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Calculating the True Worth of Software
chromatic writes "Many people recognize that the cost to duplicate a piece of software is a fraction of the number on its price tag. Many people also understand that software without support and maintenance loses much of its value. Is there a way to put a price on the software, support, maintenance, and the option for future upgrades itself? Robert Lefkowitz recently applied an options pricing model to software in ONLamp.com's Calculating the True Price of Software. Don't let the description fool you; it's both a readable and serious apologia of the common free software business model."
The true worth of software can be easily found by determining the number of first posts that it allows you to get on any given day.
..whatever someone is willing to pay for it.
Same as anything else.
WTF?
definition: design systems to fuck you out of your money
I figure to find that out, you will first have to weigh it on a scale. Vapor has no weight? Guess what then...It has no value. Free!
Is there a way to put a price on the software, support, maintenance, and the option for future upgrades itself?
Easy, these prices are proportional to the penetration indice of your previous software : a monopoly charge high fees, an outsider small ones.
I have discovered a truly marvelous proof of killer sig, which this margin is too narrow to contain.
or they get freely available alternatives (if any exist).
...although simpler, I think. Apache 2 comes in at a half million dollars, Tomcat weighs in at $250K.
The Army reading list
For example, I run a one-man contracting business. The worth to me of my accounts package is vast, the cost of it miniscule in comparison. And that cost is...one copy of Virtual PC for around £100 I think (I run OS X), one copy of XP for around £170 (retail, used it on a physical PC I no longer have and now it's on the emulator), then around £50 for Quicken UK. I can feel the Free people ganging up on me - I must be mad! That adds up to £230, that's nearly the price of a low-end machine! Well, to me that software is worth the amount, and the price is an utterly negligible amount of the cost of running my business.
Cheers,
Ian
The price of software is whatever value it adds to my business, or personally it's whatever I'm willing to pay for whatever convenience it offers (after all, software is 90% "convenience" for personal use)
If I were a doctor, a full medial records + billing application would be worth many thousands (or equivalent of support services for free software). If I am running a bakery, then inventory software is worth far less.
As a hobbyist, software related to my hobby would be worth more than some random game to play with once in a while - if I'm a gamer, that game is worth a lot more than the same hobbyist values it.
Sparks:Gadget:Beer Maker
"Many people also understand that software without support...loses much of its value." So then Linux has nothing to lose!
Go to the w3.org and put Slashdot.org through the validator.
another game: 25 cents
another game: 25 cents
another game: 25 cents
another game: 25 cents
another game: 25 cents
another game: 25 cents
another game: 25 cents
another game: 25 cents
another game: 25 cents
another game: 25 cents
another game: 25 cents
another game: 25 cents
getting the high score: priceless
(or so I thought at the time)
I've found that my posts don't format quite right w/o a sig.
Many people also understand that software without support and maintenance loses much of its value.
...but I don't find it to be true. Apart from Internet applications that can be vunerable, I got lots of pieces of useful software on my machine, some are EOL'd. I'm still running win2k sp4, and unlike xp sp2 everything seems to work just as it did back when win2k was released. And my linux box has certainly never seen a support contract of any kind. My willingness to pay is ~0$, so it's not for lack of offers.
If I buy Photoshop today, it'll still be a kick-ass graphics tool in 5 years or 10 years. As long as the OS can keep up with hardware support (cameras and printers), is there any reason why I would need support and maintenance? Beyond public forums, that is? Now the "free upgrades" of most OSS apps are pleasant, but by no means necessary. There's simply not much point in sticking with an older version, but you could certainly do it.
I know things are very different in the corporate market, where a stoppage means major $$$ down the drain. But as far as I'm concerned, it's mostly a "I would pay if I had to, but support contracts I don't have to, so I don't" attitude to software. I think that's fairly common.
Kjella
Live today, because you never know what tomorrow brings
$699
Thanks,
Darl.
Hack your mind out of its sandbox.
Many people recognize that the cost to duplicate a piece of software is a fraction of the number on its price tag. Many people also understand that software without support and maintenance loses much of its value. Is there a way to put a price on the software, support, maintenance, and the option for future upgrades itself?
Of course there is. Cost and value are two different concepts. Something can cost nothing, yet be very valuable (e.g. Apache).
Pricing things like support is merely the exercise of coming up with a price that is low enough to find people who value it more than the price, while still being higher than the cost to provide it.
The cost to provide support includes things like employing people who know all about the software.
The value to the customers is that they can rely on the software and get problems sorted more quickly without having to employ their own experts.
Neither of these bears any relation to the cost of the software itself. It can be free, or it can cost thousands, the principle is the same.
There is a difference between Free Software and proprietary software though; with Free Software, you can get support from a number of competing firms, and with proprietary software, you are limited to the original vendor. Free Software support has the advantages and disadvantages of capitalism, proprietary software support does not.
value is subjective.
sum.zero
There is a lot of finance talk going on in this article, but the conclusion he comes to is one that many of us already know: commercial Open Source creates a market for support and maintenance. Article might be good for corporate types wondering why licenses cost nothing over here.
There is no free (in currency value) software. It is just that its price happens to be zero dollars.1 0/1942204&tid=14
Hey, the parrot knows the difference between zero and nothing... http://science.slashdot.org/article.pl?sid=05/07/
www.notesmax.com
Software (actually the entire software and hardware combo as a functional system) is only really worth what it would save you in the time and money it would take to accomplish a particular job in another non-automated way. If doing that job in the manual, non-computerized way would cost you less, then you shouldn't involve computer automation at all. Every businessperson should really do a thorough cost analysis before allowing themselves to become addicted to any software app. Sometimes they'll find a system to be a tremendous time and cost saver, easily worth many times what the actual cost to implement the system and train the end users totals up to. Sometimes they'll find the system to be about as productive and cost beneficial as a heroin addiction.
As computers become more common it becomes harder to say. How much is a letter of the alphabet worth to you? How much is a common tool, such as a screwdriver, worth to you? Imagine if you could be denied the use of these though Intellectual Property laws.
