Saturday, August 28, 2010

The technology sector as a major driver of deflation:
Most high-tech companies have a business model that incorporates a sort of 'bizarro force' that is completely the opposite of what old-economy companies operate under : The price of the products sold by a high-tech company decreases over time. Any other company will manage inventory, pricing, and forecasts under an assumption of inflationary price increases, but a technology company exists under the reality that all inventory depreciates very quickly (at over 10% per quarter in many cases), and that price drops will shrink revenues unless unit sales rise enough to offset it (and assuming that enough unit inventory was even produced). This results in the constant pressure to create new and improved products every few months just to occupy prime price points, without which revenues would plunge within just a year. Yet, high-tech companies have built hugely profitable businesses around these peculiar challenges, and at least 8 such US companies have market capitalizations over $100 Billion. 6 of those 8 are headquartered in Silicon Valley.
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