Why aren't Google and Facebook ads a lot cheaper than they are since it's all built on dirt-cheap software?
No it is not.
it is not built merely on software - you also have infrastructure, useful part of management, lobbying ...
software is not dirt-cheap - producing it is extremely expensive
Price isn't determined by value created. Nor is it determined by supply/demand.
Since when price is not determined by supply/demand? (with exception of cases massively distorted by legislation, but we do not have a lot of price controls enacted by legislation on software)
So air is pretty valuable. The only reason for its cheapness is its absolute abundance, not the value it creates.
Not only. If someone would tried to charge people for breathing they would be likely voted out/executed/laughed at, depending on a case.
Why doesn't water have high profit margins?
Because reasonable people setup politics in way that fundamental goods such as water and air are provided to general population at negligible costs (does not apply to some unusual cases, like some war zones but even there attempts to provide it are typical). If this would not happen, then you get extremely irritated population. Often willing to go into revolution outright if no reasonable alternatives exists. See also food riots etc.
Other people have answered the question more generally, but I wanted to make one particular note.
Why doesn't water have high profit margins?
Because competition drives down prices, and the developed world has done a lot to encourage such competition.
For software to be abundant-like-water, it would have to be much easier to make a competing software product. Not a copy of the product--an alternative. If the developer decided not to sell, how hard would it be to replace it?
This is why the phrase "open-source software" is generally preceded with "free."
Why don't more people use OSS is a question I always have.
I think as a programmer, I overestimate how easy it is for most people to find and configure the OSS that solves their problem.
The best OSS solutions also often lag behind the best paid solutions, so OSS applications often lose large chunks of value relative to paid solutions once you scale them, thus meriting paying more money for more cutting edge systems.
So we end up with-
People that don't need to scale don't use OSS because they don't have the scale to overcome the barriers to entry such as finding what they need and setting it up.
Orgs that do need to scale use OSS... indirectly, in their software's dependencies lists, but still have people they're paying to keep their systems cutting edge and finetuned to their specific needs.
I think the fundamental reason is that OSS software alternatives to existing consumer products largely suck.
OSS is at it's strongest when it serves developer needs. That's because the creators and the target market are highly aligned. However, this is not the same for consumer products, where that instinctual alignment doesn't exist, and has to be forced in. UI/UX is painful work, and while there's a strong monetary incentive for profit-seeking entities to do so, the same doesn't apply to developers, who often loathe such work.
There are a few star examples, but they're the exception to the rule.
My employer has a giant spreadsheet of different OSS licenses, because that affects what you can deliver. In a contract-focused field the inherited licenses are no good.
Alternative tools (libreOffice, OSS compilers or git clients, etc.) are at the mercy of your IT. Letting everyone download and run whatever they want is a non-starter. So there has to be a whitelist, or at least an approval process. And the bigger the company, the more tedious this gets. At a certain point corporate wants the assurance that there’s someone to contact/sue if the software turns out to be an exploit.
magic9mushroom
If you're going to downvote me, and nobody's already voiced your objection, please reply and tell me
10mo ago
You're forgetting about copyright. Without copyright software would indeed be competed down to nothing, but with it you cannot run an open operation to zero out the price of software (or other information, such as fictional media or journal articles). You could, in theory, start a competing software company, but there are economies of scale and network effects that mostly prevent that (water has some of these too, but AIUI it's fairly tightly regulated and in practice even when it's not there's always the implicit threat of "if you play funny buggers with the water supply, much of the population will immediately drop everything to put your head on a pike and in a universal-franchise democracy they will get it").
If you want the price of software to crash to zero, therefore, making "people realise" that its equilibrium price is zero won't actually do anything. You need to revoke or at least massively rollback copyright law. Note that this will cause supply to drop significantly unless you do something about that.
This is mostly wrong. It's trivial to decompile a large share of contemporary software - the opportunity is there, but it is vanishingly uncommon for competitors to seize those opportunities. Similarly, my company had a large multinational client who availed themselves of the right to purchase our source code and walk after five years of business. They took the source code, then came back into the fold a few years later after throwing resources at their fork, being unhappy with the results, and missing our on all the great stuff we'd added in the same period.
The reason why is that most software is in a state of perpetual improvement.
And software is abundant not quite in the same way that air is, but like water is. Sure it does need some 'producing',
Incorrect. It is "abundant" in the same way, say, as movies are abundant. The marginal cost of reproducing a movie after it's filmed is near zero (well, maybe not zero if you make a million copies, but still negligible per copy). But the cost of filming the first copy is very much not zero, in fact frequently in the millions of dollars. You analogy would work if water was, say, only obtained from wells, and to build a well would cost tens of millions of dollars. We have such liquid, actually, it is called "oil". Do you think oil is abundant and oil companies should not be rewarded with profits for extracting it? I mean, after they built the oil rig and while they maintain it, anybody could come to the oil pipe and take oil from there, so it's abundant, right?