How much should I charge for my software? http://www.joelonsoftware.com/articles/CamelsandRu bberDuckies.html
...
You've just released your latest photo-organizing software. Through some mechanism which will be left as an exercise to the reader, you've managed to actually let people know about it. Maybe you have a popular blog or something. Maybe Walt Mossberg wrote a rave review in the Wall Street Journal.
One of the biggest questions you're going to be asking now is, "How much should I charge for my software?" When you ask the experts they don't seem to know. Pricing is a deep, dark mystery, they tell you. The biggest mistake software companies make is charging too little, so they don't get enough income, and they have to go out of business. An even bigger mistake, yes, even bigger than the biggest mistake, is
The user audience(home, office, large corp) actually determines the price so that it will be affordable for the specific group. Since the target audience can afford it, the company will make money from the software product.
Fallout 3 will suck.
And this is an interesting point. I've always been amazed at the dollar figures the BSA gives out for the "value" of "pirated" software, avoiding the fact that a large percentage of these people would not have bought the legitimate copy anyway.
"Who are in control, they are not in control of anything - they don't even control themselves!" - Glen Beck
Does your blog have anything to do with your comment, or are you just jamming it into your comment to trick people into going there?
I found nothing to do with software piracy whatsoever. If it's really that important, stuff your blog into a signature.
I used to read Caltizzle. I was a lot cooler than you.
*magical finances hand waving* ...OSS is capitalistic.
IWARS.
People, in general, disappoint me. Politicians even more so.
A different view than I had previously held. Quite enjoyable.
price of software = ... you get the idea :D
time spent on making it
X 2 X (minimum wage in your area)
+
length of projected lifetime before next charged upgrade (as in the next time you plan to ask for the bling) X 2 X (minimum wage in your area)
_Vishal www.squad9.com
My contract rate as a QA Lead Tester is between $15 to $20 per hour. That's how much software is worth in Silicon Valley. However, outside of Silicon Valley, I would get $50 to $70 per hour for the same kind of work. Go figure.
Is that most of the cost that goes into developing it is in the labor. The only problem that companies like Microsoft face is that their shareholders have gotten addicted to the high profit margins that have dominated for so long in the commodity software market. Realistically, Microsoft could afford to cut the cost of Windows from $100 per upgrade disk to $50 a copy and from $200 for the full version to $75-$100 if they wanted to become more aggressive. Office could see similar price reductions, and in fact such a major price reduction might be enough to cause a lot of buyers to just say what the hell and buy the software even if they don't REALLY need to upgrade.
If companies like Microsoft really want to rake in the cash on support and upgrades, they need to make them cheap and exploit economies of scale. It'd be a lot easier to convince many companies to buy a support contract that costs $5-10/machine/month for support and upgrades than make them pay $250 for an upgrade every two years. With that monthly fee, the company gets seemless upgrades and Microsoft gets a guaranteed revenue stream from them.
Click here or a puppy gets stomped!
You can't charge awefully more than your competition, can you ? If the competition gives it up for free -- then well, all your calculations go awry.
Think about the price of a browser, media player and well, a operating system.
Think Netscape vs IE circa 2000 AD. Now, only a free product could defeat IE.
--
This sig is up for free.
Because those options to purchase future maintenance and upgrades do not have a fixed price, the buyer gains no value from the "options" (or warrants).
The seller can merely make the price of upgrades and maintenance beyond what the buyer will pay and then, those "options" are worthless.
The upgrade price has merely to be less than the full price, but what control is there over the full price (there MAY be market forces, but what if the seller wants to discontinue the product)? Thus, unless you have a contractually agreed price (as in the case of the Apple extended warranty, but NOT in the case of most software purchases), you don't have an enforceable option to buy upgrades, maintenance, etc.
The real "Libtards" are the Libertarians!
... is what someone is willing to pay.
I've always been amazed at the dollar figures the BSA gives out for the "value" of "pirated" software,
Are you really? They are an organization with a specific purpose, and they're willing to exaggerate, manipulate and probably even outright lie to get what they want. Nevermind the good of society, as long as they have theirs.
This kind of corruption would stick out like a sore thumb, except there are so many other organizations that do it, the BSA fits right in. It's sad, but that's how the world is, and if you want to understand the world, you'll have to realize it.
Qxe4
People should also realize that software provides them the means to accomplish tasks they would not be able to accomplish otherwise. Herein lies the value of one's time, and whether it's more economical to allocate funds to the purchase of software that can do a job faster and better, or stick with something manual. The actual physical cost of reproducing the software itself is miniscule...the value it provides, however, can be quite substantial.
I think copyright law is totally messed up. It seems to me that the right top copy stuff is a natural right, not the right to protect stuff. I wrote a rather long essay on an alternative to copyright that I think would be much better, if anyone is interested.
avoiding the fact that a large percentage of these people would not have bought the legitimate copy anyway.
Yes, but there's a big difference between that legitimate copy and a legitimate copy. Would someone who pirates Adobe Photoshop with all bells and whistles buy it? Very unlikely. And they do, because if you're going to pirate it anyway, why go for anything but the most powerful and expensive program? But if he could not pirate any graphics program at all, he'd likely buy something. Maybe a lighter Adobe product, Paint Shop Pro, maybe he'd find GIMP or any number of possibilities. But it's not likely he'd stick with MS Paint.
So it is equally wrong to pretend that none of the piracy leads to lost sales. But finding the exact factor would involve some handwaving and a magic number between 0 and 1. Piracy apologists often claims it is 0. BSA claims it is 1. Both are wrong and they know it, but it fits their agenda and it is difficult to say what the factor *really* should be. Good luck in trying.
Kjella
Live today, because you never know what tomorrow brings
Actually one could say that piracy hurts OSS. Why? Because it gives an individual one of the benefits of OSS (zero price) with the benefits of proprietary software (ease of use, familiarity, etc, etc). Why try the GIMP, or Apache, or any of the other OSS software when you can get the paid software for free?
Besides piracy also leads to market dilution, and various image problems. e.g A pirate copy of Adobe Photoshop could have spyware. Potentially ruining Adobe's reputation in the market.
