The technology industry has a reputation as one of the most fiercely competitive industries in existence. Change happens rapidly in tech, with new firms frequently leapfrogging older ones due to new technological developments, either by finding ways to improve upon existing products and services or by developing new ones. So why it is so difficult for firms to stay on top in technology?

TUTORIAL: Stock Basics

Steady and Rapid Growth
A major component explaining why change is so rapid in the technology sector is the steady improvement in computing power for more than four decades now. Moore's Law initially stated that the number of transistors on a silicon chip can double each year, and this has more or less held true since it was stated. This "law" was first mentioned by Gordon Moore back in the mid-1960s and right at the time that Moore co-founded what is now semiconductor giant Intel. The rapid growth of computing power over the past 45 years is seen as a major reason that technology development has been so rapid. As a case in point, Intel is estimated to be 100 times larger since its founding and has therefore been a prime beneficiary of Moore's Law.

Steady and rapid growth in computing power has had profound influences on technology hardware and software. Rapidly increasing processing power has also meant that computing power becomes more affordable over time and has allowed for the proliferation of personal computers, as well as storage and network capacity, just to name a few examples. Software can also be affected as it too is centered on computing power. Additionally, it is highly scalable, as are most products that work faster over time.

Constant Change
Change can happen very rapidly in technology because quality improves and prices decline at the same time. This makes it hard to stay on top, because when prices grow low enough a product quickly becomes a commodity and is therefore subject to low barriers to entry, which allows even more competitors to enter. This has again affected personal computers and related industries in technology, including televisions, gaming devices, and DVD recorders.

The fact that most digital technology can be easily replicated and distributed is another key reason that change occurs quickly and competition can be intense. This has had a profound influence on the music industry and is now quickly affecting the movie and publishing industries, the last of which is seeing rapid movement from books to e-readers and tablet computers.

TUTORIAL: Risk and Diversification

The Internet
Of course, the internet has been a major contributor to increasing the speed in which digital information can be disseminated. The latest innovation centers around cloud computing where traditional computers and storage devices could become less important. This is because data, music and related information can be stored on off-site servers and retrieved without the need for more traditional technology hardware. (For more, see Is Cloud Computing An Investable Trend?)

Finally, change is rapid in technology because competitors build off of existing technology to create even more efficient and useful products and services. As storage servers grow cheaper and more efficient, it allows firms to build even greater computing power. Google has been cited for using cheaper technology to its advantage, as has Amazon and the latest wave of social media firms that are embracing the internet and its scalability to attract millions of users to their networks. Cloud computing can exist because storage capacity is now largely a commodity and can store vast amounts of data that can be distributed quickly through the internet thanks to efficient routers and switches.

The Bottom Line
Google has described the technology industry as too efficient, which basically boils down to the fact that its products become more efficient and also more affordable over time. The speed at which this occurs also separates technology from other industries, making it very difficult to maintain a leadership position. Scalability, commoditization, and low barriers to entry are also key components. The bottom line is that competing in the technology space is extremely difficult for the firms involved, and the main winners are consumers as they benefit from products that rapidly become better and cheaper. (For related reading, also see A Primer On investing In The Tech Industry.)

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