Why do software companies have high profit margins then?
There are some high-margin and low margin industries. IT is among the former, but largely on par with Financial, RE and Energy. It doesn't look like software is up there in the sky and the rest is down there in the dirt - it's one among many industries with margins slightly higher that the average. Given it's also pretty high-risk industry - if you make a software program and nobody needs it, virtually 100% of your invested capital is gone, unlike many industries that could still recover something from stock, materials, etc. And it's not an exceptional occurrence - failed startups are extremely common. So, it looks like we have a classic situation of high risk - high potential reward vs low risk, and lower but more steady returns.
Software is not abundant. Software is expensive. Software developers are expensive.
Google and Facebook are not build on dirt-cheap software. They pay some of the highest salaries in the industry.
Price is a negotiation. Say I sell a software product for $50/month. Either it generates more than $50/month value to you, in which case you buy it, or it doesn't, so you don't. How much it's costs me to deliver it is irrelevant to you. If you think you can get a better deal using a different product, then go do that. If enough people do that, I am forced to lower my prices, change my product, or go out of business.
If software is that easy, you should start a software company.
If software is that easy, you should start a software company.
Hmm... Is it unethical to release software for free? I was just thinking- my first thought after reading 4 is: "if software was that easy... I wouldn't be starting a software company, I'd be releasing it for free or by donation."
This goes against my intuitions, but- in an economic sense, releasing OSS that serves the purpose of a paid product is subsidizing the undercutting of that product and reducing programmer salaries right? Which could potentially stifle innovation.
Ideologically I want software to be free, but this thread has made me consider that releasing software for free could have negative effects on the ecosystem.
You just re-discovered the average cost and marginal cost difference. Let’s say it cost 10,000 dollars to develop software X. Once developed, X can be reproduced and sold for 10 cents per copy. The marginal cost therefore is 10 cents. If companies sold at 11 cents they would make a profit of one cent per product. Yet before they broke even in total, they’d have to sell 1,000,000 copies. Then to get even a normal ROI on the money they’d have to sell another 10,000 (ignoring NPV).
If software cannot be priced higher than the marginal cost (and closer to the average cost), then it will never be profitable to develop in the first place. The solution to the problem is differential pricing. You want to price to relatively poor people X at a price closer to the marginal cost and to rich people X at a price closer to the average cost to produce instead of the marginal cost.
This is why there are different pricing for firms as opposed to say individuals.
Competition pushes prices down. Your argument wants to be: "if the marginal cost of producing software is so cheap, why don't new firms enter the market and push prices down"? Well, one, smart coders and good leadership are rare-ish and thus expensive. Two, they do, but the frontier of 'the best software' continuously expands, so there's still money to be made. Three, network effects and generally the advantages of already being big are strong (just go make your own google lmao). And four, software is so valuable that only capturing a tiny fraction of the value is still immensely profitable! When I google a wikipedia article, google serves me an ad or two that I won't click on, whereas I might've paid a few (of today's) dollars for a newspaper a hundred years ago, but times a billion people times a few thousand views ads most people don't even look at are still a lot of money.
One thing to consider is the capture caused by network effects and interoperability. You need to use Microsoft PowerPoint because your interns know it, your clients expect it, all your old presentations are in .pptx format, etc. Sure, you may be willing to consider some alternative in theory, but someone would need to produce a competitor that is nearly 100% compatible with all of your other stuff and compete at price point that is incredibly compelling. Are you going to do it?
Another thing to consider is that there is such a thing as "value" to capture and companies are thinking about how to bring their core competencies to market while outsourcing everything else. They need an off-the-shelf product to do something that isn't their core competency and they will take the best one on the market at the time at whatever price they need to pay so long as it doesn't upset their price structure and bring their costs out of line with their strategy. An armchair philosopher can ponder for years where value and cost comes from, but if I can spend one dollar to make ten then I'm going to do it whether the thing I bought for a dollar is theoretically worth it or not.
This is an important aspect of economics that lots of people seem to misunderstand: prices are not determined by costs.
They’re determined by what consumers are willing to pay for your product. That’s it.
The manufacturer sets its price based on what will bring them the most profit, I.e. what the consumers are willing to pay times the number of customers willing to pay it. Notice how cost is a pretty minor factor in that.
