Wednesday, February 22, 2012

Software Shakeup

A nifty little graph appeared in The Economist that speculates about the future of software 'platforms:'
It is still too early to call the winner(s), but the outcome may be similar to the one in the PC industry: Android, an operating system maintained by Google, could play the role of Microsoft’s Windows (or DOS, its predecessor) and Apple’s iPhone the one of the Macintosh, its older and bigger brother (albeit with a much bigger market share). Only one thing seems certain: the PC’s dominance in the computer industry is coming to an end.
I have suspected for some time that a platform like Linux would eventually displace Microsoft, and perhaps eventually Apple (Note:  Android is built on the Linux platform.)   Actually, I figured it would be several such platforms, but for now I'll take what I can get.

To anyone with a 'feel' for economics, the whole OS market makes very little sense.  Whenever one observes a product priced significantly above marginal costs of production for a very long time, it is time to do a squinty-eyed analysis.  In this case, clearly there has been a great deal of market tampering in the form of intellectual property being used to put would-be market entrants into a choke-hold position, which has served to practically eliminate competition.

Just as a first approximation, I would expect the OS market and major, high-end software types (like word processors, spreadsheets, etc.) to function something like an oligopoly, with perhaps 4-6 major competitors at a time, and products priced in the $20-$40 range.  I say this because 1) once the code has been written, the marginal cost of production is effectively zero, but 2) the up-front cost of coding such a complex system must initially be fairly high, creating a significant natural market barrier.  Like the automotive market, the up-front investment limits those with the resources to enter the market.  Like the e-book, which appears to have reached an equilibrium price somewhere in the range of $0.99 to $2.99, I believe that in general software prices will eventually have to come down to a level where the purchase looks essentially 'reasonably trivial' to consumers.  This price level will ultimately come to dictate the quality of the OS, as it will decide how much initial investment can be expected to be profitable.

Of course, that is just speculation on my part.  But the bigger lesson is this -- the free-market does work; it can't be held back forever.  Sometimes it takes a very long time, especially when people try to create stupid laws to counteract it.  But eventually, it wins.  My advice:  don't make it your enemy, and don't make your living based on thwarting it.  You may get along high on the hog for awhile that way, but eventually it'll eat your lunch.  No matter how big you are, if you swim with the sharks, you'll eventually be eaten.

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