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.

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In your 30s? You missed out on £26,000 and you're not even protesting

The 1980s kids seem resigned to their fate - for now. 

Imagine you’re in your thirties, and you’re renting in a shared house, on roughly the same pay you earned five years ago. Now imagine you have a friend, also in their thirties. This friend owns their own home, gets pay rises every year and has a more generous pension to beat. In fact, they are twice as rich as you. 

When you try to talk about how worried you are about your financial situation, the friend shrugs and says: “I was in that situation too.”

Un-friend, right? But this is, in fact, reality. A study from the Institute for Fiscal Studies found that Brits in their early thirties have a median wealth of £27,000. But ten years ago, a thirty something had £53,000. In other words, that unbearable friend is just someone exactly the same as you, who is now in their forties. 

Not only do Brits born in the early 1980s have half the wealth they would have had if they were born in the 1970s, but they are the first generation to be in this position since World War II.  According to the IFS study, each cohort has got progressively richer. But then, just as the 1980s kids were reaching adulthood, a couple of things happened at once.

House prices raced ahead of wages. Employers made pensions less generous. And, at the crucial point that the 1980s kids were finding their feet in the jobs market, the recession struck. The 1980s kids didn’t manage to buy homes in time to take advantage of low mortgage rates. Instead, they are stuck paying increasing amounts of rent. 

If the wealth distribution between someone in their 30s and someone in their 40s is stark, this is only the starting point in intergenerational inequality. The IFS expects pensioners’ incomes to race ahead of workers in the coming decade. 

So why, given this unprecedented reversal in fortunes, are Brits in their early thirties not marching in the streets? Why are they not burning tyres outside the Treasury while shouting: “Give us out £26k back?” 

The obvious fact that no one is going to be protesting their granny’s good fortune aside, it seems one reason for the 1980s kids’ resignation is they are still in denial. One thirty something wrote to The Staggers that the idea of being able to buy a house had become too abstract to worry about. Instead:

“You just try and get through this month and then worry about next month, which is probably self-defeating, but I think it's quite tough to get in the mindset that you're going to put something by so maybe in 10 years you can buy a shoebox a two-hour train ride from where you actually want to be.”

Another reflected that “people keep saying ‘something will turn up’”.

The Staggers turned to our resident thirty something, Yo Zushi, for his thoughts. He agreed with the IFS analysis that the recession mattered:

"We were spoiled by an artificially inflated balloon of cheap credit and growing up was something you did… later. Then the crash came in 2007-2008, and it became something we couldn’t afford to do. 

I would have got round to becoming comfortably off, I tell myself, had I been given another ten years of amoral capitalist boom to do so. Many of those who were born in the early 1970s drifted along, took a nap and woke up in possession of a house, all mod cons and a decent-paying job. But we slightly younger Gen X-ers followed in their slipstream and somehow fell off the edge. Oh well. "

Will the inertia of the1980s kids last? Perhaps – but Zushi sees in the support for Jeremy Corbyn, a swell of feeling at last. “Our lack of access to the life we were promised in our teens has woken many of us up to why things suck. That’s a good thing. 

“And now we have Corbyn to help sort it all out. That’s not meant sarcastically – I really think he’ll do it.”