Financial Cryptography

Negroponte's judo flip on the PC industry

Sometimes we get to watch a structural change unfold before our eyes. The Intel 64bit mistake that let AMD in was one such; the Napster story another, and now, we are seeing the endings of another. Again against Intel, the OLPC, the so-called $100 laptop, has succeeded in creating a new segment. The Economist writes:

But in one respect the XO Laptop has undoubtedly made an impact: by helping to spawn a new market for low-cost laptops. Hardly any models costing $500 or less were available when the XO burst onto the scene, but now there is a wide selection of such machines, from familiar makers such as HP and Intel, and from relative newcomers such as Asus and Pioneer Computers. By raising the very possibility of a $100 laptop, the XO presented the industry with a challenge. Wayan Vota, founder of OLPCNews.com, an independent website that follows the project, calls the XO a “harbinger of an entirely new class of computers”.

Structure matters. In the market for PCs, there is a basic difference between the desktop and the laptop. Students of economics will realise that this distinction can act to discriminate between those who want to spend more and those who want to spend less. And so it is: in computer sales, the desktops inhabit the bottom end, and personal computing for the well-heeled is dominated by laptops.

In simple terms, if you can afford a laptop, you get a laptop. If not, you get a desktop. Again in economics-speak, this discrimination captures more of the consumer surplus (your spare cash), provides improved Hayekian information to manufacturers (what you really want), and ultimately leads to better and cheaper products for all.

This had the rather odd effect that although computers kept on getting better and better, laptops were not getting cheaper, only better. Indeed, those older models which were clearly suitable once and therefore would be adequate now, and cheaper, were instead being consistently stripped from the market. By common agreement, the bottom end laptop was scrubbed out.

This apparently breaks Moore's law, which implies that the same thing should get cheaper over time. Where's the cheaper laptop? Negroponte must have asked this very question, and known that given everything else we know about the computing industry, there should have been a cheaper laptop.

As described above, we know the reason there is none, but that stability is by consensus with the consumers and makers. There is nothing wrong with actually building one, and breaking the stability. And this is what Negroponte did: build something that was possible, but the market had avoided because of price discrimination reasons.

There are strong emotions about the OLPC. No matter what you think about the design, the OS, the choices, the sales or the cute green ears, one thing is clear: Negroponte succeeded in doing a judo flip on Intel, Asus and the other manufacturers, and creating the new segment. Once he had succeeded to the extent that he could sell them, other laws of competition kicked in, and the manufacturers were forced to follow.

Although the Classmate may have stolen some of the XO’s thunder in the developing world, another low-cost laptop has been a runaway success in the developed world. The tiny Asus Eee PC, little bigger than a paperback book and weighing less than a kilogram, sold more than 300,000 units in 2007 alone. It is now available in several versions: the most basic model, with a seven-inch screen, costs $299, and a new high-end model with a nine-inch screen costs $549. HP, the world’s biggest PC-maker, entered this new market in April with the “Mini-Note”, a small laptop weighing just over a kilogram. It too will cost under $500.

All of these new machines are being aimed at consumers in the rich world, who like the idea of a computer that can be taken anywhere, as well as being sold for educational use in poor countries. The $100 laptop has been a success—just not, so far, in the way its makers intended.

In the end, the fate of the OLPC is less interesting, and discussions about whether the OLPC succeeded or not miss the point. The real point is that the segment is now created. Thanks to Nicholas Negroponte, students of business now have a new case study in market structure and price discrimination, and everyone else now has a cheap laptop.

Also apropos: Battlechips. As once-distinct markets start to overlap, chipmakers come to blows from the same edition of the Economist.

Posted by iang at June 7, 2008 06:46 AM | TrackBack