Is software just a commodity?

May 31, 2008 6:45 PM

Is software just a commodity? I'm not a student of economics. I understand that a lot goes into software projects but at the end of the day the product is just an expensive apple value-added mainly through labour, is that it?

What is the validity of saying custom-produced software is just an expensive good or commodity?

I'm just wondering what other considerations I have to make, as I'm sure there are fundamental differences between farming apples and producing software. Again, I don't study economics, but I'm trying to keep an open mind and see what I may be missing. Academically, could we just be simple and say, what the client is willing to pay is equal to the economic value of the software or project?

posted by gttommy to work & money (25 comments total)

What the heck is the question, here?

Could we just be simple and say, what the client is willing to pay is equal to the economic value of the software or project?

Sure, but then again you could also say "what a customer is willing to pay for (ITEM) is the value of the (ITEM)." and just as right-on.

That's got nothing in particular to do with software. That's the definition of market pricing.
posted by rokusan at 6:55 PM on May 31, 2008

An apple has value intrinsically (as food).
Software only has value if people deem it useful.

So if you took $10,000 and invest it in the growth and production of an apple crop, at the end you would end up with $X value in apples (dependent on supply of apples and demand therefor)

And if you took $10,000 you *might* end up with a completed software product within the same timeframe. And it *might* have value in the market (dependent on demand and the problem it purports to solve)

The difference? If the apples don't sell, you won't starve.

Of course, the flip side is that (if you are a (good) programmer) the initial investment could be much, much lower (your time + a desktop computer) than if you were an apple farmer - and potentially much, much more lucrative.
posted by namewithoutwords at 7:00 PM on May 31, 2008

What is the validity of saying custom-produced software is just an expensive good or commodity?

I don't understand the question. What does "just" mean in the sentence above?
posted by TrashyRambo at 7:00 PM on May 31, 2008

oh, and to address the other question - EVERYTHING made available in a market-driven economy is a commodity.
posted by namewithoutwords at 7:03 PM on May 31, 2008

To the question in the title: Is software just a commodity? What are my other choices?
posted by GuyZero at 7:06 PM on May 31, 2008

"To the question in the title: Is software just a commodity? What are my other choices?"

Guessing but... software doesn't suffer from scarcity - once the labour has been put into it, you can get as much or as little of it as your infrastructure wants, forever after.

So in that sense, software resembles a discovery or technological development, more than a commodity. An advancement in knowledge - something that can go into a library for other people to benefit from, without the original owner having to lose it first (as would be the case with an apple).

IP laws are in place specifically to make discoveries and technological developments behave more like tradable commodities, so the difference is very much tied up with society's legal structure.

So, yes - with today's IP laws, software can be treated as a commodity. But in a free market, this might not be the case. Software is not inherently a commodity, but we have designed our marketplace so that it is.
posted by -harlequin- at 7:20 PM on May 31, 2008 [2 favorites]

No, of course not. Different programmers are paid different amounts based on the differences in quality between the sofware that they respectively produce. That's exactly what makes something not a commodity.
posted by Flunkie at 7:30 PM on May 31, 2008 [1 favorite]

So if you took $10,000 and invest it in the growth and production of an apple crop, at the end you would end up with $X value in apples (dependent on supply of apples and demand therefor)

And if you took $10,000 you *might* end up with a completed software product within the same timeframe. And it *might* have value in the market (dependent on demand and the problem it purports to solve)

False dichotomy. Your apple crop can fail just as easily as your software project can fail. You can easily starve if your apple crop happens to be located far from where you happen to live.
posted by b1tr0t at 7:49 PM on May 31, 2008

Software (which includes things like movies and movies, not just computer programs) is not a commodity in the sense that most people use the term. A commodity product is one where sources are interchangeable. The product will be about the same for your purposes no matter who sells it to you, as long as the source achieves a reasonable quality level.

You don't care which wheat farmer produced the grain that made your bread. You don't care where precisely the petroleum was pumped which was converted into the gasoline you pump into your car. Those are commodities.

But music from Metallica is nothing like the same as music from They Might Be Giants or the Stones. They're not interchangeable. If you want to listen to Metallica, Peter/Paul/and/Mary isn't an acceptable replacement. Music is not a commodity.

That's the case for computer software, too, for a very large number of reasons, and that's the reason why Microsoft makes a king's ransom about every three minutes selling Office, even though there are alternatives which can be downloaded for free (e.g. OpenOffice). When people want Office, they won't settle for anything else. That means it isn't a commodity, in the usual sense of that term.
posted by Class Goat at 8:26 PM on May 31, 2008 [2 favorites]

Software (which includes things like movies and movies...[sic] (I assume you meant music)

So, it depends on your definition of "software".

There are some types of software that are essentially consumables, like video games. In this sense it's a commodity in that it's something that's sold through a channel and one type is essentially interchangeable with another, e.g. tetris and GTA 4 are interchangeable from an economic standpoint.

Some forms of software are more like capital infrastructure though - they are large costs that lead to productivity improvements in a workforce. Exchange, Office and anything that's in-house enterprise software is more like a piece of industrial machinery. It makes you better at doing whatever it is you do.

