Ask HN: Why don't people realize that 'high software profit margins' are fugazi?
6 comments
By the way, for your air example: compressed air would be an example of value over the naturally abundant resource. Profit on one of those little cans of air used to clean your keyboard is the "value capture".
Water, on the other hand, is a municipal resource that is supported through taxation. The private companies that handle most of the work are highly regulated because clean water is considered a public good. Bottled water through private companies does have a staggeringly high profit margin.
Water, on the other hand, is a municipal resource that is supported through taxation. The private companies that handle most of the work are highly regulated because clean water is considered a public good. Bottled water through private companies does have a staggeringly high profit margin.
In the case of compressed air, actual work is being done to make it... compressed air.
With water, it is still very very cheap relative to the value it provides. Why isn't water 20% of the GDP of the world? Isn't it that important? (https://alexdanco.com/2015/11/23/ways-to-think-about-water/, never read this essay btw, read several of Alex's other essays though. I'm assuming the essay talks about the importance of water)
With water, it is still very very cheap relative to the value it provides. Why isn't water 20% of the GDP of the world? Isn't it that important? (https://alexdanco.com/2015/11/23/ways-to-think-about-water/, never read this essay btw, read several of Alex's other essays though. I'm assuming the essay talks about the importance of water)
Software isn't static nor does it exist on it's own. You're not paying for the current version. You're paying for support, security patches, and for the next versions to be written. In the case of software services, you're also paying for administration, active network security, networking, and hardware operations.
Software is a lot like art or literature. The creator needs to be able to live in order to continue creating. Otherwise updates, new versions, and new creations become highly irregular or utterly non-existent.
Profit extracted from companies over the cost of business exist because that is how all businesses function. Profit is literally the point of capitalism. Investment in companies would not happen without the promise of a return. Even the smallest of businesses would not be possible without profit.
For a non-tech example, eggs don't cost $3.99 per dozen to produce. Eggs are expensive because of an extremely high profit margin. Is it justified? Price gouging? Currently there is no hard rule that differentiates the two.
Whether or not there should be a profit percentage cap is an entirely different conversation and not unique to tech. Personally, I think there should be a maximum amount of profit expressed as a percentage of unit cost that should be legal. Further, I think that an equal percentage of the unit cost should always be applied to wage increases equally across the company for non-management roles. Management should be paid out of the extracted profit percentage.
Software is a lot like art or literature. The creator needs to be able to live in order to continue creating. Otherwise updates, new versions, and new creations become highly irregular or utterly non-existent.
Profit extracted from companies over the cost of business exist because that is how all businesses function. Profit is literally the point of capitalism. Investment in companies would not happen without the promise of a return. Even the smallest of businesses would not be possible without profit.
For a non-tech example, eggs don't cost $3.99 per dozen to produce. Eggs are expensive because of an extremely high profit margin. Is it justified? Price gouging? Currently there is no hard rule that differentiates the two.
Whether or not there should be a profit percentage cap is an entirely different conversation and not unique to tech. Personally, I think there should be a maximum amount of profit expressed as a percentage of unit cost that should be legal. Further, I think that an equal percentage of the unit cost should always be applied to wage increases equally across the company for non-management roles. Management should be paid out of the extracted profit percentage.
Your first and second paragraphs are better arguments for subscriptions over one-time payment than they are for the existence of high profit margins despite software's cheapnes.
3rd paragraph. I'm not arguing against profits just, overly high ones in the face of cheap 'raw materials'.
4th and 5th. Questioning high profit margins in businesses (didn't realize eggs too had high margins tbh) and wondering if profits should be capped seem like obviously related things.
Solutions? In the case of SaaS:
— Product pricing starting high, but declining over time (yes, literally making laws that new software MUST be absurdly expensive at first).
Would mean:
(i) Fewer 100th x competitor software product since it's hard convincing people to part with say $100, you need to actually have a 10x solution.
(ii) Increased organic word of mouth growth, since users have an incentive (declining pricing) to increase total users.
3rd paragraph. I'm not arguing against profits just, overly high ones in the face of cheap 'raw materials'.
4th and 5th. Questioning high profit margins in businesses (didn't realize eggs too had high margins tbh) and wondering if profits should be capped seem like obviously related things.
Solutions? In the case of SaaS:
— Product pricing starting high, but declining over time (yes, literally making laws that new software MUST be absurdly expensive at first).
Would mean:
(i) Fewer 100th x competitor software product since it's hard convincing people to part with say $100, you need to actually have a 10x solution.
(ii) Increased organic word of mouth growth, since users have an incentive (declining pricing) to increase total users.
In the case of legacy software: Copyright law.
In the case of cloud software: margins might not be so high since the vendor is paying for the hardware as well.
In the case of cloud software: margins might not be so high since the vendor is paying for the hardware as well.
Price is determined by scarcity/abundance...
You got halfway there; the other half is artificial scarcity.
You got halfway there; the other half is artificial scarcity.
The true reason is that they price similarly to physical infrastructure companies, without the same recurring costs. The difference between physical infrastructure costs and total expenses which goes 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 infrastructure 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 certian 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-ocurring, 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?