Ch5-6.pdf

Moore’s Law

Chip performance per dollar
doubles every eighteen
months.

microprocessor

The part of the computer that
executes the instructions of a
computer program.

C H A P T E R 5
Moore’s Law: Fast, Cheap
Computing and What It
Means for the Manager

1. INTRODUCTION

L E A R N I N G O B J E C T I V E S

1. Define Moore’s Law and understand the approximate rate of advancement for other technolo-
gies, including magnetic storage (disk drives) and telecommunications (fiber-optic
transmission).

2. Understand how the price elasticity associated with faster and cheaper technologies opens
new markets, creates new opportunities for firms and society, and can catalyze industry
disruption.

3. Recognize and define various terms for measuring data capacity.
4. Consider the managerial implication of faster and cheaper computing on areas such as stra-

tegic planning, inventory, and accounting.

Faster and cheaper—those two words have driven the computer industry for decades, and the rest of
the economy has been along for the ride. Today it’s tough to imagine a single industry not impacted by
more powerful, less expensive computing. Faster and cheaper puts mobile phones in the hands of peas-
ant farmers, puts a free video game in your Happy Meal, and drives the drug discovery that may very
well extend your life.

1.1 Some Definitions
This phenomenon of “faster, cheaper” computing is often referred to as Moore’s Law, after Intel
cofounder, Gordon Moore. Moore didn’t show up one day, stance wide, hands on hips, and declare
“behold my law,” but he did write a four-page paper for Electronics Magazine in which he described
how the process of chip making enabled more powerful chips to be manufactured at cheaper prices.[1]

Moore’s friend, legendary chip entrepreneur and CalTech professor Carver Mead, later coined the
“Moore’s Law” moniker. That name sounded snappy, plus as one of the founders of Intel, Moore had
enough geek cred for the name to stick. Moore’s original paper offered language only a chip designer
would love, so we’ll rely on the more popular definition: chip performance per dollar doubles every
eighteen months. (Moore’s original paper stated transistors per chip, a proxy for power, would double
every two years, but many sources today refer to the eighteen-month figure, so we’ll stick with
that—either way, we’re still talking about ridiculously accelerating power and plummeting costs.)

Moore’s Law applies to chips—broadly speaking, to processors, or the electronics stuff that’s made
out of silicon.[2] The microprocessor is the brain of a computing device. It’s the part of the computer
that executes the instructions of a computer program, allowing it to run a Web browser, word pro-
cessor, video game, or virus. For processors, Moore’s Law means that next generation chips should be
twice as fast in eighteen months, but cost the same as today’s models (or from another perspective, in a
year and a half, chips that are same speed as today’s models should be available for half the price).

random-access memory
(RAM)

The fast, chip-based volatile
storage in a computing
device.

volatile memory

Storage (such as RAM chips)
that is wiped clean when
power is cut off from a
device.

nonvolatile memory

Storage that retains data
even when powered down
(such as flash memory, hard
disk, or DVD storage).

flash memory

Nonvolatile, chip-based
storage, often used in mobile
phones, cameras, and MP3
players. Sometimes called
flash RAM, flash memory is
slower than conventional
RAM, but holds its charge
even when the power goes
out.

solid state electronics

Semiconductor-based
devices. Solid state
components often suffer
fewer failures and require less
energy than mechanical
counterparts because they
have no moving parts. RAM,
flash memory and
microprocessors are solid
state devices. Hard drives are
not.

semiconductor

A substance such as silicon
dioxide used inside most
computer chips that is
capable of enabling as well as
inhibiting the flow of
electricity. From a managerial
perspective, when someone
refers to semiconductors,
they are talking about
computer chips, and the
semiconductor industry is the
chip business.

optical fiber line

A high-speed glass or
plastic-lined networking
cable used in
telecommunications.

Random-access memory (RAM) is chip-based memory. The RAM inside your personal com-
puter is volatile memory, meaning that when the power goes out, all is lost that wasn’t saved to non-
volatile memory (i.e., a more permanent storage media like a hard disk or flash memory). Think of
RAM as temporary storage that provides fast access for executing computer programs and files. When
you “load” or “launch” a program, it usually moves from your hard drive to those RAM chips, where it
can be more quickly executed by the processor.

