I mistakenly sent this off-list. I'm sending now on-list, and Alex's reply
with permission:
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My mail:
From: "Alex Hudson" <
home(a)alexhudson.com>
> Well, you seem to have an unwritten implication of "unless it's cheap
> it's artificially expensive", which would be difficult to argue
> against :) Cups of coffee are very, very cheap to make - but you don't
> see the likes of Starbucks selling them for pennies/Euro cents, in fact,
> the price is actually going up not down.
OK, maybe my use of the word artificial is unclear. What I was referring to
was, in essence, to legal (or other kinds) of restraints on trade and
distribution, such as information monopolies like Copyright, or legal
requirements of huge insurance (like in the case of digital certificates).
These things are not inherent to the dynamics of producing, trading and
distributing the goods, but instead are artificial man-made obstacles that
help to monetize the good (often to the point of super-profits). For
instance, consider what a copy of a song would cost, absent copyright.
> Many consumer goods are now extremely cheap to make. Obviously, there
> are other costs involved - particularly fixed costs of staffing and rent
> if you have a shop or something - but the actual cost per unit is pretty
> much unimportant for large numbers of products.
Somewhat true, but I would argue that although a cup of coffee looks a lot
like a good, for all effects it is a service. How much of a service it is
can be clearly seen in how much people are willing to pay to have one at a
café, versus having one for free in their office. Services have a very
different cost structure.
> And of course there are other types of product, like VOIP service, where
> the cost of having a customer is extremely low (sometimes nothing,
> depending on how your call routing works). Yet many people pay
> handsomely for the service.
Again, it seems clear to me that people aren't paying for a good here, but
for a service. Essentially people are paying for not having to bother about
it. Personally I think it would be a lot more rational to create some kind
of consortium that would administrate the service for a set of businesses,
so they can share infrastructure and costs and enjoy an economy of scale
plus avoid paying the profit for the service providers, but for whatever
reason this is not happening, and there might be something I am missing.
> I think you're conflating two principles there. Obviously, having a
> monopoly gives you the ability to make mega-profits. The fact that some
> leading proprietary software makers are in that "happy" position makes
> it difficult to talk about, because I would argue that it's the monopoly
> which creates the massive profits, not the proprietary model.
But both things are intimately entwined. One point I made which you didn't
touch on at all is that Copyright is a form of a monopoly ipso facto. There
can be only one rights-holder which sets the conditions for copying and
distributing the good. Given that software is so complex (if we imagine
every line of code is a distinct piece for instance software is the most
complex thing humans build) and so difficult to characterize, you are never
(or hardly ever) going to be able to compete on the basis of perfect
substitution, it's just not going to happen. So all proprietary software of
a given complexity has a monopoly of a sort. That said, clearly not all
monopolies are made equal, and some are going to be vastly more profitable
than others, no question about that. In contrast, anyone can trade with and
around Free Software, thus competition in the context of perfect
substitution becomes possible, and one gets non-monopoly pricing but
competition pricing. This is a bit less true than it is likely to be in the
future at this point, because sufficient expertise to deliver goods and
services in the free software world is not perhaps developed to a sufficient
extent, and so there are not that many people competing in the space of,
say, Red Hat, but I have little doubt this will change.
> That's really an argument about business model. Getting users to sign up
> for software and amortise the costs that way is a great idea; it's
> thoroughly impractical though, because you'd need many users up-front
> willing to pay the price. The lifespan of a piece of software is usually
> a few years, which is much easier to write costs off over. It's the same
> for free software, too.
I somehow don't see this argument at all. Say a user A needs or will need a
piece of software to do X. Why does it make more sense for X to buy it at
monopoly pricing, having close to zero input in the software's feature set,
having no freedom to get someone else to improve the software at competitive
prices, than pay in advance, perhaps in installments, pooling with other
users, and potentially backed with an insurance if the software ends up not
being produced, after which A gets an unencumbered copy of the software
which has at least more of a chance to being taylored to their needs?
