The popular reason pure software companies have great profit margins is for marginal investment in providing the product/service to more users, given software's replicability. That's the reason everyone likes to repeat.
The true reason is that they price similarly to physical goods companies, without the same recurring costs. The difference between physical raw material costs and total expenses which go into reproducing the product/service for each new additional user, which software coys do not have deal with, is what makes up "high software margins".
But pure software products/services shouldn't be priced like their counterparts with recurring costs. They have an abundance quality.
Software companies would probably argue with you if you questioned their pricing, given the relatively low marginal recurring costs they incur, probably throwing terms like "capturing the value you create" at you.
But that isn't how price works. Price isn't determined by value created. Nor is it determined by supply/demand.
So the trick has been pricing at similar rates as regular physical goods companies. At a closer look, one could decide that is wrong. Unlike what most people think, the price of a product/service isn't determined by demand/supply. Price is determined by scarcity/abundance, so that demand/supply only come to matter in the face of scarcity.
"Capturing value" is a bogus concept which shouldn't exist.
Think about air. Air is pretty cheap to the average human. Sure, there are other factors surrounding its existence like its quality in certain places based on gases dumped into the atmosphere by natural or human activity, or other things like geographical altitude. But no average healthy human pays a dime to afford air, important as it is to them. Ergo, air is very very cheap, even though it is of enormous value to each human.
The reason air is cheap is that there is an absolute abundance of it. This abundance exists in multiple dimensions, including:
(i) absolute abundance: there is so much being produced that compared to amount used up, the ratio of amount used up is completely negligible, hence never any scarcity (ii) its natural existence and recycling: there are no factories managed by certain companies who need to buy raw materials to produce and sell air as a good, or recycle used air for re-use (iii) It is 'plumbing' free i.e getting it to users is free. No one needs to build an air supply chain.
Water, which is also naturally existing, in comparison, is far more expensive than air. (i) It needs refining (production managed by people) for certain uses. (ii) It needs actual plumbing to get to users.
Not to talk about the same factors like pollution affecting it which also affect air.
So air is pretty valuable. The only reason for its cheapness is its absolute abundance, not the value it creates. Granted, air is entirely naturally-occurring, and then some people might argue that it is what is responsible for its cheapness. How about water then, which does require some work to become usable to end-users?
Why doesn't water have high profit margins?
And software is abundant not quite in the same way that air is, but like water is. Sure it does need some 'producing', but it is virtual and easily copy-able. New work done in making it available to one more user is very low. That factor is what gives it its abundance.
Why do software companies have high profit margins then? Why aren't Google and Facebook ads a lot cheaper than they are since it's all built on dirt-cheap software?
> Why do software companies have high-profit margins then? Why aren't Google and Facebook ads a lot cheaper than they are since it's all built on dirt-cheap software?
Because it's not about the software but about the network and data. The software is easy to replicate, but the network/data isn't - the same goes for Uber/Airbnb. The reason they can charge so much for targeted Ads is because they have all the data.
> Because it's not about the software but about the network and data. The software is easy to replicate, but the network/data isn't - the same goes for Uber/Airbnb. The reason they can charge so much for targeted Ads is because they have all the data
I'm saying in the post that it shouldn't matter what makes the service/product hard to replicate. Since the cost of providing the service is low, so should the price. High profit margins shouldn't exist at all for regular goods and services. (Maybe even luxury goods shouldn't exist at all, it's mindless consumerism and d1ck measuring contests, what beneficial purpose do they serve? They are transfers of wealth from dumb people to their cunning, exploitative counterparts)
It's silly to allow pricing to be "whatever a consumer is willing to pay". That's valuable $$$ not being invested in a sector that actually needs it. I'd also severely regulate advertising. If your product/service were that good, it would spread mostly by word-of-mouth. Of course there are other functions of marketing/advertising, and that's why I would severely regulate it, not prohibit it entirely.
In general, I am very disgusted by all of the inefficiencies in our economic system. Things could run a whole lot better.
>>1296 The high cost of software is almost entirely the high labor cost of creating it in the first place. We do not have software abundance. We have distribution abundance of the scarce software we do have. Software is at the limits of economies of scale, where marginal cost is almost zero but capital/labor setup cost is extreme.
With open source, software is basically free like air if you want it like that, but open source lack of business model can't always motivate the high labor expenditure to produce and maintain the stuff. In commercial software, arguably the industry doesn't manage to charge enough to really build all the software that should exist. Almost anyone who manages to charge successfully at software scale at all becomes rich. Very few can pull it off and they are well paid by supply and demand for their trouble. Alternately, if more people could more easily charge for software, the increase in labor supply could bring those "wages" down to reasonable levels.
