Performance Priced

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Many years ago, I worked for the second largest computer company in the world. The company was Control Data Corporation or CDC. For a brief time it was second only to IBM in the world of computers. It is gone now, consigned to the dust bin of history. Enough time has passed that even some successor firms have also passed-on. Digital comes to mind. Even garage upstart Microsoft is starting to look long in the tooth, compared to today’s modern titans of Silicon Valley. One of these garage bands for whom the blush is still on the rose is Apple. Under the tutelage of the late Steve Jobs, innovative products like the iPhone and the iPad have powered Apple to record profits. However, record profits or even innovative products are no life insurance policy in the breakneck world of computer technology. CDC had both of them then, but look at it now.

Back in the day, selling computers, or “pushing iron” as it was called, wasn’t a simple process. The machines were big, expensive and arcane. Salesmen, and they were mainly men, sold the computers one at a time. Half-a-dozen machines could count for a very good year. The number of options available, the complexity of the product, and the constant evolution of the industry led to a business model called performance pricing. Simply put, if machine A could perform the task twice as fast as machine B, then machine A was priced at twice that of B. This model worked well, so long as no one peeked behind the curtain.

Sometimes midlife performance upgrades were made. When no one was looking, a technician would flip a well hidden switch and then look busy for an hour or so. CDC made a lot of disk drives and we figured out how to convert cheaper 20 MB drives to more expensive 60 MB drives. [Yes, this was a while ago.] This was accomplished by low-level reformatting the drive. They were all the same hardware, they were just formatted differently. They were all performance priced. You got what you paid for.

I was thinking about a modern application for the kind of performance pricing of computer equipment. The iPhone comes to mind. Each model comes in several variants. The sole variation is the amount of internal storage that the device has. Wouldn’t it be cheaper to make just one kind? The trick of low-level formatting of hard-drives, to size the amount of storage, was an industry standard. At the time, we were making 2/3 of all the drives. Back then disk drive platters were all the same size; software formatting determined the amount of available memory. In the iPhone storage is solid state, but the old principles still apply. For example, extra sectors are made, to replace sectors that go bad. Firmware normally controls the allocation of this storage. Why not have the firmware also control the amount of storage available to the customer. If you’ve priced USB storage, you know that 8/16/32 GB doesn’t cost anywhere near the $100s that Apple charges for it. Why not just build one device and build the extra hardware cost into your pricing model and save on manufacturing costs? I realize that it says how much storage it has on the case, but you are already committed to two colors of skins. Another 3X is a modest bump in cost, for a lucrative opportunity for Apple to up-sell their most popular product.

These business practices might seem nefarious to some, but they are not. Streamlining production costs save all customers money. If you ever bothered to read your Apple license agreement, then you would realize that you have already concurred with this too. Like Control Data’s competitors, Apple’s are not fooled by any of these shenanigans. They are already scheming to take advantage of this or any opening, and maybe take Apple down too.

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