Supply and demand has an effect because it reduces the amount consumers are willing to pay (because they can get your product elsewhere)
So your argument that software should charge less based on what it costs them is just a misapprehension of how this works in the economy in general.
Well, no... "costs" and "what consumers are willing to pay" are both important factors that go into the price. If the manufacturer's costs go up, then the equilibrium price at which profits are maximized goes up too (although the manufacturer would make less absolute profit overall). That's the real misconception that I think you're pointing at: many people, including the OP, think that prices are completely determined by the seller. In reality, sellers are already maximally greedy, so they want to find this equilibrium price point that maximizes profits. This makes price a signal that they're measuring, not something that they directly control.
Minimum wage debates tend to sadden me, because there's always somebody saying "McDonald's can just compensate by charging $1 more for a burger", making this silly mistake. As if McDonald's is just leaving all that extra money on the table, until it's forced to collect it to pay wages...
Why do software companies have high profit margins then?
It depends on the software company, many do not have that good of margins. Microsoft is a major outlier in terms of successful software companies. Same for websites. Google and facebook are so successful by leveraging moats and winner-take-all effects, but this does not work for other sites. It is very hard to replicate networks effects, unlike replicating a widget factory.
Why aren't Google and Facebook ads a lot cheaper than they are since it's all built on dirt-cheap software?
the pricing is determined by supply and demand via an auction process by advertisers, which has nothing to do with software. there is only a finite amount of space to display ads
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?
Rent-seeking, enabled by a lack of competition, enabled by network effects and natural monopolies.
This website is a place for people who want to move past shady thinking and test their ideas in a
court of people who don't all share the same biases. Our goal is to
optimize for light, not heat; this is a group effort, and all commentators are asked to do their part.
The weekly Culture War threads host the most
controversial topics and are the most visible aspect of The Motte. However, many other topics are
appropriate here. We encourage people to post anything related to science, politics, or philosophy;
if in doubt, post!
Check out The Vault for an archive of old quality posts.
You are encouraged to crosspost these elsewhere.
Why are you called The Motte?
A motte is a stone keep on a raised earthwork common in early medieval fortifications. More pertinently,
it's an element in a rhetorical move called a "Motte-and-Bailey",
originally identified by
philosopher Nicholas Shackel. It describes the tendency in discourse for people to move from a controversial
but high value claim to a defensible but less exciting one upon any resistance to the former. He likens
this to the medieval fortification, where a desirable land (the bailey) is abandoned when in danger for
the more easily defended motte. In Shackel's words, "The Motte represents the defensible but undesired
propositions to which one retreats when hard pressed."
On The Motte, always attempt to remain inside your defensible territory, even if you are not being pressed.
New post guidelines
If you're posting something that isn't related to the culture war, we encourage you to post a thread for it.
A submission statement is highly appreciated, but isn't necessary for text posts or links to largely-text posts
such as blogs or news articles; if we're unsure of the value of your post, we might remove it until you add a
submission statement. A submission statement is required for non-text sources (videos, podcasts, images).
Culture war posts go in the culture war thread; all links must either include a submission statement or
significant commentary. Bare links without those will be removed.
Jump in the discussion.
No email address required.
Notes -
No it is not.
it is not built merely on software - you also have infrastructure, useful part of management, lobbying ...
software is not dirt-cheap - producing it is extremely expensive
Since when price is not determined by supply/demand? (with exception of cases massively distorted by legislation, but we do not have a lot of price controls enacted by legislation on software)
Not only. If someone would tried to charge people for breathing they would be likely voted out/executed/laughed at, depending on a case.
Because reasonable people setup politics in way that fundamental goods such as water and air are provided to general population at negligible costs (does not apply to some unusual cases, like some war zones but even there attempts to provide it are typical). If this would not happen, then you get extremely irritated population. Often willing to go into revolution outright if no reasonable alternatives exists. See also food riots etc.
More options
Context Copy link
Other people have answered the question more generally, but I wanted to make one particular note.
Because competition drives down prices, and the developed world has done a lot to encourage such competition.
For software to be abundant-like-water, it would have to be much easier to make a competing software product. Not a copy of the product--an alternative. If the developer decided not to sell, how hard would it be to replace it?
This is why the phrase "open-source software" is generally preceded with "free."
Why don't more people use OSS is a question I always have.
I think as a programmer, I overestimate how easy it is for most people to find and configure the OSS that solves their problem.
The best OSS solutions also often lag behind the best paid solutions, so OSS applications often lose large chunks of value relative to paid solutions once you scale them, thus meriting paying more money for more cutting edge systems.
So we end up with-
People that don't need to scale don't use OSS because they don't have the scale to overcome the barriers to entry such as finding what they need and setting it up.
