The Price of Bits
Wednesday, 29 September 2010

We have a problem that we haven't even come close to solving. Software was the first example of a relatively new phenomenon, one that defines our time - a product that costs a lot to create but costs virtually nothing to duplicate. 


We have a problem that we haven't even come close to solving. Software was the first example of a relatively new phenomenon, one that defines our time - a product that costs a lot to create but costs virtually nothing to duplicate.




OK, so you are a craftsman, engineer, and you spend a year creating a wonderful hand-crafted instrument from brass. Despite the fact that this instrument is crafted from a cheap material your work is key to its value. The cost to creating another is time and effort. The value of what you have created is obvious and there would be people willing to pay the price without question.

Now suppose I have a box that you could place the instrument in and in a few seconds out pops another one - an exact copy. How much is your creation worth now? More to the point, what are consumers prepared to pay for it? The origination cost or the duplication cost?

This is the basic problem that all programmers face. After taking huge amounts of time and effort to create something it can then be reproduced for next to nothing. As a result software is either worth something or next to nothing. 

The same dilemma is on its way to other areas of knowledge and information. Until recently music was sold on physical media that cost a reasonable amount to reproduce. Now the main distribution system is a download that costs next to nothing. Again it takes time money and effort to create a piece of music but now once created it can be duplicated at no significant cost. 

Books aren't quite in the same category just yet but the ebook is making inroads into the traditional printed book market and soon the book and the magazine will go down the same road as music. High cost to create but almost negligible cost to reproduce. 

Given the problems of successfully marketing such zero manufacturing cost items it is surprising to learn that even hardware manufacturers are going in the same direction. Intel recently resurrected an old IBM marketing trick - the hidden switch field upgrade. Now you can buy an Intel processor for one price and pay extra, perhaps at a later date, to have some software enable some additional hardware features which were always present within the chip. Not quite the same but the additional features are added at a close to zero manufacturing cost.

So what makes such zero manufacturing cost items so difficult to market? You might think that it's the potential for piracy but there is more to it. The public has a big psychological problem with paying good money for what it sees as something that is worth very little or close to zero. Think back to our exquisitely crafted brass instrument. When the only way to get one was to hand craft it then it was worth big money. As soon as it can be reproduced for next to nothing the effort that went into creating it counts for nothing. 

To see how the psychology works consider an article on the web. Suppose the article is deeply researched and well presented and represents a week's work for the writer. Now the question is how to get the time and effort paid for? Make the reader pay directly seems like a good scheme but now consider the reader arriving at the site. The article has been read by others and the new reader thinks what is the cost to the author of letting me read this article? The answer is self evident - nothing, nothing at all. The article can be served to an additional reader at virtually no additional cost.

The whole point is that once again the marginal cost of letting someone have the product is clearly zero or as close to zero as makes no difference. Notice that this isn't about what the product is worth to the reader, but what the marginal cost to the publisher is in providing access to the work. 

If you switch sides you will soon see the mechanism in action. My software, i.e software I create - including music books, web pages - has a high price because I perceive the production cost. Your software, whatever form it takes, has a low value because the marginal cost to you of letting me have it is close to zero.

Back in the early days of software companies would package their products in huge boxes, mostly empty, to try to create an impression of value. They would include a printed manual, perhaps a mouse mat and physical extras where possible, again just to create the impression of worth. Today we have more or less given up on this approach because boxes and paper manuals don't travel down the Internet. 

At least the software industry started from scratch and had to face the problem that their products were next to worthless. Traditional industries - the music, and publishing industries - are finding it hard to believe that premise that their products are worthless and are doing all they can to pretend that nothing much has changed, apart from the rise of illegal copying simply because it's so much easier with digital. 

At the start I said that this is a problem we haven't come close to solving. More correctly it is a problem that we really don't understand. Currently all our efforts are on digital rights management and the suppression of piracy whereas it seems more likely that finding a way to change the perception of value would work better. It seems unlikely that there is an easy solution because it's so inbuilt into the human value system




Last Updated ( Friday, 15 October 2010 )