Cameras, MP3 players, USB drives, and mobile phones often use flash memory (sometimes
called flash RAM). It’s not as fast as the RAM used in most traditional PCs, but holds data even when
the power is off (so flash memory is also nonvolatile memory). You can think of flash memory as the
chip-based equivalent of a hard drive. In fact, flash memory prices are falling so rapidly that several
manufactures including Apple and the One Laptop per Child initiative (see the “Tech for the Poor”
sidebar later in this section) have begun offering chip-based, nonvolatile memory as an alternative to
laptop hard drives. The big advantage? Chips are solid state electronics (meaning no moving parts),
so they’re less likely to fail, and they draw less power. The solid state advantage also means that chip-
based MP3 players like the iPod nano make better jogging companions than hard drive players, which
can skip if jostled. For RAM chips and flash memory, Moore’s Law means that in eighteen months
you’ll pay the same price as today for twice as much storage.

Computer chips are sometimes also referred to as semiconductors (a substance such as silicon
dioxide used inside most computer chips that is capable of enabling as well as inhibiting the flow of
electricity). So if someone refers to the semiconductor industry, they’re talking about the chip busi-
ness.[3]

Strictly speaking, Moore’s Law does not apply to other technology components. But other comput-
ing components are also seeing their price versus performance curves skyrocket exponentially. Data
storage doubles every twelve months. Networking speed is on a tear, too. With an equipment change at
the ends of the cables, the amount of data that can be squirted over an optical fiber line can double
every nine months.[4] These numbers should be taken as rough approximations and shouldn’t be ex-
pected to be strictly precise over time. However, they are useful as rough guides regarding future com-
puting price/performance trends. Despite any fluctuation, it’s clear that the price/performance curve
for many technologies is exponential, offering astonishing improvement over time.

F I G U R E 5 . 1 Advancing Rates of Technology (Silicon, Storage, Telecom)

Source: Adopted from Shareholder Presentation by Jeff Bezos, Amazon.com, 2006.

68 INFORMATION SYSTEMS VERSION 1.3

price elasticity

The rate at which the
demand for a product or
service fluctuates with price
change. Goods and services
that are highly price elastic
(e.g., most consumer
electronics) see demand
spike as prices drop, whereas
goods and services that are
less price elastic are less
responsive to price change
(think heart surgery).

1.2 Get Out Your Crystal Ball
Faster and cheaper makes possible the once impossible. As a manager, your job will be about predicting
the future. First, consider how the economics of Moore’s Law opens new markets. When technology
gets cheap, price elasticity kicks in. Tech products are highly price elastic, meaning consumers
more products as they become cheaper.[5] And it’s not just that existing customers load up on more
tech; entire new markets open up as firms find new uses for these new chips.

Just look at the five waves of computing we’ve seen over the previous five decades.[6] In the first
wave in the 1960s, computing was limited to large, room-sized mainframe computers that only govern-
ments and big corporations could afford. Moore’s Law kicked in during the 1970s for the second wave,
and minicomputers were a hit. These were refrigerator-sized computers that were as speedy as or
speedier than the prior generation of mainframes, yet were affordable by work groups, factories, and
smaller organizations. The 1980s brought wave three in the form of PCs, and by the end of the decade
nearly every white-collar worker in America had a fast and cheap computer on their desk. In the 1990s
wave four came in the form of Internet computing—cheap servers and networks made it possible to
scatter data around the world, and with more power, personal computers displayed graphical interfaces
that replaced complex commands with easy-to-understand menus accessible by a mouse click. At the
close of the last century, the majority of the population in many developed countries had home PCs, as
did most libraries and schools.

Now we’re in wave five, where computers are so fast and so inexpensive that they have become
ubiquitous—woven into products in ways few imagined years before. Silicon is everywhere! It’s in the
throwaway radio frequency identification (RFID) tags that track your luggage at the airport. It provides
the smarts in the world’s billion-plus mobile phones. It’s the brains inside robot vacuum cleaners, next
generation Legos, and the table lamps that change color when the stock market moves up or down.
These digital shifts can rearrange entire industries. Consider that today the firm that sells more cameras
than any other is Nokia, a firm that offers increasingly sophisticated chip-based digital cameras as a
giveaway as part of its primary product, mobile phones. This shift has occurred with such sweeping im-
pact that former photography giants Pentax, Konica, and Minolta have all exited the camera business.