"Many people recognize that the cost to duplicate a piece of software is a fraction of the number on its price tag."
Yea right! A good piece of software, say a game or an office suite or something takes R&D which costs money, the actual software development which costs money, testing and fixing bugs which costs money, writing documentation which costs money, producing the boxes/labels/CDs/etc which costs money, and advertising which costs money. Employees must be payed and until the software goes for sale, the companies have a lot of sacraficing money wise. Although a box, book, and CD don't cost much, if you sell your software for say $100, it still takes a LOT of software to be sold in order to cover the costs of the employees and their work. Sure, after awhile, for example with Windows XP and its 4 year age the cost to create it has been well covered, but for smaller companies its not just a matter of being a fraction of the cost to create it.
The premise of the "price" or "cost" part of the question is the fallacy called the "Labor Theory Of Value". The fallacy is demonstrated by the simple fact that no two people produce exactly the same "value" in the same time, or the same job. Price is a calculation separate from cost.
http://www.mises.org/humanaction/chap12sec3.asp
"The Sphere of Economic Calculation"
"Value" is utterly subjective. What is worth nothing to me is of tremendous value to someone else. One loaf of bread to a starving man is valuable beyond measure. One loaf of bread on a fully stocked store shelf is practically worthless.
Giving away the software and selling support is no different from giving away the razors and selling the blades, a business model with which Gillette made a fortune long before anyone had computer software to worry about selling.
Bob-
The Ludwig von Mises Institute. The reasoning individuals economics
The market determines the value of any good or service. People will pay exactly what they are willing to pay and no more than that.
If you think there are no alternatives to your product, or you have a monopoly for some other reason, you might be able to set a ridiculous price for it (as Microsoft tries to do -- 200 bucks for Windows XP? Hmmph). But this will cause everyone to pursue superior, cheaper alternatives and sooner or later, you'll be forced to drop the price significantly. Never underestimate the power of millions of pissed off people with time on their hands.
On the other hand, if you decide to offer the product at what you consider a fair price, and you do some research to see what people might ALSO consider to be a fair price, you've got a good chance of getting lots of people to buy your stuff. FAIR is the operative word here. It's a negotiation. In this case, even if there are alternatives, you'll still get a little action because people will like you.
I think Big Business sometimes forgets this. A good example would be the "20 bucks for a CD with ten songs on it" RIAA crowd. See what kind of trouble they're going through now? If they'd just charged five bucks for a CD in the first place, nobody would have given them a lick of trouble.
Farewell! It's been a fine buncha years!
Just this morning, I was wondering the same question.
There's this bulletin board software that I use.
It's open source, it's popular, it's free, but it is an unsecure piece of shit. There's a security fix for it every fucking month and once I got hacked because I didn't have time to update it for like 3 days (luckily the hackers - nice of them - only defaced the home page and left the mySQL DB untouched)
So this morning I concluded it SHOULD be free because I really wouldn't wanna pay or donate a single cent for that crap.
A lot of free software is worth nothing.
I know I'll get modded down for this, but really - think how much you would suffer if (for example) Postfix became commercial - you'd probably switch to qmail or whatever in no time. Big deal.
So for those free software that costs nothing, the value is probably equal to cost of switching to alternative.
For irreplacable free software, hmm, is there such thing?
Yeah, most of this support maintanence is mending artificially created problems. Fix today what you broke yesterday that fixed something else that you broke before that. How can you trust that they won't abuse such techniques?
You are often fine and dandy with the way everything works, then you get some new application, such as a new tax program, that requires you to upgrade a component in your OS, that requires you to upgrade your full OS, that requires you to upgrade your hardware, and toss the old stuff in the garbage. Behold the beauty of the free market at work, where "consumers" and their generation of massive piles of shit and waste is the utmost sacred thing in the world, which would be fine, but schemes of administering them even more laxative to keep this sacred process going in overdrive is not.
One thing I like is that TFA points out that with open source software, you as a customer can competitively select your vendor for maintanence of the software (as you should be able to do in any capatilistic / free-market system). In contast, for NON-F/OSS software you're forced to stick with a single vendor (damn commies)
That's only partly true. I read an interesting article in Wired some time back which examined the phenomenon that, although CDs are cheaper to produce than vinyl, they are significantly more expensive than vinyl was in its heyday, and that CDs sales growth (after the initial adopter curve) have far outpaced LPs (again, in their heyday).
The reason they gave, and I'll buy it, is that the additional profit margin allowed them to take bigger risks on smaller groups. I used to see Green Day at parties and punk clubs, and I never thought they'd get a mainstream record deal; however, when a company can take a risk on a 10,000 CD printing instead of a 100,000 LP printing and have a pretty good chance of making a profit, they're more likely to do this.
With this lower barrier to entry, a greater variety of music became available, and while a lot of it was crap (would Britney have ever made that first album in the days of vinyl?) it did members of the music buying community to find stuff more closely matched to their own personal tastes, good or not.
So in short, the first part of your comment was right in that the market determines prices, and since people were still getting a 'thing' when they bought music, it didn't matter to them that it was cheaper than an LP. The added value was that the 'thing' contained music that they really, really liked.
The same paradigm shift happened again with the introduction of highly compressible, easily distributable files. The incremental cost per album (in this context, meaning a collection of songs) went down again by another factor of 10, possibly allowing for even more risks, and a wider variety of music. However, the RIAA got greedy and did not want to lower costs again. People rebelled because they were no longer getting a 'thing', and it was obvious to them that the incremental cost per song was fractions of a penny. Feeling that they had been ripped off, they began to steal.
So should they have just charged five bucks for a CD in the first place? That's arguable; my position is no, as I think that the wider variety of successful artists was worth the price. However, should they have cut prices in half and immediately embraced downloads to pre-empt napster-esque distribution which meant even less profit per song (I know that this is arguable, too... but that's another post, for another time)? Yes, absolutely.