Orgs that do need to scale use OSS... indirectly, in their software's dependencies lists, but still have people they're paying to keep their systems cutting edge and finetuned to their specific needs.
I think the fundamental reason is that OSS software alternatives to existing consumer products largely suck.
OSS is at it's strongest when it serves developer needs. That's because the creators and the target market are highly aligned. However, this is not the same for consumer products, where that instinctual alignment doesn't exist, and has to be forced in. UI/UX is painful work, and while there's a strong monetary incentive for profit-seeking entities to do so, the same doesn't apply to developers, who often loathe such work.
There are a few star examples, but they're the exception to the rule.
More options
Context Copy link
It’s also very field-dependent.
My employer has a giant spreadsheet of different OSS licenses, because that affects what you can deliver. In a contract-focused field the inherited licenses are no good.
Alternative tools (libreOffice, OSS compilers or git clients, etc.) are at the mercy of your IT. Letting everyone download and run whatever they want is a non-starter. So there has to be a whitelist, or at least an approval process. And the bigger the company, the more tedious this gets. At a certain point corporate wants the assurance that there’s someone to contact/sue if the software turns out to be an exploit.
More options
Context Copy link
More options
Context Copy link
More options
Context Copy link
You're forgetting about copyright. Without copyright software would indeed be competed down to nothing, but with it you cannot run an open operation to zero out the price of software (or other information, such as fictional media or journal articles). You could, in theory, start a competing software company, but there are economies of scale and network effects that mostly prevent that (water has some of these too, but AIUI it's fairly tightly regulated and in practice even when it's not there's always the implicit threat of "if you play funny buggers with the water supply, much of the population will immediately drop everything to put your head on a pike and in a universal-franchise democracy they will get it").
If you want the price of software to crash to zero, therefore, making "people realise" that its equilibrium price is zero won't actually do anything. You need to revoke or at least massively rollback copyright law. Note that this will cause supply to drop significantly unless you do something about that.
This is mostly wrong. It's trivial to decompile a large share of contemporary software - the opportunity is there, but it is vanishingly uncommon for competitors to seize those opportunities. Similarly, my company had a large multinational client who availed themselves of the right to purchase our source code and walk after five years of business. They took the source code, then came back into the fold a few years later after throwing resources at their fork, being unhappy with the results, and missing our on all the great stuff we'd added in the same period.
The reason why is that most software is in a state of perpetual improvement.
More options
Context Copy link
More options
Context Copy link
Incorrect. It is "abundant" in the same way, say, as movies are abundant. The marginal cost of reproducing a movie after it's filmed is near zero (well, maybe not zero if you make a million copies, but still negligible per copy). But the cost of filming the first copy is very much not zero, in fact frequently in the millions of dollars. You analogy would work if water was, say, only obtained from wells, and to build a well would cost tens of millions of dollars. We have such liquid, actually, it is called "oil". Do you think oil is abundant and oil companies should not be rewarded with profits for extracting it? I mean, after they built the oil rig and while they maintain it, anybody could come to the oil pipe and take oil from there, so it's abundant, right?
But do they really have margins that are huge outliers? Let's take a look at: https://www.yardeni.com/pub/sp500margin.pdf
There are some high-margin and low margin industries. IT is among the former, but largely on par with Financial, RE and Energy. It doesn't look like software is up there in the sky and the rest is down there in the dirt - it's one among many industries with margins slightly higher that the average. Given it's also pretty high-risk industry - if you make a software program and nobody needs it, virtually 100% of your invested capital is gone, unlike many industries that could still recover something from stock, materials, etc. And it's not an exceptional occurrence - failed startups are extremely common. So, it looks like we have a classic situation of high risk - high potential reward vs low risk, and lower but more steady returns.
More options
Context Copy link
Software is not abundant. Software is expensive. Software developers are expensive.
Google and Facebook are not build on dirt-cheap software. They pay some of the highest salaries in the industry.
Price is a negotiation. Say I sell a software product for $50/month. Either it generates more than $50/month value to you, in which case you buy it, or it doesn't, so you don't. How much it's costs me to deliver it is irrelevant to you. If you think you can get a better deal using a different product, then go do that. If enough people do that, I am forced to lower my prices, change my product, or go out of business.
If software is that easy, you should start a software company.
Hmm... Is it unethical to release software for free? I was just thinking- my first thought after reading 4 is: "if software was that easy... I wouldn't be starting a software company, I'd be releasing it for free or by donation."
This goes against my intuitions, but- in an economic sense, releasing OSS that serves the purpose of a paid product is subsidizing the undercutting of that product and reducing programmer salaries right? Which could potentially stifle innovation.
