The Delusion

".. when a software product's vendor goes out of business (or if the product is merely discontinued), the maximum price consumers will pay for it rapidly falls to near zero regardless of its theoretical use value or the development cost of a functional equivalent. (To check this assertion, examine the remainder bins at any software store near you.)

The behavior of retailers when a vendor folds is very revealing. It tells us that they know something the vendors don't. What they know is this: the price a consumer will pay is effectively capped by the expected future value of vendor service (where `service' is here construed broadly to include enhancements, upgrades, and follow-on projects).

In other words, software is largely a service industry operating under the persistent but unfounded delusion that it is a manufacturing industry.

It is also worth noting that the manufacturing delusion encourages price structures that are pathologically out of line with the actual breakdown of development costs. If (as is generally accepted) over 75% of a typical software project's life-cycle costs will be in maintenance and debugging and extensions, then the common price policy of charging a high fixed purchase price and relatively low or zero support fees is bound to lead to results that serve all parties poorly.

Consumers lose because, even though software is a service industry, the incentives in the factory model all work against a vendor's offering competent service. If the vendor's money comes from selling bits, most effort will go into making bits and shoving them out the door; the help desk, not a profit center, will become a dumping ground for the least effective employees and get only enough resources to avoid actively alienating a critical number of customers.

To handle the real cost structure of the software life cycle efficiently (in both the informal and economics-jargon senses of `efficiency'), we require a price structure founded on service contracts, subscriptions, and a continuing exchange of value between vendor and customer. This is already the price structure of the largest merchant software products such as ERP (Enterprise Resource Planning) systems, for which the development costs are so large that no fixed purchase price could possibly cover them; firms like Baan and Peoplesoft actually make their money from after-sale consulting fees. Under the efficiency-seeking conditions of the free market we can predict that this is the sort of price structure most of a mature software industry will ultimately follow."

- Eric S. Raymond, The Magic Cauldron