Guest Post: Why The Innovation Premium Is Diminishing

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Why The Innovation Premium Is Diminishing  

The acceleration of competition as high-tech tools and skills have dispersed throughout the global economy is an under-appreciated trend.

In the late 1980s, Apple famously reaped $1,000 in gross profit on each Macintosh computer sold: Apple was able to charge a very high premium for the innovations the Mac embodied. (Note: this was back when $1,000 was a substantial sum; that is over $2,000 in 2012 dollars.)

This ability to reap a substantial premium for innovation is fundamentally what drives the technology marketplace: since competition arises in any high-profit space, the premium for innovation degrades as competitors enter the space.

In the good old days, it took years for serious competition to arise. As the bumper sticker crowed, "Windows 95 = Mac 1985." (As I worked with both Mac 1985 and the crash-prone Windows 95, I would say Win95 was still substantially behind the Mac in stability.)

The acceleration of competition as high-tech tools and skills have dispersed throughout the global economy is an under-appreciated trend. Apple has earned billions of dollars in profits over the decades as its innovations enabled the company to charge a high premium in the marketplace. Since Apple leapfrogged the competition, this premium could be levied not just on "early adapters" of the new technology but the mass consumers who came after.

The iPod, iPhone and iPad have all followed a trajectory of constant innovation that enabled Apple to continue reaping still-hefty premiums, even years after the initial launch of the product line.

This chart depicts the dynamic. The red line is product price: it declines over time as the innovator company lowers price to maintain sales as competition arises.

The blue line represents the previous era of innovation/competition, where competitors arose slowly, and competing products reached parity of features late in the game. This enabled the innovator to continue to reap a slowly diminishing premium for years, as long as the product line was refreshed often enough to stay ahead of competitors.

The green line represents the New Era of widely dispersed global technology: competitors enter high-profit spaces quickly and reach features parity much sooner than in the previous era. Once competitors reach features parity, the innovator's premium vanishes or quickly trends toward zero.

The latest iPad models (9.7-inch screen) sell for between $500 and $700, and the iPad Mini (7.9-inch screen) sells for around $300. The Samsung Galaxy sells for about $200 (with a a 7-inch screen). Meanwhile, in China, full-function tablets sell for $50 ("Hardware is dead").

Are the $50 ($35 in bulk) tablets as good as a Galaxy or iPad? Undoubtedly they are lacking in features or qualities, but the point is that for those who cannot afford the features or qualities of a $500 tablet or $200 phone, they are "good enough."

I expect this trend of accelerating degradation of the innovation premium to continue on its current vector. The initial product cycle during which which innovators can charge a high premium will shrink, and competitors will reach features parity much faster. The profit margins of the innovating company will degrade more quickly as a result, and price will decline at a steeper rate as well.

Put another way, the price and features offered by the innovator and its competitors will converge much faster than in previous eras.

From one point of view, the recent weakness in Apple shares may reflect this trend: Apple's ability to charge a high premium is degrading faster than many expected.

This is not to say Apple's premium will vanish; as everyone knows, the Apple premium is based not on hardware features so much as the integration of intuitively easy-to-use software and hardware in a pleasing, stylish form-factor.

That said, the Android software suite is spreading fast in the open-source model; the innovative integrations of software and hardware that may emerge from this vast petri dish are unpredictable.

Looking ahead, we can speculate what this new era will mean for all technology sectors. If this trend holds, then profits within the entire space will slide as the premium slips ever-faster toward near-zero, i.e. every device and software become commoditized.

This slide in total product-cycle profits may inhibit innovation as the pay-off dwindles. This trend may also spark greater efforts to erect moats around innovations, for example, more lawsuits against global corporate competitors and louder demands for the U.S. and other advanced nations to limit the importation of knock-off products based on pirated/stolen designs and software.

Many observers are of the view that intellectual property rights are impediments, and their weakening is a good thing. But that ignores the motive for innovation: will everyone have to be a Linus Torvalds and innovate in the open-source space?

Hardware innovations often require substantial investments of capital. Will those with capital invest in innovations if the premium degrades too quickly to earn a high return? Or have we become greedy, and a lower total return on innovation is an outcome that we should welcome as both inevitable and positive?

"Faster, better, cheaper" eventually wins-- but that should not be a justification for theft. Competition should be based on innovation, not on piracy and theft. If someone doesn't like the premium being charged for someone else's innovation, then they can create their own innovation that fills the moat with a lower-cost alternative. That is the sustainable path of "faster, better, cheaper."

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0z's picture

This is Voodoo Economics.

Read "Human Action" again.

Zer0head's picture

I am certain this means nothing


The median sale price jumped nearly 20 percent ($323,000)from a year ago in Southern California

CPL's picture

Do they come with plumbing?

trav777's picture

ignore this article.  "They" will just invent whatever we need when we want it

CH1's picture

This is Voodoo Economics.