The problem wasn't that CDs weren't too expensive during the CD's relativley brief (20 years?) heyday; the problem was that they did not adjust. Broadband exists. Highly compressed music files exist. Cheap distribution exists. The masses understand it. If you work with them, they'll happily pay; if you don't, comedy will ensue.
I'll be interested in seeing what happens with video. My 3 year old 10GB iPod is starting to show its age; I'm holding my breath, waiting to see if they come out with a video iPod...
Ciao for niao!
The CB App. What's your 20?
The theory of labor would set the price of software somewhere below the cost of writing the software yourself.
With a good OSS layer available, the cost of "writing software" should be going down...which might be why big software companies nervous.
I hate it whenever I see a sentence that equates the cost of creating software to the cost of copying the software.
I am a software engineer. the piece of software I work on has 18 people working on it full-time to write it. THAT is the major cost. Duplicating it is a trivial expense. The cost of the people has to be amortized over all of the copies generated.
I contribute to open-source projects as well; I do that for a different motive than putting a roof over my head. Congratulations to those who can do that entirely with open source; for me, open source is like pro-bono work for a lawyer; I want to give back.
All that aside, you NEVER pay for the true COST of something, you pay for its true WORTH. The soft drink you are drinking right now has about $.06 worth of sugar water in it. I bet the can, transportation, and refrigeration cost more than the contents. I won't even try to calculate the cost for a $5 cup of coffee at Starbucks.
"When I informally polled enterprise software buyers about what they would pay for software given that they wouldn't be able to buy any maintenance for it (as a middleman, I'd be selling that to somebody else), the universal response was that they would pay much less than the license--implying that the option to buy maintenance was clearly a significant fraction of the price."
I wonder, what would he conclude if he sold the support without the software? That the software is worthless?
Digital Sailor
They wouldn't even listen to my question unless I gave them a credit card number they could charge $150 to.
Liberals call everyone Nazis yet they are the closest thing to it.
It's usually worth more than that. It's worth the value of the most valuable work you could be doing instead of doing the software's job. If you're a brain surgeon, your most valuable use of time is doing brain surgery which pays you say, $12,000/hour. Instead of spending time doing manual bookkeeping or writing bookkeeping software, you should either pay someone to do that or buy the software. You should spend as much time as possible doing brain surgery. This is to the benefit of both you, _and_ your clientele and your bookkeeper.
OK, point taken. What I _mean_ is that I'm amazed people buy it.
"Who are in control, they are not in control of anything - they don't even control themselves!" - Glen Beck
No it doesn't and no they don't.
People will not only pay exactly what they are willing to pay - they'll pay less, too. In fact, since most markets have a single price for everyone (or a small number of prices) and everyone is unlikely to put the same value on a product most people will be paying less than what they are willing to pay. The total difference between the sum of what everyone who buys is willing to pay and the total amount actually paid is known as the consumer surplus.
In the (mythical) perfectly competitive markets of basic economic theory price actually comes out as equal to the marginal cost of producing the product - close to zero in the case of sotware. It certainly doesn't find its value (how could it? most consumers would be unwilling to reveal their valuation even if they know what it is).
Software is different to most other products. If I consume a potato, say, this is a cost to the economy because I've reduced the amount of potato available for everyone else (or, if you like, because I've consumed something it's taken economic resources to create). If I 'consume' a copy of Windows it doesn't reduce the amount of Windows left for everyone else, it hasn't used up any economic resources (other than some trivial amount in the form of media or bandwidth) and it hasn't cost the economy anything. The cost of any existing software is zero!
Obviously, if software were priced this way little would be produced. If the cost of developing a particular piece of software is less than its worth (the total value to everyone who would consume it) then this is very much a bad thing (it's inefficient, in economists jargon). The problem is that charging anything above zero for software is ALSO inefficient! Suppose I charge 100 for some software I've written. Suppose someone values it at 75. Suppose it would cost me nothing (or close enough it doesn't matter) to get it to him. If I had a way to identify this person and he could prove his valuation then I could sell it to him at, say, 50 and we'd both gain. This isn't possible - so there's an economic gain of 75 going uncaptured, hence the inefficiency.
It's this (essentially insoluble) problem that ought to be at the heart of any intellectual property debate. IP, by giving it's holder a temporary monopoly, allows a creator to keep price above cost, creates this second kind of inefficiency and in doing so provides the incentives to create the product which solve the first source of inefficiency. Stronger IP laws mean that there is more incentive to create software (or drugs, or new machines, or whatever) but increase the second source of inefficiency by reducing competition and keeping prices higher for longer. Strengthening IP laws when there is already enough incentive to produce most worthwhile software is, by this argument, bad for the economy. [ Nor does it completely solve the problem, either. Imagine if two people are prepared to pay up to 50 and two up to 150 for some software and that it costs 350 to produce. You can't distinguish between these people (because they'd lie to get a lower price). There's no price at which you have an incentive to produce the software - and, unless a government or free software project steps in, an economic gain goes uncaptured ].
t's usually worth more than that. It's worth the value of the most valuable work you could be doing instead of doing the software's job.
That's called "opportunity cost" and *is* included (or it's supposed to be included anyway) in the cost analysis you'd perform before sinking a bunch of money into some technology/automation solution.
Everyone who stayed awake thru their undergrad "Economics 101" class should remember to include the intangible opportunity costs when figuring costs for conducting a business, but not all do.
The reason they gave, and I'll buy it, is that the additional profit margin allowed them to take bigger risks on smaller groups. I used to see Green Day at parties and punk clubs, and I never thought they'd get a mainstream record deal; however, when a company can take a risk on a 10,000 CD printing instead of a 100,000 LP printing and have a pretty good chance of making a profit, they're more likely to do this.
;) ). If I want something offbeat (say, In Flames - I love my metal!), I still gotta go downtown to the specialty shop to get it.
I don't buy this. I'm an indie artist, myself, and all I can say is that when it comes to the risk of a first album from an unknown band newly signed to a major label, the band takes most of the risk rather than the label, as the record company only usually advances enough to produce the album (manufacturing being a pittance of the cost compared to money spent on decent studio time and engineering/production. I've self-financed sub 10000 CD production runs, once eng/prod. is taken care of).
