Sunday, September 30, 2012

Race to the Bottom

Recovered from 9/7/2008... thanks, Wayback Machine!

I'm preparing to give an important presentation to a major financial institution from my home office. I start the demonstration VMWare images, bring up the Powerpoint, sign into WebEx, and call into the conference bridge. I'm using a 1 year old 2.4GHz Uniden cordless phone connected to my Vonage ATA, and the base is maybe four feet away on a bookshelf. A slight hum starts coming out of the phone as the prospect and salesweasel sign into the conference call. We natter on a bit, run through the slides, and the background hum grows. Every time I speak, it modulates into a distant howl behind my words. I try changing channels, I run around the house looking for sources of 2.4 GHz noise I can unplug, but nothing works. Eventually I give up and switch to my Blackberry phone. Yes, a cell phone connection to a tower nearly a mile away is more reliable than a cordless phone connection to a base station four feet away. Should I buy a wired phone instead? If such a beast is still available, it will be hard to find and may not include the crucial mute button. Maybe I should buy a new cordless phone? That depends on whether it would actually solve the problem.... This essay is about why it won't.

Why is that? My first cordless phone was a 900 MHz Sony that chugged along through several battery replacements and finally died last year. I paid about $80 for it in the late 1990's, and I paid about $70 for this unreliable Uniden. My wife uses a five year old 900 MHz Uniden cordless on the landline, which works fine -- except that its range is terrible. My colleague in Portland, OR reports the same buzzing and clicking problems with his 1 year old Panasonic cordless; my mother-in-law has the same problem with a six-month old high-end multiline Sony, and my neighbors have issues with their two year old $30 VTech. Looking at the Internet, I see people complaining about range, battery life, and sound quality across all phone models and designs; no one is really happy with the quality, regardless of what they paid. People have brand new cordless phones interfering with wireless Ethernet systems, alarm systems, and their DSL. The early generation cordless phones are aging out of usefulness, and the new ones, to put it bluntly, suck. The basic functionality grew better and better from 1990 to 2000, and then it stopped improving. Why can't you buy a decent cordless phone any more?

The answer lies in a negative feature of insufficiently restrained capitalistic markets: the inevitable race to the bottom. Free markets allowing free information interchange will drive prices down. This is a factor that is obviously true throughout the consumer electronics and computer industries. However, the phenomenon usually has brakes which prevent it from speeding past a certain floor of quality. You'll have to look hard to buy really lousy fruit and vegetables, because supermarkets know that the end-customers will not buy them. Information is exchanged, and the final customers' goals are considered by the supermarket, the distributor, and the farmer. By contrast, information interchange is not free in commoditized consumer electronics markets because the consumers are unable to directly influence the construction of complex products like cordless phones. In fact, from a free-market perspective you could argue that the consumer isn't even the customer at all.

To illustrate, let's look at buying furniture... you can choose to buy a particle-board bookcase for $25 from Target, or a higher-quality $50 particle board and wire shelving unit from Ikea. You could buy an unfinished pine shelf for $100 from Fenton MacLaren, or a $2000 cherrywood shelf from the same shop. Your dollars directly influence the value of the purchase: material quality is obvious, construction quality is obvious, and you get more or less what you pay for. Within the furniture marketplace, the customer's buying decisions can directly influence product quality because the construction materials are obvious to all concerned and technique is clear to anyone who wants to learn it. Furthermore, the entry cost to the marketplace is relatively low, leading to a wide availability of DIY and customized solutions. If a poor student can't even afford Target or Ikea, they can always use discarded lumber and cinderblocks or abandoned milkcrates draped with nice cloth to produce a bookcase. On the other end of the spectrum, a millionaire desiring built-in bookshelves made of inlaid exotic woods and diamond with a built-in computerized library catalog system can certainly have such a thing made by seeking out a craftsman and a programmer; it's just a matter of cost.

In bookshelves, the race to the bottom produces cheap, simple bookshelves that nearly anyone can afford to buy, but it does not preclude the availability of high-quality bookshelves for the discerning customer. This is free market capitalism working more or less as it should -- the lowest price is determined by exterior boundaries such as transportation cost, shelf-rental in a store, and government regulations protecting the safety of particle board workers. Within these constraints, the customer seeking a low price is served by bookshelf producers struggling to find cheaper, more attractive ways to build and sell a bookshelf, while the customer seeking quality is still able to purchase good furniture. Unfortunately, the same race to the bottom fails in the consumer electronics space, leading to a situation in which it is practically impossible to buy quality goods for any amount of money.

To understand why, we need to look at the construction process for a consumer electronics item. To build a product such as a cordless phone, there are many parties and many products involved. The final product is produced by a company which buys circuit boards, plastic cases, and packing material from other companies: the circuit boards are assembled by companies that buy signal processors, radio transmitters and recievers, capacitors, resistors, and assorted other components from other companies. Those companies in turn buy designs, patents and licenses to produce these components from other companies. In other words, there are marketplaces within marketplaces... marketplaces in which a handful of consumer electronics marketers purchase special-purpose materials to specification from a handful of specialized producers. The consumer seeking a quality cordless phone has no direct influence on these decisions; I have no idea what brand of radio, battery, or signal processor my lousy phone uses, nor do I know these things about the good phones I've had in the past. To find out, I'd need to take them apart and do some significant research, and to have a good reason for doing so, I would need to be able to find out what materials are used to build the phones which are currently available for sale. I don't have any leverage over the quality of the phone: in the handy British parlance, I am just a punter.

