The software economy

Published: May 3, 2010

Reserve Bank of Australia said that concerns about public finances internationally could rebuild.

KARACHI: Facebook founder Mark Zuckerberg’s net worth crossed over $4 billion at the youthful age of 25. Google founders Larry Page and Sergey Brin who both turned 37 this year come in at $17.5 billion each. Microsoft chairman Bill Gates has prevailed as the richest man for the longest time with a present net worth of $53 billion.

The technology billionaires list has to be one of the most enviable because they all got so very much, so very quick.

Software prevails in every industry from media to entertainment and finance to supply chains but to really understand why software has made so many instant billionaires warrants a deeper look at the economics of software.

Software, by and large is devoid of supply-side economies. The marginal costs of production are practically zero because making even a million copies of Microsoft Windows costs next to nothing.

In fact since it’s so cheap to made additional quantities, the product pricing of software like Microsoft Windows license is not determined by the “cost of production” as is conventional for most products. Rather, the price is deceivingly arbitrary. It’s a dark art very few are privy to even within Microsoft, encompassing profit equilibriums, demand elasticity, predatory pricing, market penetration and so on–but not cost of production.

Costs for software distribution are also negligible because it can be downloaded instantly over the Internet. This is what makes software so ubiquitous and it’s the reason why Google spread so much faster than Coca Cola could ever have. The distribution dynamics also means that fixing bugs or updating software can happen automatically.

But it also means rampant piracy because Hollywood blockbusters can be downloaded across the globe within hours of release.

Unlike cars or refrigerators, no raw materials or assembly plant is required for software development. Google and Microsoft both started in a garage while Facebook started in a dorm room by teams no bigger than two people.

Due to these distinct economic advantages, software is undoing centuries of standard practices. Money is being replaced by digital transactions which simply adjust account balances. Accountants and financial advisors are being replaced by do-it-yourself online tax filings and mortgage calculators. The same trend is prevalent through all industries.

India has been one of the biggest benefactor of the software economy, benefiting directly through sales and service revenues and indirectly by improving it’s own business processes and infrastructure.

If two people exchange an apple, they still have one apple each but if they exchange an idea, they end up with two ideas each. Software is essentially just that. It’s an idea that’s soft and digital and grows quickly and effortlessly.

Reader Comments (3)

  • Saima Chaudhry
    May 8, 2010 - 5:45PM

    if they exchange an idea, they end up with two ideas each.

    No my friend, they end up with one idea each, and two ideas collectively. :)Recommend

  • Nabil Naeem Syed, London, UK
    May 17, 2010 - 6:04PM

    Dear Aleem, why do you ignore the fact that Microsoft and many other software companies like Oracle and Sun Microsystems etc, spends Billions on technological research and software developement and later, have to spend millions to fight lawsuites and software piracy.
    Not only this, but they have charity programs to fight poverty, child labor and education developement in thirld world counitres. Nobody can deny that once a software is produced, copies can be made in Zillions at dirt cheap rates, but you need countless days and nights and hundreds of brains and hands to produce that program code,(BlockBuster films you mentioned or E-Books in Pdf formats).
    So, if Pakistan is far behind others in this industry, please donot blame others for getting benifits of their harvest, as size, place and number doesnot matter in this world. Young generation in India, China and Malaysia are far ahead of us in this field despite that their annual salaries are far less than us, but their quality of deliverable is praised in the corridors of the West.Recommend

  • Irfan Aligi
    May 31, 2010 - 9:37PM

    Can you tell me how many in corporate sector including newspapers and electronic media in Pakistan were using legal versions of windows (differnt brands), microsof word, and others. Are they paying the inventors of those software their due share. If the bigshots do not hesitate pirating and plagiarising the properties of others, why should the poor be blamed of.Recommend

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