They then usually charge the entire advance against the band's royalties, as well as promotion costs, and often even entertainment expenses (say, a lavish CD release party that the band is merely invited to rather than consulted on, then the entire cost is deducted 100% from royalties).
For signing over exclusive rights to one's work, the label assumes suprisingly little risk, while the band may see nothing, even owe the label money for costs incurred. And then they charge the consumer $20 for it. They aren't taking extra profit from the Britney-level platinum album sellers and subsidizing the 'fringe' artists, they're taking the extra profit (and whatever they can scam from the artists), and pocketing it themselves.
Now, not being that old, I can't say I know what it was like in the LP heyday, but what I've heard from people involved far longer in the industry than I, there was tendency in the LP days for the top guys at labels, production companies, and studios to be people interested in music. Today, it seems much more a big business thing, the music is just another product, and the guys you would've found heading big labels in the 60's and whatnot are probably founding indie labels today.
With this lower barrier to entry, a greater variety of music became available, and while a lot of it was crap (would Britney have ever made that first album in the days of vinyl?) it did members of the music buying community to find stuff more closely matched to their own personal tastes, good or not.
I'd disagree. The variety of stuff sold at larger shops still seems to be the same 5 or 6 genres (rock, country, pop, blues, classical, and throw in electronic and hip hop these days) as was around as far back as I can remember (we'll say the 80's
Anyway, it's enough that I don't think I'd ever want a major label deal, when such labels get the cream both coming and going.
TFOAE
Having studied mathematical finance, I immediately noticed a flaw in this analysis:
The underlying price--the price you'd have to pay if you didn't have an option--we'll leave at $100. The next version will be priced the same as this one. Because you're upgrading, you have an option with a strike price of, let's say, $50. That is, you'll be able to upgrade to the new version for only $50. A five-year option for a $100 underlying price with a strike price of $50 and a volatility of 30 percent (with a 5 percent risk-free rate) is about $62.50.
Why is this option so valuable? Because you can purchase the software for $50 -- and then turn around and sell it at a large profit on the open market. However, although you can do this with stocks, you cannot do this with software upgrades. It would be, almost certainly, illegal (i.e. a license violation) to sell an upgrade to a user who was not already entitled to the upgrade.
Cheers,
IT
Power corrupts. PowerPoint corrupts absolutely.
That magic number, first of all, depends on the software and the conditions surrounding it. Also, it is not necessarily between 0 and 1. In some cases it is negative.
For instance, in your example, perhaps someone who wants to do some graphics work pirates Photoshop versus learning the GIMP. One could argue that it's better for Adobe's sake if they pirate Photoshop -- it serves as advertising and they are likely to buy a copy later on if they do professional work.
This is why it was dumb in the first place for the industry to create the BSA. The BSA treats all software the same, when what companies need to be doing is looking at all the software they sell, figuring out where it fits into the marketplace, and taking a different approach to copyright enforcement depending on the circumstances. (I should note that, unlike trademarks, copyrights do not need to be defended universally.)
I have seen the future, and it is inconvenient.
your economics needs work. People do not pay what they are willing to pay unless a supplier has a monopoly and can engage in perfect price discrimination. Neither has ever been the case in at least the last century, probably much longer.
Microsoft does not go off setting a ridiculously high price just because it is a monopoly(which it isn't a pure monopoly, it is actually the main actor in an oligopoly). They set the profit maximizing price and it happens to be that with market power, that price is higher than the price that maximizes consumer and producer surplus(think happiness, though this is a bad definition). Now, no one can pursue superior or cheaper alternatives if you are a monopoly, there are none. that is the definition.
So what is wrong with what you said? It doesn't matter if you(as the producer) think there are other alternatives or not. It only matters if the consumer knows they exist. If you do not, you will simply be put out of business. One complication, software differentiation. As long as two pieces are not perfect substitutes(no matter how close), there is room for price differentiation.
Furthermore, economics does not say that exorbitantly high prices were the problem for the RIAA/record industry. the problem was a cheaper, perfect subsitute(that happens to be illegal). A person could get the exact same song for a much lower price. While copyright laws are supposed to help stifle this, they have had only limited success. If they charged 5 bucks a cd, it doesn't change the fact that the price of illegal downloading(there big problem right now) would attract people. The answer is much subtler and lies in risk management.
Think of it this way, lets say that there is a 5000 dollar penalty on downloading illegally. Lets say that there is a 1 percent chance you get caught. this means you would illegally download anything with a 50 dollar price tag or higher, because the price has exceeded your price of following the law. Well, with music downloading, there is an interesting time dialation. Over time, the chance of getting caught goes up, increasing your maximum price you would pay. But assuming download speeds stay the same in this window, the amount of music you can download does not equally increase. So there are two options they could follow. by lowering the price, people who see there chances of getting caught as relatively high would be willing to switch to legal music. They can also attempt to increase the perception of the probability of being caught. They are currently doing both. Right now you can get a song for 1 dollar as compared to about 3 bucks for a single. This means for a 10 song album, the price is essentially 10 dollars. They are also increasing people's maximum willingness to pay by enforcing their copyrights.
The reason they can't just keep lowering prices as you would recommend is there are still profit margins to consider. Of course, if they just changed nothing, they would have no problems, but then they would be out of business. Big business does not forget anything that could increase their profit margins.
Your wild accusations of unfair pricing are just as uninformed. there is no such thing as fair in the market. Tehre is simply the price people are willing to pay and the price people are willing to produce at.
Closed Source:
Company A spends $.5mill developing an application (Wages, benefits, office, hardware, software, etc over a year and a half of development) Company B buys software from Company A
Company B buys support license from Company A
Company A spends $.25mil on new version
Company B buys upgrade from Company A
Open Source: Company A spends $.5mill developing an application. Releases app and source.
Company B downloads/builds source
Company B buys support contract from Company C
Joe Smoe makes improvements to application
company B downloads/builds Joe's source.
The problem here is that Company A never recoups their costs. Company A will stop making new software. Which could be fine if the Joe Smoes of the world unit and make a solid community development team. Company C gets rich however off of the support.