By the time that the final product has been put on a shelf or website for the end-customer to get it, all the quality-influencing decisions have already been made in other marketplaces. These marketplaces are insulated from direct contact with end-user customers, and so they operate without the end-user's input. The customer is the company which wishes to sell millions of cordless phones, not the individual who wishes to use one or two. The result is that the customer in this marketplace has no interest in quality whatsoever, so long as the quality/price is not bad enough to justify end-users returning the phone within the post-purchase grace period. Rather, the customer is seeking the cheapest way to meet the bare minimum of functional requirements. Money not spent on the basic functionality is money that can be spent on a more stylish case or a new feature unrelated to the basic functionality. So, one can go to the store right now and buy cordless phones with translucent cases revealing colored LEDs, multiple base stations, built-in answering machines, or even an artificial voice to read off Caller ID data to you. What you can't buy is a phone with better basic quality, because the phone producers have no reason to build one.

The basic functionality of a piece of consumer electronics gear is measured against an acceptable quality threshold rather than an optimal quality threshold, because the quality is just as complex as its construction. A rotten banana or a bad bookshelf are obvious when they fail the acceptable quality threshold. No one will buy a stinking, soft piece of fruit. A bookshelf that breaks during construction will get returned promptly. Similarly, a cordless phone that doesn't even pretend to work or bursts into flame when it's plugged in fails the acceptable quality threshold. Ideally, the average capitalism customer rarely meets a product below this acceptable quality threshold because the producer of goods is going to have significantly poorer sales as a direct result of crossing that line.

By contrast, the producer of goods does not necessarily have a lot of reasons or even ability to go above acceptable quality towards optimal quality, unless the end-user has reasonable access to alernatives that do so. For instance, here in Berkeley the produce is pretty good. You can certainly find inexpensive, waxy fruit and vegetables at a Safeway or Albertson's, but you can also find very good fresh stuff at Andronico's or the Berkeley Bowl for a bit more money. Additionally, extremely high quality can be bought for a fairly high price at two weekly Farmer's Markets, or unpredictable quality can always be bought cheaply at Trader Joe's. Within this marketplace, there are a wide range of choices between acceptable quality and optimal quality, so that I as punter can choose the best quality that my wallet will handle. I would not have the same choice in, say, an Alaskan fishing village, because all my quality choices would be made for me by the distributor who selected material and brought it to the company store. If I don't like their choices, too bad, because I don't have any others. This is exactly the type of relationship that we as consumers have with the consumer electronics makers, because we do not have the ability to recognize gradations in quality between acceptable and optimal. The phone is a sealed unit and does not reveal its quality in the same way that a piece of fruit or a nice bookshelf would do; only using the phone day in and day out will tell you whether it's a good one or not. Furthermore, the phone is not the object of attention, so as long as it is performing above the acceptable threshold, its bad quality may even go unnoticed for a time. Then once it is noticed, perhaps even enough to be galling, what can you do? A cordless phone that doesn't work very well but still works as well as its competitors is going to stay in the customer's home. The poor punter may return one or two models, but once they realize that the basic functionality isn't going to improve, they will have to give up. It's either select the best of the bad choices, or don't buy a cordless phone.

Those who remember Econ 101 will recognize this situation as collusion to limit the market, but I should point out that it's a natural collusion rather than any sort of evil attempt to bilk the consumer. No one wants to know how their phone is constructed, really, any more than most people want to know the construction details of a bookshelf. However, should one want to know how to build a bookshelf, it wouldn't be too tough. One can simply go to the library, check out a book, buy some lumber and tools, and get to work. DIY bookshelves have a relatively lower entry barrier, and a person who enjoys the work even has an opportunity to hang out a shingle as a custom bookshelf craftsman. I do not know of anyone with the skills or material to become a garage cordless phone producer, though, even at the level of selecting, buying and integrating pre-built circuit boards (which would hardly solve the optimal quality problem). Because individuals cannot easily break into this marketplace, the gap between acceptable quality and optimal quality never gets filled.

In fact, can it even get filled at all? After all, one of the basic tenets of the consumer electronics world is that all of this stuff would be ridiculously expensive to produce in low numbers... maybe once the quality of basic functionality has been driven low enough, it is actually impossible to affordably produce high quality any more at all.

There is a ray of light though, which is the highly-trained individual's ability to produce a new product. While breaking into a commodity functionality market like cordless phones at a realistic price point is largely hopeless, the garage tinkerer is doing very well in branches of consuler electronics that attract DIY hobbyists. Audiophile stereo gear, computerized home entertainment convergence systems, and the recent case-modding community are a healthy sign of growth at the edges of consumer electronics. I'd like to hear of any one building a quality phone, too.

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