the Onda

Both Matt Webb and the Economist this week are ruminating on the economics of the software industry. Matt has a interesting post which basically argues that there are other more compelling revenue models for building enduser software than the straight-up license (a lesson which I learned well while book-enabling the iPhoto application while the rest of the consumer image management space was cratering). He covers ads, subscription fees, and some other models, making a whole bunch of interesting observations along the way.

It was the piece in the Economist though that really made me laugh. Especially this juicy bit on why the SaaS (software as service) business model just isn't as good as its progenitor:

Vendors of conventional enterprise software made a killing by requiring customers to pay a high licensing fee upfront and then charging them for maintenance. Web-based firms, by contrast, have to make do with subscription fees.

We need to stop taking for granted that just because software vendors were able to maintain obscenely high margins for the last 30 years, it means that this should serve as a baseline for all software related businesses going forward. In the consumer space specifically, Microsoft's ability to extract rent for that layer of value seems to me to have been a historical accident— one that made Bill Gates very wealthy in the ensuing 30 years— but not necessarily one that can be relied on going forward. I know less about the enterprise space, but would be shocked if the same microeconomic force of marginal revenue trending towards zero wasn't in full swing in the age of the Internet, open source, and software-on-demand.

Instead we have to get used to saying that 22-30% margins are actually a great achievement, and that the era of crazy absurd software profits (though not growth, as Apple is showing), is now behind us. And the bonus is that in the process we get to repurpose old business models (atoms!) and invent new ones.

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