I bought a 200 gigabyte hard disk the other day. After a rebate and coupon discount, I paid $68, which just floored me. So I did some calculations.

In 1985, I bought a 20 megabyte hard disk for $225. That means that the disk drive I bought this week has 10,000 times the capacity at 30% of the price. In 1985, the disk drive cost $11.25/MB. In 2006 it cost $.00034/MB. That’s a 3,308,800% improvement in price/performance, or about 40% per year compounded over 20 years. There simply has never been a price deflation like that in history. It’s incredible.

An IBM research paper estimated that arial density of disk storage improved by a factor of 35 million from 1956 to 2003. It’s probably double that now. The paper further noted that the floor space required to store a terabyte of information shrank by 10,000,000 during the same period. That means that what can be stored in your desktop PC today would have required a disk farm more than a square mile across 50 years ago.

So, if disk storage has become effectively free, what are the implications of that? It means that a whole class of new applications have become economically viable. The photo sharing sites that proliferated beginning a few years ago, for example would not have been sustainable as businesses prior to this deflation. Similar, although less dramatic declines in processing costs contributed to the development of that market.

Photo sharing got people used to telling stories online, which directly influenced the growth of blogging. Blogging sites also grew and prospered because cheap processors, cheap storage, consumer broadband and open-source software made them economically viable. Podcasting joined the party because technological change made it cheap to create and share audio files. Now, video services are seeing the same kind of growth.

The result is that a sea change in technology – in this instance, declining storage costs – enabled a whole new medium to emerge. And that medium is going to reshape some institutions in society. We’re pretty far afield from arial density, but I hope you get my drift.

I call this technology leverage: seemingly minor changes in technology can kick off much bigger changes in markets and institutions because technology makes it possible for new kinds of applications to emerge. It’s a cycle that has played itself out repeatedly in the history of computing but which is happening very quickly today because of the rate of improvement in hardware price/performance.

These changes are usually unpredictable. Five years ago, the idea of mass community media wasn’t given much credence because there was no model for it. For social media to develop, you needed a technology infrastructure in place that lots of people could access at low cost. Until that existed, there was simply no way to predict what would happen. Now that we understand what occurred, we can make some new assumptions about the future. But those assumptions will almost certainly be wrong because the innovations and behaviors that emerge when new technology is introduced are almost always unpredictable.

MP3 players have been around for almost 10 years, but it took miniaturization and price /performance improvements to make the iPod a mainstream product. The Video iPod and similar products are just seeping out into the market. They’re kind of expensive right now, but you know that will change. In five years we’ll have random-access digital video players that squeeze the iPod’s screen into a space the size of a business card holder. What will happen once those products are widely available for less than $200? We don’t know, but it’s a safe bet that a whole new class of applications will emerge that we can’t even envision today.

This is what makes tech markets so exciting. It’s also what keeps the tech leaders on their toes, which stimulates more innovation. As long as core technology continues to improve at this rate, this will be a wild and unpredictable business to watch. I’m not expecting to run out of topics for this blog. 🙂