Cheap Revolution, Part Six.

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Author: Karlgaard, Rich publisher@forbes.com

There's hype and there's skype. The difference is about $4.1 billion, which is what Ebay paid for the voice over Internet company last month. Skype is, like Ebay itself, cheap and easy to use. Go to Skype.com and click on a green balloon that says "Download Skype." Decision time: Would you like Skype software on your Windows, Mac or Linux computer, or Pocket PC? Click on your choice. Congratulations! You're ready to make cheap phone calls to any Skype-enabled gizmo in the world.

Ebay wants Skype so buyers and sellers in the wide world of Ebay can jump on the phone and haggle for free. The more transactions occurring on Ebay, the more money Ebay makes. Ebay's been a huge success, of course, but its growth has slowed, and its stock has been flat. Ebay's $4.1 billion gamble on Skype is a bet on growth. Organic growth--Skype adds only $60 million in sales on its own.

Skype, like the Netscape browser or the Apple II computer, is not the first of its kind. Vonage has offered voice over Internet since 2001, and it's hardly a secret. Vonage has the budget to run funny ads on prime-time television. But Ebay's purchase of Skype is a Big Bang for voice over Internet. It's an official Wall Street coming-out party for a whole new industry, like Netscape's IPO in 1995 and Apple's in 1980.

Is voice over Internet a disruptive technology--in Skype's case, a telephone killer? I think so. I would have guessed that after Ebay bought Skype, a few billion dollars of market cap might have leached out of the old telephone giants. But the market had seen the Vonage/Skype revolution coming a year ago--Mr. Market does see around corners, you know--and had quietly skimmed $30 billion away from Verizon, SBC and BellSouth before last month's Big Bang.

It's easy to picture the fear and loathing in telco boardrooms these days. Join the Skype revolution and cannibalize cash flow? Or call up the K Street armies and the FCC to regulate the runt out of existence? What would you do?

The Cheap Revolution rolls on, making new billionaires even as it collects more old scalps each year. Step back and look at what's happening in technology. Computation gets twice as fast every 18 months, and at the same price point. Storage evolves faster--every 12 months. Communications is fastest of all, doubling every 9 months.

There's more fun when you look at dropping costs. The prices of computation, storage and communication drop 30%, 50% and 66% per year, respectively, at a constant performance. Remember the Compaq Deskpro 486 personal computer? Priced at $13,999 when it debuted in 1989 ($22,000 in today's dollars), it was the best PC money could buy at the time. The Intel 486 chip inside that PC cost $750 in 1989 dollars, the equivalent of $1,200 today.

Of course, a chip of the 486's power doesn't cost anywhere near $1,250 today. It runs about $25 and is used in handheld telephones that cost less than $300. This cheapness is owed to what I call the flip side of Moore's Law, the side that predicts dropping costs at a constant rate of performance.

If you remember one thing about this column, let it be the flip side of Moore's Law. It's the driver of today's global economy. China and India? They're second-order effects of the flip side of Moore's Law. Put another way, if the people of China and India had to pay $20,000 for their digital keys to the modern economy, not many could. But when your way in is a $299 cell phone with a Web browser, the game changes. Does it ever! In 1996 the Chinese owned 7 million cell phones. In 2005 they own 360 million. There are more cell phones now in China than in North America.

Affordable technology combined with global pools of smart labor form a Cheap Revolution. The Apple iPod is a product of the Cheap Revolution. The flip side of Moore's Law took 60 gigabytes of storage, which during the 1980s would have cost tens of thousands of dollars, and shrunk it to about $20 today. Apple added clever design and music-player software. The iPod is manufactured in China and sold in America for less than $300. Think about it this way. Just one generation ago the closest thing to an iPod was a Sony Walkman hooked up to an IBM mainframe computer.

Google and Yahoo are also children of the Cheap Revolution. The trick to fast search is to crunch the algorithm on a National Security Agency-class supercomputer. But how many companies have a few billion dollars lying around for that? Well, today you don't need a few billion bucks. You need only a fraction of that if you can gin up a virtual supercomputer from thousands of cheap computers.

The way to think about the Cheap Revolution is simple, yet hard to do. The simple part is to see that computation, storage and communication are moving in the direction of cost free. The hard part is to realize what this march of technology might do to your company. Suppose your top quartile of employees left to start a new company, harnessing the Cheap Revolution. How would they try to wreck you? Don't shy away from this mental exercise. It's human nature to imagine that your business will evolve in predictable ways--right up to the moment when the Cheap Revolution rears up to smack you.

Visit Rich Karlgaard's home page at www.life2where.com or email him at publisher@forbes.com.

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By Rich Karlgaard, Publisher; publisher@forbes.com