Saturday, July 17, 2010

In Defense of Planned Obsolescence

Planned obsolescence seems to be considered by nearly everyone to be a bad thing. Like Ebenezer Scrooge, it has become a swear word and insult in its own right quite apart from its actual meaning. I contend that it has gotten a bad wrap with the assumption that it universally hurts consumers and helps producers. I’m going to analyse that assumption and challenge the negative stereotype that it has gotten.

Planned obsolescence is quite often vilified by this apocryphal story about Henry Ford:

There is a story about the late Henry Ford that illustrates the application of this strategy in the car industry. Ford sent a team of agents to tour the scrap-yards of America in search of discarded Model T Fords. He told them to find out which components never failed. When they returned they reported failures of just about everything, except the kingpins. They always had years of service left in them when some other part failed irretrievably. His agents wanted to hear how the boss would improve the quality of all those components that failed. Soon afterwards, Henry Ford announced that in future the kingpins on the Model T would be engineered to a lower specification.

This story is told to illustrate a way that Ford was able to get richer by making all of his customers worse off. This is a big misunderstanding of how economics works. I should say at this point if you are one of those people who think of the market as zero-sum, so that it’s impossible for both Ford and his customers to be simultaneously better off through a market exchange then it’s best if you stop reading now, you’ll never understand economics if your thinking is so flawed.

First of all, this move wouldn’t have hurt his consumers since the part in question was just filling up scrap yards. There’s no used market for the parts since there wouldn’t be anyone with a Model T that outlasted it. Lowering its quality to that of the rest of the car wouldn’t be noticed by anyone, except for the scrap yard owners with big piles of kingpins no one wanted to buy. Secondly, the money that Ford saved on the production of the car would have been used to expand (hire new workers, build new buildings) and to do R&D on new or better products. He could have just funnelled that money into his pocket, but he was a better business man than that. Ford wouldn’t exist today if he just creamed off all of the profits for himself. And lastly, the extra profit on the sales of a Model T would give Ford a cushion to lower its price as the competition heated up from other manufacturers. So it becomes a good trade-off for consumers, they get a cheaper car for the small cost of not having a part that will survive the car but be essentially worthless.

I’ve been thinking about this topic recently because of two conversations I heard over the last couple of weeks that Apple’s iPhone is a dastardly example of planned obsolescence. As with the Ford example, these people aren’t thinking everything through.

Making a product is an exercise in compromise. There are hundreds of trade-offs to be considered, and only the companies that find a good balance between all of the competing forces will sell and survive. Build quality is one of those factors. Sure, Apple could use a higher quality metal or plastic in their products to make them last longer, but they would have to trade in something else such as a new feature or a particular aesthetic. Which is better for the consumer? That all depends on the consumer, as we each have different needs and tastes. Apple’s goal is to adjust all of the factors to maximise the number of people they “hit” with their mix of compromises.

Planned obsolescence could be taken too far, of course. If a product was designed to fail in 3 months then it may sell well for those 3 months but then disappear quickly as consumers switched to a competitor (or stopped buying that type of product entirely.) There is clearly a limit as to how far it can be taken, and that applies to both ends of the spectrum. A company that makes a product that is designed to last forever may do well in the short run but not survive to make a follow-on product since there won’t be enough demand for it. And this is a problem in the high-tech industry as new features can be added at an astonishing rate, so people will expect them.

“But, what if I want to buy an iPhone that does last forever? Apple is screwing me over by making a product they know will be obsolete, when I expect that it will continue to last.” That really is an unrealistic expectation. Apple’s products come with a 1 year warranty (2 more years for an additional cost.) That’s the best indicator for how long Apple expects the products to survive (on average, as there are 1st generation iPods still ticking away nicely.) If you don’t like that, there are competing products that are designed to last longer. In some cases, though, there aren’t competing products that will last longer and that means that no one has yet figured out how to effectively provide such a product. You’re not going to find paper bags that can be used and re-used for 3 years, even though it may be technically feasible to make them. They’d just be too expensive to sell.

“But, what about resale? I still want the new iPhone in 2 years but want to get a good return on my used one.” Ignoring for the moment that the initial price would have to be higher in order to get a higher resale value, it’s actually a good thing for the people who buy those used phones. You’ve become the evil capitalist when you want to resell your phone to some less fortunate soul that can’t afford a new one. Also, the cheap second-hand market effectively creates an iPhone that lasts forever. Instead of paying $2,000 for an indestructible iPhone you pay the same amount on 10 used iPhones over your life and get the same benefit.

“But, what about changing the style without adding new substance, like Chevrolet adding fins to make us think our car is obsolete?” If you think you’re being taken advantage of because of changing styles then you are a victim of your own superficiality. You’re not being tricked, you have voluntarily made yourself a slave to meaningless fashion. No sympathy for you.

In summary, planned obsolescence was not created as a way to screw over the consumer. Those that have tried to use it for that purpose were flashes-in-the-pan and the market punished them for it. But the same is true the other way, it’s possible for a company to make a product that lasts too long will likewise be punished for it in the market. You may think that this is a flaw with markets in general, that we would all be better off had everyone made a greater effort in the longevity of their products. But that also comes with a trade-off in innovation. So much of what we have today that makes our lives better wouldn’t exist because there wouldn’t be any room for new products. You may be thinking that would be okay, we’ve had too much innovation and that is bad for us. I wager that you only think that while you are enjoying those innovations, but take them away and you’ll be wishing you had them back.

Most people decrying planned obsolescence are proverbially wanting to have their cake and eat it, too.

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