> I think discussing this in terms of Microsoft, Adobe, Oracle, SAP, and
> Apple, IBM, etc. is really missing the point. These guys are global
> multi-national corporations. They're not representative of proprietary
> software houses, and they're pretty much bound to make huge profits no
> matter what they do, because that's the nature of the beast: they serve
> a huge market and have fearsome economies of scale.
Somewhat agreed, I just suspect that profit margins of proprietary software
houses are generally high.
> And it's not like software licensing is the highest margin product
> necessarily: in Oracle's last 10K filing, they say that their support
> business has margins of 84%. Practically every one of their software
> customers buys support as well, which is an ongoing revenue.
Fair enough, services can be extremely profitable too. But consider that
this is an ancillary service related to a good that is held in monopoly.
Noone but Oracle can give that level of service for Oracle products. It is
precluded in the vary fabric of proprietary distribution. Oracle is not
competing to service Oracle products in equality of conditions to other
companies. So this is just another front on which proprietary software
houses can extract super-profits, by charging non-competitive rates for
services they alone can provide.
> At the end of the day, prices are set pretty much what a market will
> bear, give or take a business's goals wrt. volume. I don't think
> software, free or not, would work much differently: although I do think
> there are well-known proprietary vendors who have a very comfortable
> monopoly in the market, I don't think that it's actually that common.
It must be kept in mind that software has artificially (through copyright)
been made into a rivalrous good. So although the market has something to
say, there are important market distortions in place1. Distortions which
would not take place in a Free Software context. Market pricing is
notoriously distorted by situations of monopoly or even sufficient asymmetry
in power between agents.
> I also don't think free software is any kind of economic tool: while the
> ability to share notionally does change things, in practise people copy
> proprietary software so much I don't think it changes much at all.
This is quite true of individuals and SMEs. It is much less true of bigger
companies and governments. In addition, proprietary software which is
sufficiently rare or specialized can be very difficult to find for people to
get copies at no cost. Also, there is an important tendency towards
utilizing technical measures in order to place obstacles to the free copying
of proprietary software, which makes this argument more compelling. While I
doubt that there will be perfect copy protection, sufficiently good copy
protection acts as a substantial barrier that enforces proprietary pricing.
1: I am not saying that a free, unrestrained, unregulated market is
necessarily what we should be after, just making observations on what
differences there are, and what consequences derive from them.
--David.
End
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Alex's reply:
David,
(Did you mean to post this offlist? Feel free to forward my reply
onwards if not).
On Wed, 2007-11-07 at 16:40 +0100, David Picón Álvarez wrote:
> From: "Alex Hudson" <
home(a)alexhudson.com>
> > Many consumer goods are now extremely cheap to make. Obviously, there
> > are other costs involved - particularly fixed costs of staffing and rent
> > if you have a shop or something - but the actual cost per unit is pretty
> > much unimportant for large numbers of products.
>
> Somewhat true, but I would argue that although a cup of coffee looks a lot
> like a good, for all effects it is a service. How much of a service it is
> can be clearly seen in how much people are willing to pay to have one at a
> café, versus having one for free in their office. Services have a very
> different cost structure.
I don't think you can argue a cup of coffee is a service. Being able to
drink it in a café is a bonus, but not required - there are plenty of
street vendors (e.g., AMT in London) who sell them on the street for the
same price. The product is definitely the drink.
For VOIP, I agree it's a service, but I was pointing out that people
will pay a lot of money for something which cost-wise "isn't much".
> But both things are intimately entwined. One point I made which you didn't
> touch on at all is that Copyright is a form of a monopoly ipso facto.
Yeah, I did ignore it, mostly because I don't think it matters.
For example, Red Hat sell their Enterprise OS and Cent OS give it away.
