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Subsidise tech R&D: Budget 2011
February, 16th 2011

One decade of the new millennium is over and companies, especially in consumer electronics , are wooing customers with new models. Mobile handset vendors are releasing, on an average , about 35 new models in the domestic market every month, indicating a drastic reduction in product lifetime. However, new technology is also at the risk of becoming obsolete very fast. What do rapid evolution of technology and the resultant obsolescence mean for the stakeholders?

Should a customer change her mobile, desktop or laptop every year? How do companies generate economic value out of obsolescence ? Should the government step up investment in public IT infrastructure? First, let us take the effect of technological obsolescence on companies. Technology obsolescence impacts the future economic value of a product or a component, which increases the risk involved in financing its development.

Companies may resort to different strategies to tackle the problem. These include differentiated pricing for an upgraded product, forward or backward integration to gain control of the market for the product, greater R&D intensity to introduce differentiated products or diversification to derisk. In telecom, the move away from proprietary to opensource software adoption, especially in mobile handsets such as Android reduces technology obsolescence cost, both for handset-makers and consumers.

Another trend is the emergence of managed services wherein mobile service providers such as Airtel have outsourced network deployment and management to network equipment makers such as Ericsson and Nokia-Siemens . Airtel transfers the obsolescence risk to the network equipment makers. BSNL has gone a step further, adopting a franchisee model in broadband wireless access. Here, the obsolescence risk is transferred to the franchisee. Also, in technology, obsolescence may not be related to the whole product, but might occur for components that make up the product.

Sometimes , obsolescence rate is faster than the components lifetime. Technology refresh is required either because the component ages or has reached end-of-life . It is also possible that the technology refresh makes the system much more efficient that the extra features make it worth the refresh , or the maintenance costs go down substantially justifying the refresh cycle. Besides industry, technology obsolescence also impacts the consumer. The customer upgrades the hardware or software to stay on top of the technology trend. Pricebased competition is likely to provide similar alternative products to the subscriber and enable her to reduce the technology obsolescence cost.

The success of featurerich mobiles from domestic handset companies such as Micromax, Lava and Karbonn as reasonable cost-effective alternatives to handsets from multinational companies illustrates this customer rationality. A customer can also trade her old incompatible version to reduce costs.

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