Moore's Law and Hard Goods
I was doing a thought experiment the other day, thus proving how BADLY I need a life, about the application of Moore's Law to hard goods. I got on this track because I spend a lot of free mental time thinking about The Long Tail, Chris Anderson's excellent book about how Moore's Law effects e-commerce. I always get the law wrong, so I looked it up. Moore's law says:
Moore's law describes a long-term trend in the history of computing hardware. Since the invention of the integrated circuit in 1958, the number of transistors that can be placed inexpensively on an integrated circuit has increased exponentially, doubling approximately every two years. Ref: WikipediaWhat does this have to do with hard goods?
Good question and, at least on the surface, nothing. The Long Tail states in a digital world, thanks to Moore's law, distribution of digital media will be pennies. Distribution costs will approach zero. On the surface it would seem like there is no applicaiton of such an idea to hard goods. Hard goods such as toys, tires and ties have handling costs. They must be shipped to a warehouse to be shipped to customers. Their cost, therefore, can never be zero and they are not impacted by Moore's law.
Or are they? I "see" the long tail in the multimillion dollar e-commerce site I manage all the time. In fact, the long tail is what I call a "repeatable fractal". I can find a long tail in every product category we sell. I see it in books, toys and DVD's. The head may be smaller in some categories, but it is always there followed by a smooth roll into a long tail. In a previous post entitled Finding The Long Tail I shared how I find our "tail" by looking for our 80 / 20 split and using a rolling total.
I started to think maybe one of the long tail's other virtues is it spreads cost out in a way that does make hard good inventory costs head toward zero. I thought it might be possible to sell every X Widget on the planet. I even riffed on why "infinite inventory" could have saved The Ford Motor Company to our owner. Here is a piece of that email:
In the digital world cost is lowered by Moore's law. In hard goods cost is lowered by the velocity of movement and the size of the tail. This is a pure B&N and Amazon play. In Amazon's case, they spin up their inventory by using every used bookshop in the country. These independent shops partner with Amazon creating "infinite inventory" without Amazon having to sell every book ever published. Amazon creates an arbitragable event - traffic - then they sell it off to their affiliates. I've often thought that we could use technology to knit brick and mortar to our sites. We provide the "buy on line pick up at the store" option and we inherit every store's inventory through our technology. This is one way to bridge the gap to infinity without it breaking our financial back. We network the costs. There are others. The common factor in every "infinite inventory" idea I can think of is technology. Technology in the form of recommendation engines and EDI bridges (us to stores and back in) allow us to apply Moore's law to hard goods inventory. We create the same benefit Amazon and B&N enjoy. B&N achieve infinite inventory in a different way than Amazon. They do the traditional thing - drop ship and partnerships.
Applying the concept of infinite inventory to our vertical will require imagination, creativity, money, new technology, new technology and new technology, but he who is the most creative makes the most money (these days). In a single dimensional world inventory has cost and makes profit. In a web world inventory lives as information BEFORE it exists as an actual physical thing. I wrote a blog post a bit ago about how Ford really isn't a car company. They happen to make cars, but they are, first and foremost, an INFORMATION company. They fail when they think that the steel they weld together is what they do. Cars, like toys, tires and ties, exist as information BEFORE they are physical things I can drive, tie or play with. Who is winning the "car" information business? Google? Cars.com? Autos.com? I don't know, but I know who is not winning….Ford. Information sites are pounding the manufacturer because they have the most valuable thing - INFORMATION. The car is always secondary to the information (today). The days when my grandfather purchased a new Lincoln Mark IV every year for sticker+ are gone. Information precedes EVERYTING else so Ford is an information company (first).
When my mind stopped seeing products as physical things and started understanding how, for most of their lives, products are not physical things. They are pieces of DATA flowing around a network. Once I saw that I understood WE could "sell" every product on the planet (in some way shape or form). The benefits of such a leap would be enormous. Since no one has Amazoned our space, we are seeing many upstart brands created and nurtured by the absence of a category killer selling infinite inventory. There is no Wal Mart organizing, accepting, denying and determining success. Our vertical is the wild west. All wild west markets WILL find a Gorilla. This is because Gorilla's (Amazon, Barnes and Noble) save everyone time. If you are a manufacturer you tailor your pitches and do what the Gorilla tells you (if you want to have a prayer of making your numbers). I think of Wal Mart as a huge traffic arbitrageur. They sell EVERYTHING. They sell their expertise. P&G and M&M et al. gladly pay for Wal Mart's expertise by LOWERING their prices. They sell their traffic. They sell their legitimacy. You tell another Gorilla, Target for example, Wal Mart is in and they ask how they can get in too.
What I know, beyond any doubt, is digital markets MUST have Gorillas. Google can not support an infinite set of web sites. Their challenge is relevancy. Their desire is to dump as many searches into the lap of the largest Gorillas in the forest. I think of Google as Darwin. When Ford doesn't come up for "new car", "Top 10 New Cars" or "Best New Car" then they are not in the car business as it is today. How could Ford sell infinite inventory? If Ford thought of itself as the Gorilla of Car Information they would create forums, social networks, recommendation engines and DATA about cars, all cars. They don't have to sell Toyota's, but if I get my Toyota information from Ford they may as well be selling Toyotas BECAUSE Toyota traffic is an arbitragable event. In fact, from what I've seen on car margins, Ford may make more money from traffic arbitrage than from selling cars (just as they used to make more money from loaning money than selling cars). If Ford = infinite information about cars instead of just information about Fords they wouldn’t be begging congress for money and their stock would be worth a lot more than $3.00 a share. Why can't Ford do this? Easy, lack of imagination and confusion about what business they are really in. If I was talking to CEO of Ford (in his jet) I would say "Alan, you are in the information business AT LEAST AS MUCH as you are in the car business."
We have the same situation. We in the information business at least as much as in the business we think we are in. And, in the information business it is possible to have, or "sell", infinite inventory.
It is possible for every web site to "sell" infinite inventory and building systems to do so will exponetially lower hard goods costs in a "Moore's law" fashion.
Related Post: Saving The Ford Motor Company