Their desktop costs ~£200, and that's before you add in the various
non-basic support options. By your logic, they're making huge profits on
each copy, but the price hasn't changed since the competitor giving it
away for no cost (CentOS) came into the market. In fact, I think they
put prices up after that - and it's effectively the same product with a
different name on it.
So, when you say:
> In contrast, anyone can trade with and around Free Software, thus
> competition in the context of perfect substitution becomes possible,
> and one gets non-monopoly pricing but competition pricing.
..... I don't think that's actually borne out in practise, and my point is
that you're not correctly distinguishing between monopoly and
non-monopoly pricing. The monopoly effect of copyright is actually
pretty limited.
>> [on amortising fixed-costs up front]
>
> I somehow don't see this argument at all. Say a user A needs or will need
> a
> piece of software to do X. Why does it make more sense for X to buy it at
> monopoly pricing, having close to zero input in the software's feature
> set,
> having no freedom to get someone else to improve the software at
> competitive
> prices, than pay in advance, perhaps in installments, pooling with other
> users, and potentially backed with an insurance if the software ends up
> not
> being produced, after which A gets an unencumbered copy of the software
> which has at least more of a chance to being taylored to their needs?
Simply because you'd never get the numbers of users to sign up to make
the costs bearable.
Software sales is almost classically entrepreneurial: "I will take the
risk of this up-front cost in order to try to make profit later". Your
pitch above is almost the reverse of that, "I will do this thing if
there is no risk to me".
If you look at the numbers, in the first scenario you say "I will sell
this product for X years, to Y people per month at price Z, giving me a
return of (X*12)*Y*Z". In the second, you need to get Y people to sign
up to a price Z such that Y*Z at least covers the cost of development.
By taking on the risk of the cost, the first scenario can stand a much
lower Z than the second because it has the X*12 to counter-balance.
I'm not saying it doesn't happen, but if you think of any product where
people can order to measure or buy off-the-shelf, the custom job is
almost always more expensive. There are no economies of scale, the price
may not be fixed, and you have to wait for it to be made. From the point
of view of the entrepreneur, although it's more risky there are also
chances of better profits, which is essential.
> > I also don't think free software is any kind of economic tool: while the
> > ability to share notionally does change things, in practise people copy
> > proprietary software so much I don't think it changes much at all.
>
> This is quite true of individuals and SMEs. It is much less true of bigger
> companies and governments.
That's probably right, but to bigger companies and governments, the
costs of software licensing are pretty irrelevant save for examples such
as Microsoft.
E.g., SAP are obviously a proprietary company. SAP also costs a lot of
money. But when you buy it, you get a hoard of business process
consultants come and tweak it all up for you, and what you have is
pretty individual. The ongoing support and maintenance of that software
is pretty much what you pay the money for. SAP are also extremely
profitable (last time I looked, anyway ;)
Why is there no free software competitor to SAP? The licensing costs
don't really come into it - I can speak from experience. I would also
argue that the licensing of it makes no difference the majority of
customers because the various installs are so custom: it's really that
aspect the customer is paying for, and there is no benefit to being
proprietary in that model, the lock-in exists by nature.
To be honest, it's very similar with finance software. The software is
pretty easy to put together, and is generally pretty breathtakingly
expensive. There is only limited value in the software itself, since the
tax rules and all the other bits are what really matter. It could easily
be implemented in free software, and customers won't care one way or the
other because they're basically buying a service. Again, though, free
software has made no significant in-road into that market.
It's pretty easy to say that monopoly-style conditions exist with
proprietary software, and in obvious cases that's clearly true. But
there is also a lack of competition from free software in markets which
on the face of it would suit that model *extremely* well. Yet, it
doesn't happen.
There is a real issue with the extent to which free software scales over
enterprises, and I would argue the majority of free software at the
moment is mostly suitable for small/medium sized organisations. People
at enterprise/governmental level aren't just not buying free software
because they don't like it; they're also not buying it because it
doesn't exist.
Cheers,
Alex.
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