Ambient Devices and the Fifth Wave

Pritesh Gandhi almost never gets caught in the rain without his umbrella. That’s because Gandhi’s umbrella
regularly and wirelessly checks weather reports on its own. If the umbrella gets word it will rain in the next few
hours, the handle blinks with increasing urgency, warning its owner with a signal that seems to declare, “You
will soon require my services.” Gandhi is CEO of “fifth wave” firm Ambient Devices, a Massachusetts start-up
that’s embedding computing and communications technology into everyday devices in an attempt to make
them “smarter” and more useful (the weather-sensing umbrella was developed while he helmed the firm).

Ambient’s ability to pull off this little miracle is evidence of how quickly innovative thinkers are able to take ad-
vantage of new opportunities and pioneer new markets enabled by Moore’s Law. The firm’s first product, the
Orb, is a lamp that can be set up to change color in real time in reaction to factors such as the performance of
your stock portfolio or the intensity of the local pollen count. In just six months, the ten refugees from MIT’s
Media Lab that founded Ambient Devices took the idea for the Orb, designed the device and its software, li-
censed wireless spectrum from a pager firm that had both excess capacity and a footprint to cover over 90
percent of the United States, arranged for manufacturing, and began selling the gizmo through Brookstone
and Nieman Marcus.[7]

Ambient has since expanded the product line to several low-cost appliances designed to provide information
at a glance. These include the Ambient Umbrella, as well as useful little devices that grab and display data ran-
ging from sports scores to fluctuating energy prices (so you’ll put off running the dishwasher until evening
during a daytime price spike). The firm even partnered with LG on a refrigerator that can remind you of an up-
coming anniversary as you reach for the milk.

Products developed by “fifth wave” firm Ambient Devices include the weather-reading Ambient
Umbrella, the Energy Joule, a seven-day forecaster, and the Orb lamp.

Source: Used with permission from Ambient Devices.

CHAPTER 5 MOORE’S LAW: FAST, CHEAP COMPUTING AND WHAT IT MEANS FOR THE MANAGER 69

Moore’s Law inside Your Medicine Cabinet

Moore’s Law is about to hit your medicine cabinet. The GlowCap from Vitality, Inc., is a “smart” pill bottle that
will flash when you’re supposed to take your medicine. It will play a little tune if you’re an hour late for your
dose and will also squirt a signal to a night-light that flashes as a reminder (in case you’re out of view of the
cap). GlowCaps can also be set to call or send a text if you haven’t responded past a set period of time. And
the device will send a report to you, your doc, or whomever else you approve. The GlowCap can even alert
your pharmacy when it’s time for refills. Amazon sells the device for $99, but we know how Moore’s Law
works—it’ll soon likely be free. The business case for that? The World Health Organization estimates drug ad-
herence at just 50 percent, and analysts estimate that up to $290 billion in increased medical costs are due to
patients missing their meds. Vitality CEO David Rose (who incidentally also cofounded Ambient Devices) re-
cently cited a test in which GlowCap users reported a 98 percent medication adherence rate.[8]

The GlowCap from Vitality, Inc., will flash, beep, call, and text you if you’ve skipped your meds. It can also
send reports to you, your doctor, and your loved ones and even notify your pharmacy when it’s time for
a refill.

Source: Used with permission from Vitality, Inc.

And there might also be a chip inside the pills, too! Proteus, a Novartis-backed venture, has developed a
sensor made of food and vitamin materials that can be swallowed in medicine. The sensor is activated and
powered by the body’s digestive acids (think of your stomach as a battery). Once inside you, the chip sends
out a signal with vitals such as heart rate, body angle, temperature, sleep, and more. A waterproof skin patch
picks up the signal and can wirelessly relay the pill’s findings when the patient walks within twenty feet of their
phone. Proteus will then compile a report from the data and send it to their mobile device or e-mail account.
The gizmo’s already in clinical trials for heart disease, hypertension, and tuberculosis and for monitoring psy-
chiatric illnesses.[9] And a pill with built-in smarts can identify itself to help guard against taking counterfeit
drugs, a serious worldwide concern. Pills that chat with mobile phones could help promote telemedicine,
bringing health care to hard-to-reach rural populations. And games and social apps based on this information
can provide motivating, fun ways to nudge patients into healthy habits. The CEO of Proteus Health says that
soon you may be able to think of your body as “the ultimate game controller.”[10]

