middle.

The big problem is that the stance that makes sense in terms of maintaining party unity is to try to run on a ticket of moving past the referendum and focussing on the party’s core issues of social justice, better public services and redistribution.

But the trouble with that approach is that it’s alarmingly similar to the one favoured by Kezia Dugdale and Scottish Labour in 2016, who tried to make the election about public services, not the constitution. They came third, behind a Conservative party that ran on an explicitly pro-Union platform. The possibility of an English sequel should not be ruled out.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.