This CAN work however, if Company A owns Company C, or if Company C invests in Company A (ie: IBM donating to OSS causes). The writer of the article makes the assumption that Support = Future Development. It doesn't.
So it will work well for large companies that can dominate the support marked (and Asian phone support companies). But I don't see OSS being benefitial in the small business environment, where tight staff limits supporting ability and with out the initial income from sales it'll be hard to recoup the initial investments.
-Rick
"Most people in the U.S. wouldn't know they live in a tyrannical state if it walked up and grabbed their junk." - MyFirs
just to clarify some of your points. People do reveal there value for products all the time. Its in buying the object and understanding the market that the theory of revealed preferences comes into play. Its interestingly stuff and very subtle, but you can figure out the value a person placed on an object, after the fact.
Furthermore, you dont exactly arbitrarily choose your price. Some markets just don't exist because they aren't profitable to be in. If your software costs 350 and the market does not support this software, then it won't ever exist and this IS NOT an inefficiency. Consider the market for me carrying your package by hand to NYC from LA. Just beucase I am willing to do it for 1000 dollars and no one will pay it does not mean there is some inefficiency in the market place. Even if XYZ places the value of it at 50 dollars, the market hasn't lost that 50 dollars(on net, it hasn't).
Now consider your example. I know about marginal cost pricing of goods so stick with me for a second. Why does someone charge 100 dollars for a piece of software? This is where classical economics is no help. It has to do with covering startup costs. With software, fixed costs are everything. marginal costs are nothing. And if the marginal cost can never exceed the fixed cost, and average fixed cost never drops below price even at maximum market saturation, you have a problem. Software falls into this black hole of economics. While the ability to price discriminate(what you hint at with your example) is one solution, it is usually not feasible. So it should be included that price discrimination doesn't usually exist because it is so expensive to do(car dealerships are an excellent example of price discrimination. We were able to get a guy to go 600 dollars below invoice for a car to us, but other people paid MSRP, about 6000 more).
IP laws are in place because people actually value software as the several hundred/several thousand dollar price tag but there is no way of a software company to take advantage of this. We say that the benefit of having the software at all is worth having to deal with prices that are above the optimum for society(in this case, marginal cost pricing). What people need to realize is that software as we know it today does not exist without IP laws. This is not to say software would not exist, but IP laws allow for the creation of software outside of the case by case, contractual basis it would ahve to be to engage in price discrimination.
I don't think using Gimp and Apache for your example works. Apache is widly accepted by those who in general don't buy into the Open Source "paradigm", and Gimp is simply "not ready for prime time", just is nowhere near the professional quality that Photoshop users need.
"Who are in control, they are not in control of anything - they don't even control themselves!" - Glen Beck
not by the product's inner value. Estimate your target audience, multiply by license fees and see if your goals as a corporation are met. I think it's as simple as that.
or at least over my willingness to think hard on a saturday evening. But when you consider arbitrage of software and support contracts, isn't there a problem, that the support is worthless without the software? When you buy a "score" you're paying for a revenue stream, and when you buy the "prime," you're getting the right to vote at stockholder meetings. I don't pretend to know who gets what in case of a liquidation and return to investors. I suspect the prime gets the money in that case.
But my point is that both of these have some value. What can a person who doesn't have a Mac do with an applecare contract? Nothing, except sell it to another Mac user. In this case, I would expect the sum to be greater than the parts, because the support contract value depends on whether you possess the software or not. I think this should nix the informal poll on the value of software without support, though I could be wrong. I'd imagine that if you polled the same community about the value of support without price, and added up the totals, you'd come out way short of any reasonable market prices, and reason is simply because support is only valuable with software added in.
The only good thing here is that OSS generally pushes the price of software down to zero, by forcing you to allow competitors. But few companies attempt to do anything close to the kinds of equivilence arbitrage requires. Redhat doesn't offer a free version of Redhat Enterprise without support, and they don't sell support for Fedora Core.
Certainly, pricing is a delicate subject that can't be made in a four hour period for a TV show about entrepeneurs.
I Browse at +4 Flamebait
Open Source Sysadmin
..You must watch the outstanding PBS Nova episode titled "The Trillion Dollar Bet".
http://www.pbs.org/wgbh/nova/stockmarket/
I must say the article is the most interesting internet article I have every read. Maybe because I actually understand every part of it.. even the math.
The nova episode is also the most exciting I have ever seen... especially when you come to understand the real finanical implications of the option-pricing forumula at work in the real world.
Nobel Prize in Economics stuff hear folks.
- No Sig for you!
If open source software is free and remains free, how is it that upgrades (including maintenance) will cost money? The author needs to tackle this little conundrum in his thesis before leaping onto such concepts as the cost of "options" on something that is free.
ok, I guess I was being a bit pedantic. But I think the reason people must buy it in general is because so many groups lie and exaggerate that people get used to it and ignore it. Or maybe it really is that they are so naive? That is a scary thought.....
Qxe4
I price software as part of my job and I can tell you all this mathematical/economic cost/value stuff is speculation.
What my company does (and it's one that does this well) is start by projecting a market opportunity for what you're thinking of selling, and what you could collect at x% of that opportunity, high/low range. If it's enough to cover your costs at the corporation's internal rate of return (IRR), you can go forward into competition for investment dollars against other software projects, and if you win you get the cash to start product requirements and design.
But there are LOTS of sticky problems with this seemingly logical approach. First, you have to invest serious time and cash getting to the point where you can even make a credible proposal. This usually means taking some of the profit from your in-market (Horizon 1 or H1) products and using them for a bunch of 2-5 year proposals (Horizon 3 or H3), in the hopes that one or more of them will be winners and get fully funded by the corporation as strategic initiatives. Otherwise they die in embryonic stage, or, slightly better outcome, get combined as a feature/function of another H3 initiative.