70 INFORMATION SYSTEMS VERSION 1.3

One of the most agile surfers of this fifth wave is Apple, Inc.—a firm with a product line that is now so
broad that in January 2007, it dropped the word “Computer” from its name. Apple’s breakout resur-
gence owes a great deal to the iPod. At launch, the original iPod sported a 5 GB hard drive that Steve
Jobs declared would “put 1,000 songs in your pocket.” Cost? $399. Less than six years later, Apple’s
highest-capacity iPod sold for fifty dollars less than the original, yet held forty times the songs. By that
time the firm had sold over one hundred fifty million iPods—an adoption rate faster than the original
Sony Walkman. Apple’s high-end models have morphed into Internet browsing devices capable of
showing maps, playing videos, and gulping down songs from Starbucks’ Wi-Fi while waiting in line for
a latte.

The original iPod has also become the jumping-off point for new business lines including the
iPhone, Apple TV, iPad, and iTunes. As an online store, iTunes is always open. ITunes regularly sells
tens of millions of songs on Christmas Day alone, a date when virtually all of its offline competition is
closed for the holiday. In a short five years after its introduction, iTunes has sold over 4 billion songs
and has vaulted past retail giants Wal-Mart, Best , and Target to become the number one music re-
tailer in the world. Today’s iTunes is a digital media powerhouse, selling movies, TV shows, games, and
other applications. And with podcasting, Apple’s iTunes University even lets students at participating
schools put their professors’ lectures on their gym playlist for free. Surfing the fifth wave has increased
the value of Apple stock sixteenfold six years after the iPod’s launch. Ride these waves to riches, but
miss the power and promise of Moore’s Law and you risk getting swept away in its riptide. Apple’s rise
occurred while Sony, a firm once synonymous with portable music, sat on the sidelines unwilling to get
on the surfboard. Sony’s stock stagnated, barely moving in six years. The firm has laid off thousands of
workers while ceding leadership in digital music (and video) to Apple.

T A B L E 5 . 1 Top U.S. Music Retailers

1992 2005 2006 2008

1. Musicland 1. Wal-Mart 1. Wal-Mart 1. iTunes

2. The Handleman 2. Best 2. Best 2. Wal-Mart

3. Tower Records 3. Target 3. Target 3. Best

4. Trans World Music …
7. iTunes

4. iTunes, Amazon tie 4. Amazon, Target tie

Moore’s Law restructures industries. The firms that dominated music sales when you were born are now
bankrupt, while one that had never sold a physical music CD now sells more than anyone else.

Source: Michelle Quinn and Dawn C. Chmielewski, “Top Music Seller’s Store Has No Door,” Los Angeles Times, April 4, 2008.

T A B L E 5 . 2 Tech’s Price/Performance Trends in Action: Amazon Kindle and Apple Music Storage

Amazon Kindle Apple

First Generation Fourth Generation iPod iCloud

250 MB 2 GB 5 GB 5 GB

November 2007 September 2011 October 2001 October 2011

$399 $79 $399 Free

Amazon’s first Kindle sold for nearly $400. Less than four years later, Amazon was selling an updated
version of the Kindle for one-fifth that price. Similarly, Apple offered 5 GB of music storage in the ori-
ginal iPod (also priced at roughly $400). By the iPod’s tenth birthday, Apple was giving away 5 GB of
storage (for music or other media) for free via its iCloud service. Other factors influence price drops,
such as being able to produce products and their components at scale, but Moore’s Law and related
price/performance trends are clearly behind the price decreases we see across a wide variety of tech
products and services.

