Commoditization = Deflation
The other deflationary pressure is the stagnation of wages for the bottom 90%.
Apple’s slumping sales growth in China re-energized discussions on the commoditization of smart phones: the basic idea is that once devices, services, goods, platforms, etc. are interchangeable and can be produced/generated anywhere, they are effectively commodities and their value declines accordingly.
In the case of Apple’s iPhone, many observers see diminishing returns on the latest model’s features as the price point (around $1,000) now exceeds what many customers are willing to pay for the status of owning an Apple product and the declining differentiation of the iPhone when compared to other smart phones available at a fraction of the iPhone’s price.
Commoditization doesn’t just affect the top tier of the food chain; it affects the entire food chain. The commodity $400 smart phone has diminishing returns over the commodity $200 smart phone, and the $200 smart phone has diminishing returns over the commodity $100 smart phone.
Commoditization ravages price and profitability. Once the production facility is paid for by the first run, the cost basis of future production drops, enabling the producer to reap profits even as price plummets.
This is why perfectly good tablets cost $35 wholesale in some Asian markets.
Commoditization doesn’t just affect tech devices: passive index funds have commoditized investing. Why pay a hedge fund’s steep fees when a passive index fund may beat the net return (i.e. after fees) of the hedge fund?
No wonder hedge funds are closing left and right; investing is being commoditized by passive funds, funds managed by software, etc.
Commoditization is inherently deflationary as prices and profits are pushed down along the entire food chain.
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