Culture of cheap: How discount computers cost the consumer

The American obsession with low-priced products -- especially electronics -- is actually bad for the individual consumer. According to one expert, the race to the bottom cramps innovation, speeds the decline of successful industries and alters our expectations of product quality.

Are thinning margins and the economics of cheap ruining our attitudes?

This month, I added my contribution to ZDNet's "Dead-finger Tech" series with Apple's 13-inch MacBook Pro laptop, and an interesting discussion arose in the comments about the true value of "premium."

Often, a post about an Apple product spirals into Windows vs. Mac. In my post, the real topic of discussion is hardware -- that is, all else (OS, components) equal, which company makes the best hardware?

And is it really unfair that better hardware comes at a price?

In my original post, I wrote that I chose the aluminum unibody MacBook Pro because I believe Apple makes the best laptop hardware on the market today. In my reply, I linked to a recent New York Times article, "Why 'Cheap' May Really Be Expensive," which outlines the argument that discount culture has "created a false dichotomy between quality and price that has made quality goods unnecessarily expensive."

That quote comes directly from The Atlantic correspondent Ellen Ruppel Shell, who authored a book on the subject, Cheap: The High Cost of Discount Culture. The premise of the book is that the term "cheap" was once associated with shoddy quality or a stingy attitude -- in other words, a dearth of style and craftsmanship. Today -- even moreso, post-global economic downturn -- "cheap" is an empowering term that denotes financial savvy, according to Ruppel Shell.

"Cheap" has become a coveted result.

To extrapolate her argument to a ZDNet-specific topic, we buy products such as netbooks because they're cheap -- not because we need them.

What's the problem with that? Ruppel Shell argues that there's "a pervasive social effect" of the pursuit of cheap, a general ignorance to the fact that someone is paying for that low price somewhere along the supply chain. It could be cheap labor, lackluster materials or lower build quality.

It could be all three.

"Cheap," in the sense of a valued good at an inordinarily low price, doesn't really exist. You get what you pay for, as the old saying goes.

Such a phenomenon leads people who don't know the cost of products to believe they're getting bargains in a "cheap" environment such as Walmart, when the reality may not necessarily be true. Cheap (such as Ikea, an example in the article) can be chic, but cheap (such as discount department store Value City) can be downmarket, too.

Let's apply this thinking to consumer electronics -- specifically computers, which sit at the center of everything tech.

The margins for computers are tumbling, and it's easier than ever to afford a computer. No. 3 computer maker Dell is known for using its low base prices, which are often loss-leaders, to attract attention and a chance to upsell (via component upgrades, accessories and services).

Take this example: At the time of publication, Dell sold its brand-new Inspiron 546 desktop (no monitor, AMD Sempron 2.3GHz, Vista, 2GB RAM, 320GB HDD, 16X DVD-RW, ATI Radeon 3200 graphics, keyboard, mouse, power supply, case, cables) for $269.

That's a lot of parts from a lot of vendors -- plus the labor involved in putting it together and packaging it for delivery -- for not a lot of money. Just the processor sells for about $50 on Amazon. Add a Vista Home Premium OEM license, ballpark $50, and you're already at $100. We haven't even addressed the rest of the components, much less factoring in packaging, engineering, development, marketing and other fees.

I'm not going to itemize the whole system, but you get the point: with component, labor, shipping and licensing costs, there is not a lot of room for a profit margin on this system, much less the customary 20 percent or so expected at the retail level.

Dell is a business that intends to make money. So someone's paying the difference.

It's the same reason why the mobile phone you have costs more to manufacture than what you paid for it. The difference here is that it's obviously your wireless contract that's subsidizing your purchase.

But there lies the problem: there's no service contract on your average computer. So something's gotta give, in the form of lots of service fees, aging components and poor build quality.

Consumers begin to believe that it costs, start-to-finish, less than $300 for a computer. But they're really getting what they pay for.