Horizon 2 (H2) products -- perhaps the most interesting set -- are in early-stage and/or non-consolodated markets, have consumed a bunch of your H1 $$$ already, and are supposed to be growing at a rate commensurate with their status as strategic investments. This is still a dangerous place, as many H2 products are killed and their carcasses stripped for other uses. People often disappear as part of these activities too, which can be the most painful part.
So naturally the IRRs are very different for H1, H2, and H3 projects. "Hits" are as rare in this business as any other creative and/or competitive pursuit (music, publishing, performing, athletics). If you're not operating at an obscene margin with successful H1 products (90%+), you can't fund the future. So if someone complains about high maintenance or upgrade costs for software that has most of its development costs behind it, well, we're not going to get too upset. We'll strive to invest to improve and innovate the products so people pay their renewals instead of supporting themselves on older versions, or going to a newer version of a competitor's offering. But this is iteration, not revolution. And we'll do a market analysis based on what customers will pay, based on value but also on exit costs and alternatives, and we'll charge every penny of that to maximize returns.
Now -- the big problems with this, and the reasons it's all such an inexact science, is that we get market projections from analyst sources who are invariably wrong, and usually by a lot. This happens scarily frequently on H1 markets, so you can see what H2/H3 problems occur. Plus, it's often almost impossible to even define a logical market definition for a segment, because maybe it overlaps a couple existing segments, maybe it obsoletes one thing but not another, maybe it's altogether something new.
And maybe you get it ALL right and build a thriving software business, but some startup comes out of nowhere and kicks your ass anyway. Or MS copies your stuff in crude form and makes it part of the OS. Or some OSS equivalent gets giddyup and suppresses your prices below what's required to be profitable.
That's why so few of these things ever turn out to be real moneymakers, and why you don't see prices for successful software getting cut once the investment is recouped. When you have one, you do whatever you can to extend its lifecycle to infinity. Customers actually help you a lot here, because once you have them using your software to solve problems, and getting getting value out of your deployed software, they don't want someone (especially you) coming along telling them, "Aw, that stuff is garbage, I have something way better here for you." Because that means they have to migrate and retrain and invest and disrupt and (most importantly), TAKE RISK. Customers don't lik
I'm looking over the wall, and they're looking at me!
The "options" make up most of the price of the software, leading him to conclude that the actual licence is worth next to nothing. However, a big part of the options is the $50 discount you get if you already own the software.
If the bare licence would cost $0, then so would the upgrade.
Even if you can split off the option to have maintenance and upgrade into a separate value, it does not mean it costs the same - in particular, you will always have to pay for that option if you buy proprietary software(and you might not get returns for it - Windows support in the past ended 5 years after a release, or the company might go broke).
With free software, you don't have to pay for the option to have support, although you have the option to do so if you wish to be professional.
This means the article does actually not say that free software has the same price, but that the stripped price of paid for software is much lower and comes closer to "free".
I also suspect that the two options the author of the article mentions, maintenance and a cheaper upgrade, actually overlap, because the company will just sell you the upgrade instead of doing special maintenance. This means these two options add up to something with lower value.
I'm still trying to figure out what people mean by 'social skills' here.
A simpler and more effective approach is that of simple two-part pricing, which extracts more customer surplus (=value-price) than a single price does. One neither pays the "COST" nor the "VALUE" of the object, but something in between. No market is purely competitive (price=marginal cost), nor purely monopolistic. For more info:
http://en.wikipedia.org/wiki/Two-part_tariff
An alternative and equally simple way is to treat the maintenance costs as insurance. One loses money in expected value terms by buying insurance, but avoids really catastrophic possibilities.
The options explanation is truly overblown here.
Let me disabuse you, dude.
Then concept of 'volatility' was well understood before Black abnd Scholes. Indeed, the origins of thinking like that are at least as old as Locke or Hume. If you can buy something for $1.00 one one side of the road, and then legally re-sell it on the other side of the road for $1.01, then you might be prepared to invest a lot of money for a small gain, because the gain looks fairly certain. However, if the guy that buys the stuff is not there today, and the prices sometimes bob up and down by a few cents, then you probably won't because you risk taking a large loss, which will put you out of the game for good. So, you will factor in some extra gain to offset this risk. If the price is affected by many small and independent features, and each feature may be modelled by a simple bell-shaped curve, then the square of the width of the total distribution is equivalent to the sum of the squares of the individual distributions. So, if one factor may vary the price by on average +/-3 cents a day, and the other by +/-4 cents, then the total daily variation will be on average only +/-5 cents, not +/- 8 cents because the two variations will be cancelling each other half the time.
With care you can guess how a price may vary with time. If today's risks are more or less the same as yesterday's, then you can sum the squares as though they happened at the same time. So, crudely, we can guess that the width of our bell curve will increase as the square root of time - so the likely error in our prediction of the price in four days time is twice the likely error of predicting tomowwor's price. Okay, we can drop out the days when no trading happens, weight the days after holidays particularly heavily because people have had the weekend to consider their decisions, scale down the volatility over the winter because that's how people seem to behave, and so on.
That's about as far as the Black and Scholes equations go. This would suggest that individual prices go up and down, but the whole economy ought to be pretty stable. For every price that is dropping, there ought to be another one that is going up: the more prices you consider, the stabler the sum ought to get. At the small scale, and over short times, Black and AScholes may give you the right-looking noise on the top of your share price.
Reality check, folks. Economies are rarely like that, and healty economies are never like that. The skilled economists can make money out of a rising or falling economy, but have difficulty when things are stagnating. And, when the economy is moving, then the shifts in price are correlated to some extent, and the apparent volatility in one direction may greatly exceed the Black and Scholes model. So, B&S is a model, like the billard-ball model for gas molecules - it can predict simple thermodynamic properties of gases, such as the interdependence of pressure, temperature, and volume, but it casnnot predict the bulk properties such as viscosity, turbulence, and so on. Any self-respecting physicist would have binned this theory, or at least tried to incorporate some terms for overall economic drift, or general correlations. It does not work. It could never have worked for long. Its predictions do not look like any real economy.
Yet, somehow, these people have got control of all our money. How did that happen?
