The law of gravity says software prices drop to zero: Wired editor

June 15, 2009 by Dave Haynes

Wired magazine is having its first-ever business conference this week, and as publishers will naturally do, a Wired editor got mike time.

In this case, however, the guy had intertesting stuff to say.

Wired editor-in-chief Chris Anderson told the opening session at Disruptive by Design that digital capability drives the prices of products and services down to zero.

“This law of gravity is un-fightable,”  Anderson says, as related in Wired online. “Because if you don’t do it, someone else will. Because they can. If it’s not zero today, it will be zero tomorrow.”

Anderson’s new book is about stuff that’s free, and is called Free: The Future of a Radical Price.

He traced the history of free products from Jell-O’s giveaway of billions of free recipe books starting in the ’20s to today’s free e-mail programs and beyond. His central thesis: as the marginal cost of creating a product drops towards zero, its price will do the same. Companies that anticipate these trends can sometimes disrupt entire markets — see transistors vs. vacuum tubes in the ’60s.

“This is the law of gravity online,” said Anderson, referring to Joseph Bertrand’s 1883 statement that “In a competitive market, price falls to the marginal cost.” However, that’s not to say that no one will pay for anything in his model.

“What it says is that anything that becomes digital will become free — not to say that everything online will be free, but that everything will be available in a free version, so that fundamentally, you’re either going to be competing with free or you’re going to be making a product free and selling something else, because the marginal cost for these products is the same for everybody — which is to say zero.”

Anderson sees many areas of digital content as obeying this law, including music, video, and video games (the big three “shiny disc” industries), news, books, and e-mail.

For those without business degrees, or who spent much of business school at the local watering hole, this is what he’s going on about with respect to “marginal cost.” if it costs $50 to make an end table and a total of $75 to make a pair, the marginal cost is $75-$50, or $25.

So why am I going on about this? Because the same thing is happening in this industry with respect to software – with hundreds of players the cost is increasing commoditized and we have already seen the “free” players come into the marketplace.

So what do you do, as a DS software company?

Well, if your platform is out of line with what seems to be settling in as the industry norm for SaaS models (something around $25-$35 a month in low  volumes), then maybe you’ve got big troubles. You are a very long way from free, so what you have better be “throw the Earth off its normal rotation” good.

If you are in around the norms, and have an established reputation and solid client base, you’re probably not worried all that much about free stuff. 

As Anderson notes, smart business people WILL be prepared to spend real money (even if they know they can get essentially the same functionality cheaper or even free) because they want some reasonable assurance and comfort that the platform will stick around and will be supported.

The companies that are probably more challenged by this free business than anyone are those companies that have hung out the “Free!!!” shingle. The whole idea of the free schtick is either a bait and switch scheme or a critical mass play. You offer a free version but if you want stuff like video support or reporting, you pay. Or you get it free but you look at nag prompts for content services or upgrades. Or something like that. It’s never truly free.

I tend to agree there is a rational argument around even the SaaS model being free. The guys who work that model aren’t so much selling the software itself but all the services and support in behind it. There’s a cost, they argue, to operating large screen networks reliably and effectively. You can do it yourself, but beyind the software, it will cost this, this and that. If we do it for you, we do it cheaper and better.

It would be an interesting positioning statement for one of the more established DS software guys to say its softweare is free, but its platform costs X per month. And you can’t buy one without the other.

Note: I’ve written about this before. Go here.

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