No, it is a very common process: The commodification of a new adaptation.

At first, the thing can only be done by a few and is only done by a few: they make a lot of money. After a while, others get in on the deal.

Thus, steel production goes from an innovation to a (more or less) commodity, as do laundry methods, soft drinks, and most everything else. That's why the promoters have to sucker people into buying their brands - because Miller, Bud, Coors, etc. all make their beers in 98% the same ways.

Ident 7777 economy's picture

At last, a man who understands the development, engineering and production process.

TheGardener's picture

Oz, yes I fully agree with you.

Voodoo Economics , 7th edition...

"the iPod, iPhone and iPad have all followed a trajectory of constant innovation"

What about the 15 years in between being an obscure fetish brand for the "creative" paid for by newly wealthy parents
and the Spoiled Apple raising from the ashes like a new sun?

Bold trajectory , as bold as history writing.

First and last mover advantage, the latest share moving vogue...running full circle with underclass participation

FL_Conservative's picture

Fundamental law of financial returns provides that sustainability can be achieved with (a) high unit volumes and low gross margins or (b) low unit volumes and high gross margins.  If one finds themselves in an environment with high volumes and high gross margins, it's an anomaly that won't sustain itself (think real estate or any typical asset bubble) and you should plan accordingly.  If one finds themselves in a low margin, low volume environment....put your head between your knees and kiss your ass goodbye.

pepperspray's picture

Death Star: git er dun

LawsofPhysics's picture

Simply put, innovation requires tremendous captial and resources.  If you squander that capital and resources through massive corruption, fraud, and the failure to allow real consequences for bad behavior then you are fucked eventually.

As far as I can tell, the capital and resource mis-allocation and mal-investment will continue until the supply lines finally break and WWIII starts in earnest.

Some things never change, hedge accordingly.

DCFusor's picture

Bullshit.  Innovation only requires ideas that are made real.  The only thing that requires tons of resources is hitting the ground running, with enough dough to hire enough lawyers to protect you from predatory lawsuits by the big companies who accuse you of stealing some idea they didn't invent either.

Even Apple " lords of innovation" haven't quite yet caught up to a post WWII comic writer - The Dick Tracy series.  Big whoop.  So they sue over things like rounded corners, or whether something bounces at the end of a scroll - yeah, that's world beating innovation.

What's actually been happening in the biz is M&A to buy customer lists - fighting over the pie rather than trying to increase its size, and lawsuits designed only to hold any sucessful competition back.

I know - because I'm one of the few self-made profitable inventors.  Our "skonk works" made millions for us, and more than that for the customers we developed innovative product for.  But we quit the biz due to legal threats.  You can't do squat without stepping on someone's idea of IP these days.  Even MS has patented the number 7, and the use of XOR to exchange variables - you can't patent math according to law, but you can if you're a big company.  IBM has a patent on entertaining your cat via use of a laser pointer.

It takes years and tens of millions to defend against/break such patents.  And that is the ONLY reason it takes major resources to "innovate", though I see very little true innovation these days.

My site from back in the heyday:

I frigging know whereof I speak.


LawsofPhysics's picture

So "ideas are made real" without any energy or raw materials input?!?!?

You are beyond stupid.  

Lost My Shorts's picture

Does IBM really have a patent on entertaining cats with a laser pointer?  That is too funny -- what is the patent number?

I totally agree with you -- IP is just a way that large corporations and trolls hold back innovation for their own benefit.

CH1's picture

innovation requires tremendous captial and resources.

Bullshit. Resources are secondary, at best. 

LawsofPhysics's picture

LMFAO!!!  Riiiiggggghhht, all these gadgets, drugs, robots and fusion reactors develop, build, and sell themselve without ANY energy or resource input at all.


Fucking halarious, must be my lying eyes then.

TruthInSunshine's picture

Cold fusion, dude. Look it up.


/obvious sarc

LawsofPhysics's picture

Thanks Truth.  Yeah, that shit just innovates and builds itself with no resource or energy input at all.  Remind us, how many cities are getting electricity from those reactors again?  People never bullshit on the internet or in writing, if it is written it is the truth.

< sarc off >

Flakmeister's picture

On the subject of cold fusion:

The end of the E-Cat story? Andrea Rossi loses supporters for his "cold fusion" device

Mr Passerini's blog, titled "22 steps of love" has been the main focus of support for the E-Cat in Italy up to now. He says in his last post, titled "ad maiora" that "Some time ago, I wrote that, after that two years would have passed from the date of January 14 2011, I would quit in any case in the absence of official and certain announcements on the reality of the E-Cat." Passerini states that he will be waiting patiently and "will return when the news that we have been waiting for during the past two years will arrive"

The closing of Mr. Passerini's blog comes after that, in November of last year, another of Mr. Rossi's supporters, Mr. Paul Story of "eCatNews" declared that he would close his blog because, "with scant hope of Rossi delivering on his promises, I find myself wondering why I would waste any more time on him. If he is committing fraud, he should be pursued by the police. Interest in the man or the subject is now relegated to the level of curiosity, not dedication."