Then there's embedded software which doesn't have an independent economic existence and just goes along inside whatever it's in. Mobile phone firmware, CNC machinery control software, whatever.

Anyway, it depends.
posted by GuyZero at 8:48 PM on May 31, 2008

Academically, could we just be simple and say, what the client is willing to pay is equal to the economic value of the software or project?

Well, we could say that in the capital investment model the value of the software is the difference between the firm's output before and after the software was installed. If a bank computerizes its records and its profit goes up $1M then the system had a value of $1M regardless of what they paid for it.
posted by GuyZero at 8:51 PM on May 31, 2008

Software isn't a commodity at all. Most people use closed source software for everything which usually costs money and is often pathetic. However, I use almost all open source software which is usually free of charge, very customizable, and simply superior to closed source programs of the same type. I even use Ubuntu for my operating system which is open source. Only 5% or less of the software installed on my computer is closed source, and most of them are games which there is no open source version with similar game play.
posted by realitytvlover at 9:20 PM on May 31, 2008

Open source software still has inputs and provides some benefit regardless of how much you paid for it.
posted by GuyZero at 9:39 PM on May 31, 2008

Thanks for the responses, I appreciate the different viewpoints.


rokusan: "What the heck is the question, here?"

TrashyRambo: "I don't understand the question. What does "just" mean in the sentence above?"

I'm wondering if the same models/theories used to determine the price of an apple could be applied to software projects.


GuyZero: "So, it depends on your definition of "software"."

I was thinking more in terms software at a business level, for example video games or embedded software may be bought at a fixed price by consumers, but before it gets to that stage, there was an investment made either internally or by a third-party to develop the software.
posted by gttommy at 10:03 PM on May 31, 2008

I understand that a lot goes into software projects but at the end of the day the product is just an expensive apple value-added mainly through labour, is that it?


Not quite. Don't get suckered by the labor theory of value, which proposes that the value of the software project is somehow proportional to the amount of labor that goes toward producing it. The idea that more work equates to more "value" may seem intuitive, but it simply doesn't make sense.

Is a piece of software more valuable if it's written by a team of hundreds of programmers over the course of several years rather than one dude in his basement? Not necessarily. Would it somehow acquire more value if more labor was expended -- say, if the management hired more programmers, or made the production more labor-intensive by requiring employees to speak in Pig Latin and code in assembly language? Probably not. And when you consider purchasing a piece of software, do you wonder how long and how difficult its development was, and how much labor was involved along the whole supply chain when thinking about how valuable it is? I hope not -- it would make Windows Vista the most valuable piece of software ever written.

If you're like me, you probably have a much simpler definition of value. How much do you want this piece of software? How useful is it to you? Your perceived value is totally subjective, but if you're rational, it's probably related to the marginal utility of one more software program, at least as you perceive it.

Of course, software is a unique thing. It's very useful, and often costs a lot up-front to create, but once written, it costs nothing to duplicate and can be distributed to pretty much everyone at no or negligible cost, regardless of how much they value it. Thus, the marginal cost of software is low or zero, and its price tends towards free -- Google Docs is a great example of this phenomenon.
posted by ecmendenhall at 10:10 PM on May 31, 2008

Google Docs is a great example of this phenomenon.

Google Docs is a very poor example because there is a cost to Google associated with operating it. Google gives Docs away for free because it enhances the Google brand, and they make a ton of money from the adwords business. I don't host applications for free because I don't have an unlimited source of income.
posted by b1tr0t at 11:07 PM on May 31, 2008

A service like Google Docs is probably not the best example, but it's not as bad as you make it out to be.

I'm guessing the marginal cost of a single user of Google Docs is significantly less than the marginal cost of distributing a copy of Microsoft Office was a decade and a half ago, back when CDs were still somewhat pricey and they shipped printed manuals (as well as offering phone support).
posted by Good Brain at 11:32 PM on May 31, 2008

Software is not fungible. Obviously copies of one piece of software are, but different instances as produced by different people, generally, are not. I think that's the critical difference you're looking for.
posted by polyglot at 11:42 PM on May 31, 2008

You're right, b1tr0t -- Google Docs is far from "a great example," and on further consideration, a complicated and confusing and terrible one, but I think the case can be made that Google is still acting rationally by providing access for free.

Yes, there's a marginal cost to Google of serving one more page, and that cost increases as they provide more and more pages, but from a marginal standpoint, it's still remarkably low. Not so much for total costs -- they're high simply because there are loads of users.

Google wants to produce where marginal revenue equals marginal cost. Since marginal revenue comes from ads rather than the price to the user of accessing the service, as long as the ad revenue from adding one more user outpaces the cost of serving another page, they'll keep on offering it.

Of course, there aren't ads in Google Docs itself (one big reason it was a poor example), but one could argue that it drives users to search and gmail, where they can potentially generate revenue -- enhancing "the Google brand," as you say above.

Then again, maybe it's just a giant money sink. The internet tends to turn economics upside-down.

posted by ecmendenhall at 12:41 AM on June 1, 2008

Class Goat produced an excellent discourse on what a commodity is, so I'll just visit what a "good" is from my non-specialist view point.