While the change in hard drive prices isn’t directly part of Moore’s Law (hard drives are magnetic
storage, not silicon chips), as noted earlier, the faster and cheaper phenomenon applies to storage, too.
Look to Amazon as another example of jumping onto a once-impossible opportunity courtesy of the
price/performance curve. When Amazon.com was founded in 1995, the largest corporate database was
one terabyte, or TB (see “Bits and Bytes”) in size. In 2003, the firm offered its “Search Inside the Book”
feature, digitizing the images and text from thousands of books in its catalog. “Search Inside the Book”
lets customers peer into a book’s contents in a way that’s both faster and more accurate than browsing
a physical bookstore. Most importantly for Amazon and its suppliers, titles featured in “Search Inside
the Book” enjoyed a 7 percent sales increase over nonsearchable books. When “Search Inside the Book”
launched, the database to support this effort was 20 TB in size. In just eight years, the firm found that it
made good business sense to launch an effort that was a full twenty times larger than anything used by
any firm less than a decade earlier. And of course, all of these capacities seem laughably small by

CHAPTER 5 MOORE’S LAW: FAST, CHEAP COMPUTING AND WHAT IT MEANS FOR THE MANAGER 71

today’s standards. (See Chapter 11.) For Amazon, the impossible had not just become possible; it be-
came good business. By 2009, digital books weren’t just for search; they were for sale. Amazon’s Kindle
reader (a Moore’s Law marvel sporting a microprocessor and flash storage) became the firm’s top-
selling product in terms of both unit sales and dollar volume. The real business opportunity for
Amazon isn’t Kindle as a consumer electronics device but as an ever-present, never-closing store,
which also provides the firm with a migration path from atoms to bits. (For more on that topic, see
Chapter 4.) By 2011, Amazon (by then the largest book retailer in North America) reported that it was
selling more electronic books than print ones.[11] Apple’s introduction of the iPad, complete with an
iBook store, shows how Moore’s Law rewrites the boundaries of competition—bringing a firm that
started as a computer retailer and a firm that started as an online bookstore in direct competition with
one another.

Bits and Bytes

Computers express data as bits that are either one or zero. Eight bits form a byte (think of a byte as being a
single character you can type from a keyboard). A kilobyte refers to roughly a thousand bytes, or a thousand
characters, megabyte = 1 million, gigabyte = 1 billion, terabyte = 1 trillion, petabyte = 1 quadrillion, and exa-
byte = 1 quintillion bytes.

While storage is most often listed in bytes, telecommunication capacity (bandwidth) is often listed in bits per
second (bps). The same prefixes apply (Kbps = kilobits, or one thousand bits, per second, Mbps = megabits per
second, Gbps = gigabits per second, and Tbps = terabits per second).

These are managerial definitions, but technically, a kilobyte is 210 or 1,024 bytes, mega = 220, giga = 230, tera =
240, peta = 250, and exa = 260. To get a sense for how much data we’re talking about, see the table below.[12]

Bytes Defined

Managerial
Definition

Exact
Amount

To Put It in Perspective

1 Byte One keyboard
character

8 bits 1 letter or number = 1 byte

1 typewritten page = 2 KB1 Kilobyte
(KB)

One thousand bytes 210 bytes

1 digital book (Kindle) = approx. 500—800 KB

1 digital photo (7 megapixels) = 1.3 MB

1 MP3 song = approx. 3 MB

1 Megabyte
(MB)

One million bytes 220 bytes

1 CD = approx. 700 MB

1 DVD movie = approx. 4.7 GB1 Gigabyte
(GB)

One billion bytes 230 bytes

1 Blu-ray movie = approx. 25 GB

1 Terabyte
(TB)

One trillion bytes 240 bytes Printed collection of the Library of Congress = 20 TB

1 Petabyte
(PB)

One quadrillion
bytes

250 bytes eBay data warehouse (2010) = 10 PB[13]

1 Exabyte (EB) One quintillion
bytes

260 bytes

1 Zettabyte
(ZB)

One sextillion bytes 270 bytes Amount of data consumed by U.S. households in 2008
= 3.6 ZB

Here’s another key implication—if you are producing products with a significant chip-based compon-
ent, the chips inside that product rapidly fall in value. That’s great when it makes your product cheaper
and opens up new markets for your firm, but it can be deadly if you overproduce and have excess in-
ventory sitting on shelves for long periods of time. Dell claims its inventory depreciates as much as a
single percentage point in value each week.[14] That’s a big incentive to carry as little inventory as pos-
sible, and to unload it, fast!

While the strategic side of tech may be the most glamorous, Moore’s Law impacts mundane man-
agement tasks, as well. From an accounting and budgeting perspective, as a manager you’ll need to
consider a number of questions: How long will your computing equipment remain useful? If you keep
upgrading computing and software, what does this mean for your capital expense budget? Your train-
ing budget? Your ability to make well-reasoned predictions regarding tech’s direction will be key to an-
swering these questions.