Earlier on, in April 2012, Mr. Sterling Allen of the blog PESN (Pure Energy Systems) had been appalled at Rossi's behavior and had stated, "I apologize to anyone that I've encouraged to try and do business with Andrea Rossi, and I retract my endorsement" even though he later continued to cover announcements about the E-Cat.

FeralSerf's picture

"On the subject of cold fusion:" from NASA's viewpoint

"The theory indicates energy densities, some several million times chemical. The current experiments are in the 10's to hundreds range. However, several labs have blown up studying LENR and windows have melted, indicating when the conditions are "right" prodigious amounts of energy can be produced and released. There are some six or so groups claiming device outputs in the 100 watt range and three others claiming kilowatts. Efforts are ongoing within NASA and other organizations to validate (or not) these claims. It should be noted that these devices are essentially "Edisonian," the result of attempts at experimental "discovery" vice ab initio design from the weak interaction theories per se.

Therefore, the LENR situation and outlook is the following:
Something real is happening.
The weak interaction theories suggest what the physics might be.
There are efforts ongoing to explore the validity of the theories.
There are continuing Edisonian efforts to produce "devices" mainly for heat or in some cases transmutations.
There are efforts to "certify" such devices.
NASA LaRC has begun LENR design studies guided by the Weak Interaction Theory


There are estimates using just the performance of some of the devices under study that 1% of the nickel mined on the planet each year could produce the world's energy requirements at the order of 25% the cost of coal."

Flakmeister's picture

Could you come up with substantiated claims for any of what is in the article? I couldn't...

Here is the preprint for the Widom-Larsen Weak Interaction LENR Theory

I failed to notice any citations, i.e. nobody references it, it other words, it is crap...

I did find some commentary on the theory

The Widom Larsen theory claims that the process going on in the cold fusion systems is that protons are absorbing electrons on the surface of the metal, where there is an inhomogenous electric field which can be very strong, and turning into neutrons. These neutrons then catalyze a bunch of energy releasing nuclear transformations. The mechanism is through the weak force, not the nuclear force.

It is preposterous, because there is a 1MeV mass difference between the proton and neutron, which is greater than the mass energy of the electron. It would be as reasonable to say that electron-positron pairs are produced at the surface of a metal. They aren't, and they can't be.

The strong electric fields at the surface of a metal are only so strong that they produce eV level energies for accelerating charged particles from the metal to infinity. There are no further energies available to bridge the gap to 1MeV of energy, and Widom and Larson simply make up this energy, by unphysical ansatzes for the near-surface field and made up energy balance requirements that pretend that MeV's of energy magically appear in individual particles on a metal surface.

You do seem to believe in just about anything you read that will stop you from facing reality...

PS I worked on muon catalyzed fusion experiment in my youth, in other words, a real LENR...


FeralSerf's picture

"You do seem to believe in just about anything you read. . ."

I don't believe much that I read that you've wrote.

I didn't state anywhere in my post whether or not I believed it.  I do believe that NASA said it though.

Do you believe NASA went to the Moon?  Or do you believe they lie?

Flakmeister's picture

Why don;t you google Dr. Joe Zawodny, one of the NASA scientists in the famous NASA LENR video and see what he says about the current status of LENR...

So I take it that you believe in AGW since the NASA Goddard Space Center, aka Hansen and co. produces data and publishes papers showing that AGW is real?

When NASA Langely makes a public announcement that they have evidence of Lab-induced LENR I will pay attention.

FeralSerf's picture

" I take it that you believe in AGW since the NASA Goddard Space Center, aka Hansen and co. produces data and publishes papers showing that AGW is real?"

Even though I didn't state that I agree or disagree with NASA, I'm not surprised that you take it that way since your existence seems to be based on jumping to conclusions and non-sequiturs.

"When NASA Langely [sic] makes a public announcement that they have evidence of Lab-induced LENR I will pay attention."

You don't read very well.  The link, was a public announcement from NASA that they have evidence ("Something real is happening."  "several labs have blown up studying LENR and windows have melted, indicating when the conditions are "right" prodigious amounts of energy can be produced and released.")

FWIW, I'm not especially comfortable with the Widon-Larsen Weak Interaction LENR Theory.  But WTFDIK?  Time will tell.

Flakmeister's picture

Wow, you seem to have a very low hurdle for proof....

I would think someone of your purported background be a tad more skeptical of such claims..

Truly, WTFDYK...

