Richard Stallman's new article: Overcoming Social Inertia

[David Picón Álvarez]

From: "Alex Hudson" <home at alexhudson.com>
> That's not really true. There are many examples of low marginal cost
> items - software isn't particularly special in that regard.

All goods of zero or next to zero marginal cost I can think of are either 
very, very cheap, or there is some kind of artificial regime that restricts 
their distribution in order to make them artificially expensive. 
Counterexamples are welcome, though, I might be wrong about this.

> A free market doesn't put a near zero cost on such a product, because
> that doesn't reflect the cost of the product: software for example has a
> huge fixed cost. The marginal cost is only one aspect of the overall
> costs, and you could only set the price close to that if you knew in
> advance you would sell sufficient copies to cover your other costs.

It is true that software has relatively high fixed costs, which (absent 
altruism) have to be paid by users somehow. However, I think it is reasonbly 
clear that a substantial amount of proprietary software is being sold at 
what can only be considered obscene per-copy profits. Even once a normal 
rate of profit is recovered from a given piece of software, per-copy pricing 
usually does not change, thus generating super-profits that are only 
expected in monopoly conditions. Of course, Copyright is a monopoly of 
sorts. In reality, it is almost impossible to produce a good which is a 
perfect substitute of a piece of proprietary software, since things like 
performance, data formats, exact feature set, UI, are of enough complexity 
that reproducing them perfectly is close to impossible. So in effect, the 
profits derived from software have a lot more to do with demand under 
monopolistic conditions than any notion of competition. Sure, there is 
imperfect substitution all over the place, which does have an impact, but 
far less than perfect substitution would, of course. In a rational world, 
even under a proprietary software paradigm, software users would pool 
resources and hire a software house to produce the software they need. After 
that, they could use as many copies as they wanted. However, probably 
because software management is perceived (with some fairness) to be very 
complex, users believe this to be far too high risk.

> The higher the fixed cost, the more risk a business takes trying to sell
> that product - you can make a big loss if the product doesn't sell.

You could finance the fixed costs by getting prospective users to pay for 
the software in advance, or through milestones. Of course, many software 
houses choose not to go this way, because they hope for the super-profits 
that come after the fixed costs are amortized and every copy comes basically 
for free.

> There are a few examples of companies who have made massive profits off
> proprietary software, like Microsoft. Most proprietary software doesn't
> generate anything like that level of profit; businesses selling such
> products are as likely to be unprofitable as any other business.

There is no guarantee that a proprietary software house will be profitable, 
but I would argue that, if the threshold of amortizing fixed costs is 
passed, very very high rates of profit are assured. Also, I doubt that 
Microsoft is as much of an oddity. Sure, it is the clearest and biggest 
instance, but there are plenty of smaller once. Oracle, Adobe, SAP, come to 
mind. Surely there are a lot more which are doing very well by 
regional/national standards, just not spectacularly well like the previous 
ones.

--David.


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