Nearing Zenith

wildchocolate:

Lately it seems more and more evident that the general population expects software to be free or at the very least cheap. This is reinforced when companies like Apple, who make a tremendous income off of their hardware, the iTunes store, and many other revenue streams, heavily discount their software.

The expectation of “software should be free” is perfectly reasonable, given that most consumers really haven’t been buying a lot of software. At least not without getting a box with a CD/DVD inside. Consumers are having trouble seeing the value of software and aren’t really being encouraged to find it.

Part of the challenge of the App Store model is getting consumers used to the idea of paying something, even $0.99, for a collection of bytes. If you’re in the business of producing bytes, it’s a natural and healthy practice to buy/license bytes from others in the form of code, images, music, sound clips, font, design templates, physics engines, etc. Consumers haven’t been a part of this digital economy for more than a few years and are, so far, somewhat reluctant to embrace it.

This will change, though, and Apple is leading the way with iTunes and the App Store. You can still choose not to buy content from them, but they make it about as easy as possible and quite rewarding. Over time, software prices will rise as consumers start to see the benefits of the pricier apps and are willing to put a bit more money into the App Store. Lower App Store software pricing doesn’t reflect an inevitability so much as a transition period. The App Store habit has to be encouraged in order for it to take hold.

The elephant in the room, at least to my eyes, is that consumers have been driven to a “cost-based” spending mindset. “What’s the cost?” or “Can I spend less somewhere else?” they’ll ask, not “What do I get for my money?”

Consumers with a cost-based spending mindset will see the purchase of a $3.99 app for their iPhone as “being nickel and dimed.” Shift their perspective a bit, to a value-based spending mindset, and they’ll see a $3.99 app as a (small) one time cost to add value to their phone. From a value-based perspective, $3.99 is peanuts for a phone that will cost $2500 over two years. From a cost-based perspective, it’s frivolous spending. It’s a small shift in thinking, but the overall impact on consumer behavior is enormous.

This shift will happen, but we can certainly encourage our family and friends along the way. Consumers already understand the value of good clothing, a good car, living in a good school district, etc. But software? Software is still somewhat mysterious to them. Let’s help them see the value of software! The 13 reasons are an excellent place to start.

It also isn’t helped by the re-occurring “dot com boom” theme of putting out products or web services for free, getting investors involved, signing up millions of people, and then only kind of worrying about how to make money. I mean who cares, all it takes is a little annoying advertising to make some money and keep the investors happy, right?

Very true. Right now, software vendors are encouraged to accommodate the cost-based spenders because, let’s face it, there are so many of them. There’s a lot of (what I call) “bored money” out there seeking a high rate of return. This money is, in effect, subsidizing free software. And why not? What better way to capture a boatload of users than to offer your product or service for free?

The reason this will fall apart (again…) is that there’s almost no profit to be had from cost-based spenders. The only (viable) reasons I can see to go after the parsimonious are: a) they are the product, not the customer, b) to cash out through IPO or acquisition. Reason a) is possibly a viable and sustainable business model, but b) gets us back to the “dot com boom” theme which is a whole topic to itself.

Neither of these reasons will work out for the majority of investors, so you’ll see this practice of subsidized software change in the next few years. Investors will retreat from this field of battle once the negative returns start rolling in. Another dot com bust is inevitable, unfortunately, and we’re just going to have to ride it out.