BTW, when you fuck around with H2, things can and do go boom, even when you are careful and it doesn't have anything to with LENR...

Flakmeister's picture

Charles Ponzi relied on there being people like you out there...

FeralSerf's picture

 Joseph Goebbels relied on there being people like you out there.

Flakmeister's picture

Nope, never been a fool or an anti-semite, you got me confused with some other Hedgehogs....

FeralSerf's picture

Somehow -- I don't remember details -- I got the feeling that you don't like Palestinians much.  That would suggest you are an anti-semite.

Goebbles was, arguably, not a fool (I'm not so sure about you).  He was a master propagandist.  You might not be a master, but you are clearly a propagandist.

CH1's picture


Laugh all you like, and engage in other manipulative "arguments', but your utter obsession with resources is your own, and deviates from reality.

We all know that resources matter. Only you think they are God Almighty.

LawsofPhysics's picture

You are the one saying that resources and capital "don't matter" or are "secondary", not me.

Good fucking luck.

TheGardener's picture


What you were trying to say is : "one needs to be tremendously resourceful for innovations" or any such praise AFTER THE FACT. Capital has nothing to do with it and you probably meant LACK OF RESOURCES as a driving force of innovation.

A gave you one courteous junk , that`s what they are for.

Flakmeister's picture

As I just said in one of the 787 threads.... technology, aka complexity, has diminishing marginal returns... Moreover, the product cycle becomes hyperaccelerated making investments a momo proposition, e.g. the "golden age" of profits from the touch screen revolution is basically over, what, after 4 years?

And as an added bonus from all this is that the product reliablity is almost nil... I am willling to bet you that 60 years from now, people will have fewer baby pictures of themselves than the current babyboomers do, despite 100 times the number of pictures having been taken of them....

TideFighter's picture

Are you counting those photos taken by government camera's and stored in Utah? Surely not.

Flakmeister's picture

Don't over tighten the chin straps on the collander, you risk auto-asphyxiation....

trav777's picture

governments are highly interested in tracking people using facial recognition.

fkin casinos already do this, so do some other facilities.

are you intentionally obtuse?

Flakmeister's picture

The connection between what you wrote and what buddy wrote is tenuous at best...

Moreover, given I have a passport, I guess it is too late for me...

Cosimo de Medici's picture

Unless I miss my guess, you are telling me to keep stacking silver---well, silver halide---and keep the Rodenstock and Schneider free from dust.

And damn, that K25 has never been beat in terms of density, dynamic range and durability.  Don't need no Paul Simon to remind me!

On a completely different subject---but which touches on another recent article and a somewhat similar theme---keep the old Hinckley deck polished.

By the way, between you and DC Fusor, I am optimistic that no amount of fools or even the State of Kansas School Board, will relegate the Scientific Method to the annals of history.  It might be getting Dark in here, but at the end of the tunnel there is still a glimmer of hope and light.

Rainman's picture

Google's Driverless cars..they're coming...innovation will now attempt to overcome human stupidity and carelessness 

LawsofPhysics's picture

Yes, making humans even more inept at dealing with reality and even less employable.  This should turn out well.

Dr. Engali's picture

Isn't that the truth. Thanks to TV people can't think for themselves without being told what to think. Thanks to technology people don't know how to spell or write. They can't cook to feed themselves, they're so stupid they think meat comes from the grocery store. And now we are going to create cars that drive themselves.  We will have a world like Wall-E in the future, with a bunch of whales lying around unable to do anything for themselves. I'm pretty sure we weren't meant to live that way.

Flakmeister's picture

Technology will enable the nanny state that so many here fear....

What is really ironic is that when the reckoning from PO and AGW comes, the ones surviving will be at the fringes, the people that currently know how to eke out an existence off the land, whereas, the sophisticated Westerm middle classes will drop like flies...

trav777's picture


reckonings have come to various nations in the form of collapse and this isn't what has occurred.

Flakmeister's picture

YMMV and we do agree that this one is different....

Totentänzerlied's picture

Not that I disagree, but you imply that "employability" is correlated to ability to deal with reality. The size of the government payroll says otherwise.

John Law Lives's picture

I understand that commercial aircraft could also be equipped to be flown without human pilots.  That probably would not be too popular with the general public to take a commercial flight without humans in the cockpit, but it could be an option.

TheGardener's picture

The flying public has no idea what ride they are taken for.

But once you are a pilot ,you made friends with the winds.

Don`t ever think about your human cargo or what the gods may have in store for them, you are too close to argue.

Pilotless aircraft is like heating your home with wheat,
nature has a habit of getting rid of what defies her the most.

trav777's picture

the less human intervention in flight, the fewer the accidents.

Humans are ALWAYS the most failure-prone element in any system.

Totentänzerlied's picture

I don't think  the pilots' unions would be too happy about that... same old  story.