By Phil Bak, CAIA, CEO at Armada ETFs.
The coolest thing I ever saw as a kid was a dual VCR player. It was the height of technology, and it was awesome.
So what you’d do, you go buy a package of blank VHS tapes. And then you get your parents to drive you to Blockbuster where you walk around and look at the little movie boxes and eventually pick one. You bring the tape home and then the magic begins: the movie goes into one side, the blank tape into the other. And after two hours, you’ve got your very own personal copy of Die Hard or Platoon or Aliens to watch over and over again. Or at least until the VCR ate the tape.
That was technology at the time. That was high tech. Back up a few more decades and the typewriter was also considered high tech. Go back even further, so was the shovel.
It is easy to be blown away by the technology breakthroughs of today. It is absolutely mind blowing what we can do with AI. And it’s even more mind blowing to think that in a few generations we’ll look back on these breakthrough tools with the same curious bemusement as we do the dual VCR today.
This is the basis for Eroom’s Law. But before we get there, let’s talk about Moore’s Law.
Moore's Law was introduced by Gordon Moore, co-founder of Intel, in 1965. It states that the number of transistors on a microchip doubles approximately every two years, leading to a corresponding increase in computing power and a decrease in relative cost.
What has been remarkable about Moore’s Law is how sustainable and consistent that trend has been. Take a look, here is a chart from Moore’s original 1965 paper, which included a forward ten year projection:
And here is how it played out since:
Remarkable, isn’t it? I think so.
So let’s get back to Eroom’s Law. Eroom, of course, is “Moore” backwards. Eroom’s Law, introduced today by your humble substack author, is the flipside of Moore’s Law.
EROOM’S LAW (Moore backward): The value of existing technology hardware halves every two years.
If every action has an equal and opposite reaction, this is it. Moore’s Law demonstrates the incredible advancement of technology power over time, and Eroom’s Law demonstrates how current tech makes previous hardware and technology infrastructure obsolete at an increasing velocity.
Take a beat and think about it. Think about the yin and yang of Moore’s Law and Eroom’s Law. Think about the dual VCR player. Think about that slow laptop you had to replace because it can’t keep up with today’s applications, and then think back further to how fast that same laptop felt when you powered it up the day you bought it.
The maturation of AI is leading us to the cusp of exponential demand for data centers. But unless you are in the business of building them, this is massively bearish for the data center category.
It’s counter intuitive, but it’s true. This is Eroom’s Law at play. As the technology and infrastructure rolled out by new data centers is rapidly progressing, the value of the older hardware is rapidly stagnating.
The business of data center REITs is to spend a ton of money on capex up front, and then sit around hoping new tech advances don’t make them obsolete before you can recoup. It is, in fact, a bet against the pace of new technology.
All this while under relentlessly increasing pricing pressure from the likes of AWS, Azure, and now even crypto miners getting into the game. And while refinancing at rates significantly higher than anticipated.
Nowadays we watch more movies, shows and content than we ever have before. But that hasn’t made the dual VCR any more valuable, has it?
All posts are the opinion of the contributing author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CAIA Association or the author’s employer.
About the Author:
Phil Bak is the CEO of Armada ETFs, a REIT-specialty asset manager that delivers customized solutions to REIT investors through ETFs, SMAs, and access to proprietary AI and machine learning REIT valuation models.
Phil has previously served as the Founder/CEO of Exponential ETFs (acquired by Tidal Financial Group), Chief Investment Officer at Signal Advisors, and Managing Director at the New York Stock Exchange.
Phil is the author of two patents on innovative ETF structures and has led market structure enhancements that have become industry standard. Phil has been featured in top-tier media outlets such as the Wall Street Journal, Bloomberg, CNBC, Financial Times and Reuters. He holds the Chartered Alternative Investment Analyst (CAIA) designation and is the host of The Phil Bak Podcast, The ETF Experience Podcast, and an author on Substack.