I don't see the problem in any case except that it's hard to build software worth paying for and hard to build the trust and model for people to pay.
> The high cost of software is almost entirely the high labor cost of creating it in the first place.
Also, you have to be paying for the millions of always-on, backed-up, omniscient computer servers necessary to be a Google or a Facebook. And the people to fix them when they break. Etc.
What I mean is, there's tons of invisible maintenance costs for centralized software projects. In decentralized projects (Bitcoin, Eth's Farcaster, dapps) the maintenance costs are upfront and per-user, and thus more visible, plus more expensive in total because of the decentralization overhead
When I was at Apple, I worked in the Internet Services division, which includes iCloud. Apple (and Google and Meta) depend on giant datacenters all over the world filled with hardware for their core software services. Without those datacenters, much of your iPhone software would stop working. The actual cost of providing those software services is not low.
None of you understand the post at all. And that's sad.
On the other hand, it means I can go ahead to acquire my own personal wealth with inflated software prices without really feeling guilty. I did try to explain it to everyone after all. But "they wouldn't agree".
>New work done in making it available to one more user is very low. That factor is what gives it its abundance.
I agree with the microeconomic framing of marginal cost, which in competitive markets will tend to be close to the sale price. As a rough example, the price of a taco should depend more on that additional tortilla and meat that went into it than the fixed costs of rent. If the shop is out of tortillas it's out of tacos.
It's true, the marginal cost of providing Google services to one additional Google user to Google is extremely small. Software services are strongly non-rivalrous (use by one person does not significantly reduce availability to others, like water and air), but strongly excludable in many instances (it is possible to restrict availability only to paying customers, unlike air, but like potable water). In the case of water we have *collectively agreed* that it should be a public good (i.e. not exclude it by charging for it at public taps). In the case of software we are not in clear agreement about what to do about it and the power to determine the provision of services is in the hands of factions who can operate somewhat independently from governing authorities, so they do and inflate software prices or do a sleight of hand by showing you too many ads.
Not that the governing authorities really have a good model of what's going on either. It's legitimately embarrassing to watch them try and take on the software factions. All of this while the software factions take on more and more of the traditional roles of government in provisioning public goods and services such as maps, education, census counts, etc. Why do people not realize this? My guess is that most of them are too enthralled to know what's really going on.
>Why do people not realize this? My guess is that most of them are too enthralled to know what's really going on.
This really only is a guess for them. For the rest of us, it is probably that software is new. We haven't yet adapted to how to think about it in a governance context, especially one in which software factions are taking on many of the traditional roles of governments. Software companies are outdated in terms of what they seek to maximize, which may be a key limitation.
>>1466 >All of this while the software factions take on more and more of the traditional roles of government in provisioning public goods and services such as maps, education, census counts, etc. Whoever provisions public goods becomes the government. There's some truth to that.
>>1465 Try explaining again. If your big gotcha is "I'm going to create new software and then 'overcharge' for it" good luck to you, man. Let us know when you launch so we can buy your product. Good software is valuable and scarce. If you can create more of it, let's go!
>>1469 good software: works, does a useful job well, doesn't crash or have bugs, is a joy to use, doesn't use too much energy or have weird latencies, changes your life for the better.
But you previously said that there exists software that has worth. Surely then, that software would serve some generalized form of the good that you believe in, would it not?
Anonymous #6 is the very first person to understand my argument, even though I have been pushing this stuff in everyone's faces for almost a year now. Everyone else tries to defend the margins by talking about the things which give these companies their business moats, completely missing the point.
Great business moats do not justify the insane margins.
I learned the rudiments of this framework in >>1466 in introductory economics, though my formal training is not in economics and I am not an expert on this subject. The development of the theory is generally attributed to Alfred Marshall in his work, Principles of Economics, clearly influenced by classical economists such as Adam Smith. Given the state of the discussion here it may be useful for us to read some of these texts together.
The issue here is more of economic efficiency than prices at "what the market will bear". In microeconomics one speaks of a notion of efficiency. There is allocative, or Pareto efficiency, in which changing the allocation will not make anyone worse off, and productive efficiency, in which production of one good will not decrease the production of any other group. In the case of high software profit margins, the monopolist is able to set higher prices due to market power. This lowers the consumption of the good to a level lower than what it would be under perfect competition, which is a form of allocative inefficiency.
If we're going to delve into economics, I would advocate including the modern Austrians in addition to the conventional neoclassical authors like Marshall.
I say that *not* out of any libertarian sympathy (I'm not a libertarian) but because the Austrians have a much better grip on concrete economic dynamics and are much less blinded by over-simplified mathematical models. Their descriptive economics can easily be separated from their normative preferences.