72 INFORMATION SYSTEMS VERSION 1.3

Tech for the Poor

Nicholas Negroponte, the former head of MIT’s Media Lab, is on a mission. His OLPC (One Laptop per Child)
project aims to deliver education to children in the world’s poorest communities via ultralow-cost computing
devices that the firm has developed. The first offering, the XO laptop, costs roughly $175, although a sub-$100
tablet is in the works. The XO sports a rubberized keyboard and entirely solid-state design (flash RAM rather
than hard drive) that helps make the machine durable. The XO’s ultrabright screen is readable in daylight and
can be flipped to convert into an e-book reader. And a host of open source software and wiki tools for course-
ware development all aim to keep the costs low. Mesh networking allows laptops within a hundred feet or so
to communicate with each other, relaying a single Internet connection for use by all. And since the XO is tar-
geted at the world’s poorest kids in communities where power generation is unreliable or nonexistent, several
battery-charging power generation schemes are offered, including a hand crank and foldout flexible solar
panels. The OLPC Foundation delivered over 2.4 million laptops to children in twenty-four countries.[15] The XO
is a product made possible by the rapidly falling price of computing.

The XO PC

Source: Used with permission from fuseproject.

While the success of the OLPC effort will reveal itself over time, another tech product containing a micropro-
cessor is already transforming the lives of some of the world’s most desperate poor—the cell phone. There are
three billion people worldwide that don’t yet have a phone, but they will, soon. In the ultimate play of Moore’s
Law opening up new markets, mobiles from Vodafone and Indian telecom provider Spice sell for $25 or less.
While it took roughly twenty years to sell a billion mobile phones worldwide, the second billion sold in four
years, and the third billion took just two years. Today, some 80 percent of the world’s population lives within
cellular network range (double the 2000 level), and the vast majority of mobile subscriptions are in developing
countries.[16]

Why such demand? Mobiles change lives for the better. According to Columbia economist Jeffrey Sachs, “The
cell phone is the single most transformative technology for world economic development.”[17] Think about the
farmer who can verify prices and locate ers before harvesting and transporting perishable crops to market;
the laborer who was mostly unemployed but with a mobile is now reachable by those who have day-to-day
work; the mother who can find out if a doctor is in and has medicine before taking off work to make the costly
trek to a remote clinic with her sick child; or the immigrant laborer serving as a housekeeper who was “more or
less an indentured servant until she got a cell phone” enabling new customers to call and book her services.[18]

As an example of impact, look to poor fishermen in the Indian state of Kerala. By using mobile phones to find
the best local marketplace prices for sardines, these fishermen were able to increase their profits by an average
of 8 percent even though consumer prices for fish dropped 4 percent. The trends benefiting both er and
seller occurred because the fishermen no longer had to throw away unsold catch previously lost by sailing in-
to a port after all the ers had left. The phone-equipped fleet now see more consistent pricing, spreading
their catch more evenly whereas previous fisherman often inefficiently clustered in one market, overserving
one population while underserving another. A London Business School study found that for every ten mobile
phones per one hundred people, a country’s GDP bumps up 0.5 percent.[19]

CHAPTER 5 MOORE’S LAW: FAST, CHEAP COMPUTING AND WHAT IT MEANS FOR THE MANAGER 73

Bangladeshi economist Mohammed Yunus won the Nobel Peace Prize based on his work in the microfinance
movement, an effort that provides very small loans to the world’s poorest entrepreneurs. Microfinance loans
grew the market for Grameen Phone Ltd., a firm that has empowered over two hundred and fifty thousand
Bangladeshi “phone ladies” to start businesses that helped their communities become more productive.
Phone ladies a phone and special antenna on microcredit for about $150 each. These special long-life bat-
tery phones allow them to become a sort of village operator, charging a small commission for sending and re-
ceiving calls. Through phone ladies, the power of the mobile reaches even those too poor to afford ing
one outright. Grameen Phone now has annual revenues of over $1 billion and is Bangladesh’s largest telecom
provider.

In another ingenious scheme, phone minutes become a proxy for currency. The New York Times reports that a
person “working in Kampala, for instance, who wishes to send the equivalent of five dollars back to his mother
in a village will …