Few expect that such an inexpensive desktop is going to last a family as long as a higher-quality system. At the rate in which technology advances, the components will be outdated quickly. No one's complaining about how wide the panel gaps are on this machine, or if the stickers are on crooked, or if the paint's wearing off, or if the fan sounds like it should be on a Mack truck -- it was $269, for Pete's sake. What do you expect?

For a laptop, the same thing applies: why complain about plasticky buttons, a flex-happy frame, less than crisp screen, poor finish, a temperamental touch pad or shoddy battery life? It was just a $298 Compaq Presario laptop from Walmart! (Nevermind that it's almost 7 lbs.) Who cares if the design doesn't make any sense!

It's that kind of thinking that gets consumers in trouble.

Yes, everyone appreciates low prices for goods. But to recall the Ikea example, cheap and flimsy has become the default. If it's not cheap and flimsy -- in the case of the MacBook Pro -- it's "premium," "overpriced" and has an "Apple tax."

Remember Apple COO Tim Cook's statement in April about netbooks? He said:

For us, it's about doing great products. And when I look at what is being sold in the netbook space today, I see cramped keyboards, terrible software, junky hardware, very small screens, and just not a consumer experience… that we would put the Mac brand on, quite frankly. And so it's not a space, as it exists today, that we’re interested in, nor do we believe that customers in the long term would be interested in.

At first glance, Cook's comment seems elitist: "We're too good for netbooks." But if you define a netbook as a small-format notebook that uses older parts for a correspondingly low price, it's no wonder Apple wouldn't bite. By mission or reputation, Apple clearly isn't in the business of making low-priced, disposable electronics equipment.

Which brings me to a sidenote: Apple not in the business of making a luxury item, either -- deliberately pricing systems out of reach, to be coveted.

The MacBook is not a Gucci handbag. A MacBook is perhaps, at most, twice the price of a "cheap" comparable system. On the other hand, a leather Gucci bag is easily 10 times the retail of a standard leather purse, itself five times the retail of a budget "pleather" bag.

Electronics aren't fashion, but you get the point: the MacBook isn't a luxury computer system, if retail price is to be fairly scrutinized. (I'll leave you to debate whether the sticker price of Sony's upwards-of-$2,000 Vaio P-series is worth the form factor innovation.)

Apple just isn't willing to enter the "budget" sector, even if it might make a quick buck from it. It's more likely to address the gap in its lineup with a product that continues the tradition of innovation and quality evident in its other products, with a price that corresponds. Thus the tablet rumors.

But this isn't about Apple. This is about the expectation that a fully-featured computer costs as little as $298 to manufacture, even less if you include a reasonable profit margin for the company responsible for it. That's just not accurate.

To be sure, some people don't mind a product that could be considered "cheap" in the pejorative sense of the word. But when a company like Apple (or perhaps Sony, or a boutique) continues to advance innovation in leaps and bounds through investment in R&D, or environmental compliance, or product quality, don't be surprised that their products are priced appropriately.

After all, ideas cost money. For companies, ideas and innovation are an investment for higher returns.

Still, if you believe that Apple's margins are too comfortable -- say, for a 15-inch laptop -- that's fine. No one will pick a bone with you.

But there's no reason to believe you should have to pay at least $1,500 for a 15-inch laptop that doesn't creak and twist, either.

Ruppel Shell notes the distinction in an interview in the Wall Street Journal:

"Today, design has become a proxy for craftsmanship. But most of the cost of a product goes into crafting it, not designing it. That's why the teapot doesn't last on the stove: it's made with cheaper steel.

[...]

Consumers think they have to pay for quality. They don't know they are being overcharged. My kids called [popular grocer Whole Foods] Whole Paycheck because it's so expensive. I think we can make quality affordable to the vast majority of Americans."

The bottom line? Those $298 computers have an indirect effect on $800 computers and $1,500 computers, mostly for the worse.

Computer manufacturers have been left to fight on the grounds of price. Really, they ought to be fighting on the grounds of innovation (or customer service, or customization, or design, or...).

You get what you pay for. Almost.

Update: Hardware 2.0 blogger Adrian Kingsley-Hughes weighs in on the subject.