Trade can be divided into Goods and Services. One class of Goods are physical objects that provide their owner utility -- ie. satisfy a need or want (this class can also be considered "Wealth").

Services are intangible activities that provide beneficial effects similar to goods. Services are made available by Service Providers.

To answer the question, my thinking here wants me to say that Software is a trade good that enables a Computer (a Capital good -- something that is not consumed in the production of Wealth) to become a Service Provider of a given service.

hmm, the history of technology is the history of man creating Things to provide Services in place of human capital. Interesting topic.
posted by tachikaze at 1:48 AM on June 1, 2008

Google overall is a bad example.

The margins from the ads they display on search results pages are so think that they literally give everything else away for free and feed their employees three meals a day all off the ads profits. Read the Google 10K some time. There is only one revenue stream: ads. And over 60% of ads revenue comes from the search results page. Everything else makes no immediate economic sense.

How useful is it to you?

This is only true for very wide values of "you".

No one individual wants Oracle or SAP. These tools have literally no value to a single user. But they're the equivalent of an auto parts assembly line to most organizations - a massive capital cost that enables them to run their business. So how do you value an assembly line? Discounted future cash flows, etc. At some point you should go actually learn about economics if you want an actual answer to this question.

As far as how companies determine how much to invest in developing software, it's no different from any industrial product. How does Proctor & Gamble decide whether or not to build a new detergent plant? How does Verizon determine if they should put up a new cell tower? The answer: GET A MBA.
posted by GuyZero at 1:51 AM on June 1, 2008

To answer the question, my thinking here wants me to say that Software is a trade good that enables a Computer (a Capital good -- something that is not consumed in the production of Wealth) to become a Service Provider of a given service.

The separation of hardware and software, for the purpose of this question, is irrelevant. Software is certainly a capital expense and hardware and software are useless in isolation. In many organizations software costs are greater than hardware costs and the operating expense of electricity is higher still.
posted by GuyZero at 1:56 AM on June 1, 2008

There are two types of software. Custom or bespoke software, which is generally written to order for a specific customer (or group of customers) to fit a particular need. The best way to look at this kind of software is the bespoke service model. Whether it's accounting software, an online grades system or a document management system they're written or modifed to fit the needs of an individual business. The quality tends to tie directly to the skill of the developers and engineers, so is anything but a commodity.

Other software has become very generic, especially when dealing with implementing a particular standard. PCs themselves have largely become commodities, which price often being the prime determiner, rather than quality or specification. Web browsers would be a possible example of commodity software; you can choose one for a particular reason, but they are pretty interchangable, and all are free.

Copyright law and proprietary data standards are probably the only things stopping vast swathes of commercial software becoming commoditized.
posted by ArkhanJG at 5:17 AM on June 1, 2008

Software (and other published goods) is a funny beast, because as I have often described it, the second copy costs nothing. It's only the first one that contains 100% of the non-recurring costs.

Second, and in contrast to other published items, software EXISTS in a specific context. Without the platform, it has zero value.

So the $10,000 CAD program I bought on CD weighs EXACTLY what an empty CD weighs. If I drop it out of my car and a kid picks it up, it is useless, undefined, value-less to him, but a treasure to me.

The firware images (.hex or .S19 files) I used to provide for a motor controller or similar products were of no value without the application-specific hardware. In that context, a floppy full of data might be worth $50,000 to a client, but it too, weighs exactly what an empty disk does. In reality, they are paying for a specific arrangement of magnetic domains and I am some sort of magic organist recording an odd melody only I can play.

This is in contrast to apples, which we all can eat and which have, as others have said, intrinsic value.

These thoughts may not directly address your question, but they are relevant and odd aspects of software and I couldn't resist sharing them. Your question would, as others have also said, benefit from more precision.

...but I have heard it said before that if you laid all the economists in the world end to end, you wouldn't reach a conclusion!

Economics != precise.
posted by FauxScot at 5:46 AM on June 1, 2008

A commodity is a particular type of good, one where each unit is of roughly uniform quality such that units produced by different producers can be traded at the same price regardless of where they came from. Coal, iron, soybeans, gold, pork bellies: these are commodities. Prices for these items can be set by a board of trade rather than by a free market in trade because the price that each producer would be able to command for his/her goods would, in theory, be the same, because the goods are the same. The board sets a price of $X a pound for coal, and people who buy coal don't care whether they've invested in coal from producer A or producer B, because the coal they own is the same product.

Apples actually are not traded as commodities, because there are significant differences between different types of apples that come from different producers depending on the seeds used, growing techniques, climate, etc. Those differences in product make setting a commodity price impossible.

Similarly, one couldn't set a single commodity price for "software," or even for different classes or types of software such as "word processing software" or "operating systems" where each producer of those goods would command the same price for her/his products, because the products are not the same regardless of origin. Microsoft's operating system is not equivalent to Red Hat's, so a central agency couldn't set a single price for both and expect buyers who paid that price not to care which one they ended up with.
posted by decathecting at 11:54 AM on June 1, 2008