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Thursday, June 16, 2005

Commodification Of Software - Nope!!

Rick Schaut writes in response to commodification claims,Milk is a commodity. Given a taste test between Lucerne 2% milk and Wilcox 2% milk, only a very small percentage of the population would be able to tell the difference. Between various stores, you might find as much as a 50% difference in prices for a gallon of 2% milk, but that’s mostly because some retail sellers use milk as a loss-leader to bring people into their stores. Contrast this with, say, DVD players. If you go to PC World’s price grabber, you’ll find the most expensive player priced at just under $4100.00. The least expensive DVD player is $49.00. With a price differential of nearly two orders of magnitude, clearly the market for DVD players is not a commodity market. If we’re going to understand the process of commoditization, then our understanding had better account for the difference between the market for milk and the market for DVD players.
One way to understand that difference is to claim that all goods and services either are commodities already or will eventually become commodities, and that goods and services in markets with huge price differentials simply haven’t become commoditized yet. This seems to be David’s stance, though he doesn’t explicitly say so. The problem with this stance is that some markets appear to never become commoditized, and there is no real way to see how they can become so. Consumer electronics has resisted commoditization since the invention of the radio, and there’s no sign that commoditization is near. While overall prices in the market for consumer electronics have dropped steadily over the years, a wide variety of prices continues to be a feature of that market. Indeed, if anything, the price differentials have increased, not decreased. Another way to understand the difference is to note that some goods or services lend themselves to something called “product differentiation.” This concept is predicated on the idea that consumers have a wide variety of tastes, and that some are willing to spend more than others to satisfy those tastes. Goods and services marked by product differentia

David Stutz raised in a piece written sometime back in the context of perceived threat of opensource to Microsoft, Why be distracted into looking backwards by the commodity cloners of open source? Useful as cloning may be for price-sensitive consumers, the commodity business is low-margin and high-risk. There is a new frontier, where software "collectives" are being built with ad hoc protocols and with clustered devices. Robotics and automation of all sorts is exposing a demand for sophisticated new ways of thinking. Consumers have an unslakable thirst for new forms of entertainment. And hardware vendors continue to push towards architectures that will fundamentally change the way that software is built by introducing fine-grained concurrency that simply cannot be ignored. There is no clear consensus on systems or application models for these areas. Useful software written above the level of the single device will command high margins for a long time to cometion tend to compete on the basis of “features” rather than price

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