The commoditization of software
By John Carroll

Special to ZDNet
March 17, 2003, 6:06 AM PT
URL: http://zdnet.com.com/2100-1107-992824.html

COMMENTARY--For years, hardware companies struggled under pressure
from the forces of commoditization, as widespread
popularity of standardized operating systems forced them into withering competition, the end result of
which was a phenomenal reduction in hardware prices.
Today, the shoe is on the other foot, as software is commoditized by the appearance of free (as in cost) open-source software. Constructed through the joint effort of thousands of programmers around the world, its low cost serves as a strong challenge to proprietary software companies' business models.
Commoditization is a powerful force for consumer
benefit. In hardware, however, there was never any risk of free hardware pulling the economic rug from
under the industry. Commoditization, taken to the point where software is practically free, would run
contrary to the interests of software developers who have an interest in earning a living from their craft.
In short, a market where the price of software plummets too low will rapidly drain the value of
programmers, and hence cost many programmers their
jobs and drain the industry of investment as investors
chase more lucrative places to put their money.
The "de facto" free nature of open source
The last time I poked my nose into the open source
debate, a lot of people pointed out that open source
does NOT imply no cost. They noted that licenses can
be written in such a way as to require fees which are
paid back to the copyright holder. This theoretical possibility, however, does not change the fact that the vast majority of open source software is, in fact, available at no cost.
There are a number of likely reasons for this.
Whenever you have access to the source code, cloning is facilitated. AT&T once owned the Unix operating
system, yet that didn't stop the rapid propagation of
Unix clones once AT&T showed willingness to license
the full source to universities. Programming ideas
are universal, and there are an unlimited number of
ways to represent an idea in code. Thus, with careful attention to detail, developers can clone an entire program without directly copying a single line of code. Such cloning makes it hard to maintain a baseline price, particularly when certain segments of the development community dance to the tune of the free (as in cost) software movement.
Second, open source culture is suffused with a belief
in the merits of free, as in cost, software. As I noted last June, Richard
Stallman is on record as saying that programmers
needed their expectations of compensation readjusted
in order to return, Rousseau-like, to some lost state
wherein programming Van Goghs do their work for the
sheer love of programming. At the time, some
responded that I shouldn't pay any attention to the
man behind the red curtain as he isn't representative
of the open source community at large. Yet,
commoditization driven by free software is a growing
reality, and every day freer, open source software
becomes available on the internet.
It's easy to disagree with specific statements made by Stallman. Yet, it is hard to avoid the fact that these statements, in the aggregate, have shaped the open source culture in such a way to create an emphasis on free, as in cost, software.
The nature of valuation
Value, or the price of a product, is not an inherent
attribute of that product. It is the result of the
interplay between supply and demand, and is completely
divorced from any inherent characteristics of the product in question. Oil costs much the same to
extract whether the price is elevated by war fears or low from oversupply. Similarly, the fact that steel
prices go up because of a rapid increase in the demand
for steel doesn't change much the raw cost of
producing that steel.
Expectation, however, also plays a large part in the determination of value. If people expect to pay a high price, they tend not to question it. Any American who has seen the price of Levi Strauss jeans in Europe ($90-$100) has wondered in quieter moments whether they couldn't finance a future trip with a suitcase full of jeans at an entrance to Rome's Termini station. In Switzerland, the price of mixed drinks is astronomical ($10 is typical). A Swiss friend told me that this was a historical anomaly due to former high taxes on hard liquor in Switzerland.
The tax today is more reasonable, but the price of
mixed drinks in bars remained because the Swiss were
used to paying those prices, and so bars were happy to
continue charging them.
The same expectation principle applies in the market
for software. Tales abound of companies that moved
from a revenue model based on advertisements (hence,
free access) to one based on end-user fees, only to
find that no one was interested in their product
anymore. Adobe Photoshop is very expensive (currently
$586.99 on Amazon), which is about $300 less than
it used to cost) yet it continues to be the
best-selling graphics editor on the market. Even
Adobe competitors benefit from the price. Paintshop
Pro is a relative bargain at $109, but even that price
is higher than the software average and is only
sustainable due to expectations cultivated by Adobe.
Living in a commodity market
If expectations are created that software isn't
something upon which consumers, business or otherwise,
should spend much money, then that lowers the value of software, which by extension lowers the value of the programmers who make it. This isn't exclusive to makers of shrink-wrapped software, but applies up and down the supply chain, including even makers of tailor-made software (read: contractors and consultants). If you bought a coat for a buck, would you consider paying $20 to have it let out after too many fried chimichangas dipped in Cheez Whiz added
a few inches to your girth, or would you walk out and
buy a new one? On the other hand, if you paid $200
for the coat, you might consider paying $20 to have it
taken out.
Consider SAP. Major consulting companies earned
billions helping large companies customize the SAP
product. SAP skills were at the top of the list on
any jobs board during the 1990s. SAP was also eye-popping expensive, which justified customization expenditures that often ran into multiple millions.
The operating theory among many open source
programmers is that the market for their services will persist because people will want to pay for
customization, something that will be easier to afford
given cost savings in the base product. I'll grant
that customizing software isn't as simple as buying a
wider coat, but I reject the notion that companies
will spend MORE on customization (or even maintain
former budgets) simply because they paid less for the
base cost of software. More likely, expectations of software cost will be adjusted downwards, resulting in
downward pressure on developer salaries (which is
happening) and a greater incentive to sublet
customization to the lowest-cost location.
The market for development outsourced to foreign
locations is getting a lot of press these days. Certainly the slow economy has a lot to do with the
demand. Furthermore, programming skills are more
generally available than in the past, which was bound
to happen given that nations such as India and China
aren't standing still. However, I think the role that
software commoditization and its driving force, open
source software, is given too little attention. A
large component of America's economy is information
technology, and free software undermines demand for
such products, thus hampering recovery and increasing
the attractiveness of outsourced development.
Furthermore, given the general lowering of software
price expectations initiated by the popularity of free alternatives, interest in outsourced development only rises.
Lastly, high profits attract high levels of
investment. RedHat managed a thin
profit selling open source software in a fast
growing market for Linux, but how does that stack up
against Adobe, IBM's software division, Oracle, or
even Microsoft? That sort of profitability attracts
investment by the bucketful, whereas RedHat's sort
won't attract the same levels. Less investment means
fewer software jobs, and lower valuation of programmer
skills.
Conclusion
As I've noted in the past, software is a
strange market. Doctors don't roam the countryside
offering free medical services and spewing invective
against the evils of the for-profit medical industry.
Carpenters aren't forced to contend with a free-carpentry movement, and financial analysts at Merrill
Lynch aren't pilloried at "free financial analysis" conventions. For whatever reason, a surprising number of people whose aim is to make a living from programming endeavor to provide free alternatives to product sold by others within the industry.
Free software has the same effect free TVs would have
in the market for televisions. The question on the
minds of people involved in the production of software
(or TVs) should be whether that effect is desirable.
As investment
in software shrinks, so will the value of
developers. That's a reality that even open source
developers must face.
John Carroll is a software engineer living in Ireland. He specializes in the design and development of distributed systems using Java and .Net. He is also the founder of Turtleneck Software. We wish to give John a special thanks for his 25th contribution to our forums.
- posted by sankarshan @ 3/18/2003 07:50:00 AM