Market Competition and Software Economics

You recently released some software – Banana CropFoundation Server 2005(TM) – which allows users to plan,track and report on their banana crops, improving their operationalefficiency measurably. You have some competitors in the space -some even inexpensive or free, several of them open source -but they aren’t nearly as comprehensive or intuitive asyours.

Sales are brisk and times are good. While you’re charging afairly hefty licensing fee, the price is small compared to thebenefits your software brings to your users (users whose profitmargins increase because their competitors are still doing thingsthe old-fashioned way). Congratulations! It is an enviable positionfor an ISV to be in.

Crawford Lake

Things aren’t all puppydogs and lollipops, however. You’veheard through the grapevine that many of the smaller bananaproducers have taken to your software, but finding your fees toohigh they’ve resorted to pirating it.

Annoyed by this “unmaterialized revenue”, you do some numbercrunching and find that they couldn’t afford your software anyways.At least not at a price that would make it worth your while. Youalso know from impromptu surveys that they’d just use the freestuff anyways if push came to shove.

What should you do Should you super-size your copy protection?Should you pursue legal options against these miscreants Are youreally losing anything given that these non-paying users wouldn’tbuy your software anyways?

This is a very interesting software positioning and economicsquestion, and it isn’t nearly as clear-cut as it appears to be atfirst glance. The typical reply many would come back with is that”they wouldn’t be paying customers anyways. Be thankful for thefree advertising and look the other way”. Others would say that youshould provide a gratis or very low cost “small producer” versionthat would give these producers a leg-up: Maybe one day they’llgrow and become a major customer.

The problem with that line of thinking is that itoverlooks the core competitive advantage that your software bringsto your paying customers

The problem with that line of thinking is that it overlooks thecore competitive advantage that your software brings to your payingcustomers: Each user – legal or not – is being viewed as an islandrather than a rich ecosystem that feed off of each other. Forinstance if every banana producer has the software, then Big Co haseffectively gained no advantage buying your software, and in manyways it is now coming at a net loss (because they’repaying for software that merely puts them on an equal footing withtheir competitors. Competitors who are using it for free).

You can see this sort of piracy and price positioning quandaryin many places. The small graphics designer saves up enough to buya copy of Photoshop CS, yet instead of gaining a professionaladvantage, he’s merely even with countless competitors who justdownloaded it from a torrent. Similarly, from a global perspectivemany large software companies overlook software piracy in thedeveloping world, or they offer their wares at asubstantial discount, yet what happens when all of theirhigh-paying development shops, paying tens or hundreds of thousandsin licensing fees, close up, unable to compete against the codingdens running their entire infrastructure with marginal softwareoverhead?

In mainstream culture, where to many it is a fight to keepup with the Joneses, the same sort of thing occurs with mediapiracy – if two kids get an allowance, and one pirates a copy ofthe latest cool CD and spends his allowance on a cool T-shirt, andthe other instead spends his money on a legal copy of the CD, thelatter is culturally a loser – he is falling behind theJoneses. Unless there is morally or legally enough of a risk topiracy, the former has “won” in the equation. Naturally the latteris going to reconsider his options the next time allowance daycomes around.

On the flip side, if you fight piracy too hard and you mightencourage the evolution of open source competitors. The moredifficult Photoshop is to acquire and use, the more improvementsGIMP is likely to see, because let’s face it: To most users it’sthe gratis freedom that matters a lot more than the librefreedom.

All in all a very complex problem with no clear answers. Itcertainly isn’t as clearcut as “if they wouldn’t pay for it anywaysthen they aren’t a lost sale”.