Project Treble [LWN.net]

Project Treble

Posted Sep 24, 2018 15:47 UTC (Mon) by nybble41 (subscriber, #55106)
In reply to: Project Treble by giraffedata
Parent article: Project Treble

> People will pay more for a 4 year life and you can save all the cost of making and selling that second unit, so both parties come out ahead.

That is not universally true. First, if consumers were planning to replace their devices within two years anyway, they may *not* be willing to pay more for a device which lasts longer only in theory. Resale is an option, but used devices sell for much less than new ones, even after adjusting for the remaining lifespan. Putting that aside and assuming that devices are only replaced when they reach their projected age limits, people may pay more for a 4-year gadget than a 2-year gadget—but not twice as much, unless replacing the device every two years was a serious inconvenience worth paying extra to avoid. There is a time cost to spending $2X up front rather than $X now and another $X in two years, plus the buyer is taking on the risk that replacement may be needed earlier than expected due to accidents or other factors beyond their control. Meanwhile from the manufacturer's point of view sales volumes have been cut in half, which means the fixed costs per unit have doubled. This is on top of the higher cost to design and manufacture devices to higher quality standards so that they last longer in the first place. The minimum viable price for a device which lasts twice as long may well be more than double the price of the shorter-lived version, which would price the more durable device out of the market.

Of course, there is a cost to frequent replacement as well; otherwise people would be replacing their phones every other week to keep up with the latest and greatest. The variable costs to manufacture each device and the inconvenience of switching to a new device keep the ideal lifetime from dropping to zero. In the end there is a balance which depends on the time value of money, the ratio between fixed and variable costs, and the expected time before the device succumbs to an accident, natural obsolescence, or the vagaries of fashion independent of the manufacturing quality.

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Project Treble

Posted Sep 29, 2018 14:45 UTC (Sat) by Wol (subscriber, #4433) [Link] (1 responses)

> Putting that aside and assuming that devices are only replaced when they reach their projected age limits, people may pay more for a 4-year gadget than a 2-year gadget—but not twice as much, unless replacing the device every two years was a serious inconvenience worth paying extra to avoid.

You haven't understood the argument. Let's assume that 30% of the factory-gate sale price is profit, 70% is the cost of manufacture. If the 4-year device adds 20% to the cost of manufacture, I only need to sell the new device at 150% the cost of the old one to come out evens. If I can do it for 155% that's a 10% increase in my profit!

Cheers,
Wol

Project Treble

Posted Oct 1, 2018 0:19 UTC (Mon) by nybble41 (subscriber, #55106) [Link]

I understand your reasoning just fine, but that was not the original argument. The comment I was replying to unconditionally equated increased longevity with higher profits, arguing that (a) people will always be willing to pay more for a more durable good and (b) they will always be willing to pay *enough* more to offset the loss of volume. Manufacturing costs were completely ignored. Taken to its logical conclusion, this is an argument that every good should be made as durable as physically possible, no matter the cost. Practical evidence suggests otherwise, however, as cheaper, more disposable goods dominate in most areas.

Your argument is much more nuanced, and indeed it is not necessary to double the price in order to break on profits. However, I expect doubling the longevity of the device would add considerably more than 20% to the manufacturing cost; keep in mind that the fixed costs per unit sold (including R&D expenses) have *doubled* simply due to the decrease in volume even before adding in whatever fixed and variable expenses are involved in making the device last longer, plus lower-volume manufacturing is less efficient in general. Also, people may not be willing to pay 50% more up front, even for a device which can reasonably be expected to last twice as long. It's not exactly sound financial behavior, but given a choice between a 2-year device one can afford right now and a 4-year device which would require saving up for a couple more months (or sacrificing other discretionary expenses), plenty of people would choose the former. It's uncommon to find anyone thinking even two years ahead to when the device will need to be replaced; such far-off concerns tend to carry very little weight in the present.

The bigger issue, however, is that you're assuming you can set prices however you wish. The original scenario stipulated a *competitive* market, so you don't have that option; that nice 60% margin you get from selling at 150% of the original price isn't going to last. In a competitive market economic profits tend toward zero (i.e. accounting profits tends toward the marginal rate of return, the least return which makes the investment worthwhile compared to other alternatives) as new competitors see an opportunity and enter the market. Assuming your original 30% margin reflected a competitive market at equilibrium, can you still break even at only (approx.) 20% over the original price? Because that's what your competitors will be charging.