Ideologically I want software to be free, but this thread has made me consider that releasing software for free could have negative effects on the ecosystem.
More options
Context Copy link
More options
Context Copy link
You just re-discovered the average cost and marginal cost difference. Let’s say it cost 10,000 dollars to develop software X. Once developed, X can be reproduced and sold for 10 cents per copy. The marginal cost therefore is 10 cents. If companies sold at 11 cents they would make a profit of one cent per product. Yet before they broke even in total, they’d have to sell 1,000,000 copies. Then to get even a normal ROI on the money they’d have to sell another 10,000 (ignoring NPV).
If software cannot be priced higher than the marginal cost (and closer to the average cost), then it will never be profitable to develop in the first place. The solution to the problem is differential pricing. You want to price to relatively poor people X at a price closer to the marginal cost and to rich people X at a price closer to the average cost to produce instead of the marginal cost.
This is why there are different pricing for firms as opposed to say individuals.
More options
Context Copy link
Competition pushes prices down. Your argument wants to be: "if the marginal cost of producing software is so cheap, why don't new firms enter the market and push prices down"? Well, one, smart coders and good leadership are rare-ish and thus expensive. Two, they do, but the frontier of 'the best software' continuously expands, so there's still money to be made. Three, network effects and generally the advantages of already being big are strong (just go make your own google lmao). And four, software is so valuable that only capturing a tiny fraction of the value is still immensely profitable! When I google a wikipedia article, google serves me an ad or two that I won't click on, whereas I might've paid a few (of today's) dollars for a newspaper a hundred years ago, but times a billion people times a few thousand views ads most people don't even look at are still a lot of money.
More options
Context Copy link
One thing to consider is the capture caused by network effects and interoperability. You need to use Microsoft PowerPoint because your interns know it, your clients expect it, all your old presentations are in .pptx format, etc. Sure, you may be willing to consider some alternative in theory, but someone would need to produce a competitor that is nearly 100% compatible with all of your other stuff and compete at price point that is incredibly compelling. Are you going to do it?
Another thing to consider is that there is such a thing as "value" to capture and companies are thinking about how to bring their core competencies to market while outsourcing everything else. They need an off-the-shelf product to do something that isn't their core competency and they will take the best one on the market at the time at whatever price they need to pay so long as it doesn't upset their price structure and bring their costs out of line with their strategy. An armchair philosopher can ponder for years where value and cost comes from, but if I can spend one dollar to make ten then I'm going to do it whether the thing I bought for a dollar is theoretically worth it or not.
More options
Context Copy link
This is an important aspect of economics that lots of people seem to misunderstand: prices are not determined by costs.
They’re determined by what consumers are willing to pay for your product. That’s it.
The manufacturer sets its price based on what will bring them the most profit, I.e. what the consumers are willing to pay times the number of customers willing to pay it. Notice how cost is a pretty minor factor in that.
Supply and demand has an effect because it reduces the amount consumers are willing to pay (because they can get your product elsewhere)
So your argument that software should charge less based on what it costs them is just a misapprehension of how this works in the economy in general.
These are logically inconsistent statements. A company that wishes to maximize profit generally seeks to set its output where its marginal cost equals its marginal revenue. When costs change, that point moves, and the price associated therewith changes.
More options
Context Copy link
Well, no... "costs" and "what consumers are willing to pay" are both important factors that go into the price. If the manufacturer's costs go up, then the equilibrium price at which profits are maximized goes up too (although the manufacturer would make less absolute profit overall). That's the real misconception that I think you're pointing at: many people, including the OP, think that prices are completely determined by the seller. In reality, sellers are already maximally greedy, so they want to find this equilibrium price point that maximizes profits. This makes price a signal that they're measuring, not something that they directly control.
Minimum wage debates tend to sadden me, because there's always somebody saying "McDonald's can just compensate by charging $1 more for a burger", making this silly mistake. As if McDonald's is just leaving all that extra money on the table, until it's forced to collect it to pay wages...
More options
Context Copy link
More options
Context Copy link
It depends on the software company, many do not have that good of margins. Microsoft is a major outlier in terms of successful software companies. Same for websites. Google and facebook are so successful by leveraging moats and winner-take-all effects, but this does not work for other sites. It is very hard to replicate networks effects, unlike replicating a widget factory.
the pricing is determined by supply and demand via an auction process by advertisers, which has nothing to do with software. there is only a finite amount of space to display ads
More options
Context Copy link
Rent-seeking, enabled by a lack of competition, enabled by network effects and natural monopolies.
More options
Context Copy link