"Even if you can split off the option to have maintenance and upgrade into a separate value, it does not mean it costs the same - in particular, you will always have to pay for that option if you buy proprietary software..."
/get/ support. I have never seen it being asked how much would proprietary software be worth /without/ the option for support. It turns out that most of the value may be in support afterall, which is exactly what Free software critics have been arguing. This is one reason this article is so damning to proprietary software. It takes the primary argument of the Free software critics and says, "If only you understood how right you are!"
The author asked enterprise software customers how software pricing would be effected if there were no support options. They replied that it would devalue the software a lot. This alone is instructive as it asks the support question in a way I have not seen before. Most arguments for proprietary software revolve around the ability to
The real insight comes at the end of the article where the author notes that as far as the market goes, Free software provides more support options to the consumer in the context of free market capitalism, which should produce the best value for the customer via competition. If you buy the numbers in the article, most of the value of software, Free and Closed, is in support. So the model that produces the best support structure should win.
With proprietary software the free market goes out the window once you purchase the software and get locked into a long term support contract. Not true with Free software.
My point is that this article should be a banquet of food for thought. It applies some real math to the problem of TCO rather than anecdotal ranting or simple competition driven pricing models. This is not about what the market will bare (competition driven pricing) but an analysis of costs and value from the standpoint of an economist.
Kind Regards
"A few great minds are enough to endow humanity with monstrous power, but a few great hearts are not enough to make us w
those are the values of those pieces of software to your business.
those values will be different for other businesses, even businesses in the same field.
hence the 'value' of the software is subjective, or particular to the individual.
sum.zero
Let's set economics aside, because I don't consider it a science (I consider it a combination of wishful and magical thinking, derived from generalizations and simplifications economists shouldn't have made in the first place, that ONLY exists because so many in the business world agree to it as a sort of consensual delusion).
Let's talk about what REALLY HAPPENS when someone buys something.
Joe wants to buy a widget. Now, he thinks, it'd be nice to have this widget, but it's not a life or death thing, so I figure, maybe I'll spend ten bucks. If it's more than that, it isn't worth it, I'll get some plastic and make my own (or something, it's open-ended at this point).
So, Joe goes to store #1. He sees a widget for fifty bucks, and thinks "Fifty bucks! Fifty bucks! I can get a blowjob for fifty bucks! What are they, nuts?" and he leaves.
He goes to store #2. He sees a widget for twenty bucks. That's closer, but still a little pricey. He leaves.
He checks out Home Depot. He can get the materials to make his OWN widget for eight bucks, but it'll take a couple of hours. He decides to think this over, and checks online.
Online, he finds out he can order a widget for a total of ten bucks, but it'll take two weeks.
Now, will he buy online and wait for it to be delivered, or spend a couple of hours making his own widget? Or will he chuck the whole thing and live widget-less?
I say again. People will ONLY spend what they think something is worth, NOT what you're willing to sell it for. If your item is too expensive, people will either find an alternative, build their own workaround, or give up entirely.
Oh, and people downloading? That's a workaround.
Farewell! It's been a fine buncha years!
It's not inefficient if the total that everyone is willing to pay is less than 350. In my example that's not true. Two people are prepared to pay 50 and two 150 - a total of 400. A perfect economy might charge, say, 40 for the first two people and 140 for the second two (it might charge other similar amounts, too). The buyers all gain - they get something they want for less than the most they'll pay. The seller gains, too - he develops the software for 350 and sells it for a total of 360.
NOT doing this is inefficient because everybody gains from it. The market might not let this happen - for the simple reason that, in many cases, it just isn't possible to charge different people different prices.
Oh, definitely. The question isn't whether we need IP laws, it's: how strong? Not just 'how long before literal copying is allowed?' but also questions such as 'how much protection should there be against copying look and feel, names, algorithms and business methods?'.
Weakening IP laws might mean that some worthwhile software is never written. It also means that the software which
It always amuses me when people say that. They almost invariable go on to make some kind of economic argument. If thinking and arguing over how someone make a choice about whether and where to buy something isn't economics then I'm a sabre toothed lesser spotted walrus.
I didn't say people wouldn't do that. What I said was that people will not only spend what they think something is worth to themselves; they'll happily pay less, too. Originally you said that people will pay *exactly* what they are willing to pay.
Whilst obvious it's important because of what you said in your first sentence: 'The market determines the value of any good or service.'. Many people are paying less than they are willing. That means that neither the price charged nor the total revenue give you much of a hint of the economic value the product brings to society. If you're lucky they'll give you a lower bound. Once the various things economists spend silly amounts of their time worrying about have taken their toll (tax, externalities, information asymmetries and plain ordinary stupidity) they might not even give you that.
Something similar 'happened' to me. Let me explain briefly.
Years and years ago a nearby donut shop had Bally Midway's Tapper in it (the real 'Budweiser' version not the 'root beer' version). So I started playing it and got really good at it.
That was the problem (it did help the game was at the lowest skill level).
Apparently, my long games I played used up more electricity than the profit the shop owner could have gotten from the 25 cents I put in the game to play it. He was very annoyed. So one day, just for me only, he temporarily adjusted the game to the highest skill level and I played it.
I lasted probably about half an hour before I lost. The game action was simply too fast for me.
Oh well.
Perhaps I had the last laugh as around that time I had one game last about 8.5 hours. I did this to find out what happened to the game after 255 levels of play.
It starts all the way over like you just put a quarter in. It doesn't 'glitch out' like PAC-MAN or 'lock-up' like GALAGA does when they reach level 255 and beyond (if possible).
Because of the 'pattern play' I used against such Bally/Midway classics like TRON, PAC-MAN, (and BURGERTIME!) I gave up on them and started playing fighting games principally by CAPCOM and SNK and pretty much never looked back. Fighting the computer was diverting but the real fun was fighting another human in a 'versus' contest on these class of videogames.
Nowadays, its just 'graphics, graphics, graphics' and as a result I've all but stopped playing videogames except the classic ones from the late 1970s to early 1980s where, to paraphrase STREET FIGHTER's Ryu (Hoshin): 'The gameplay is all.'