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Ramblings of a Short Man

~ Written by Thai Bui, read by… um… millions

Ramblings of a Short Man

Monthly Archives: March 2010

The Commoditization of Technology

24 Wednesday Mar 2010

Posted by Thai Bui in Software Development, Startups, Technology, Uncategorized

≈ 4 Comments

Tags

business, marketing, Software Development, Technology

I’m a software engineer by training, somewhat by practice, and, in a sadly diminishing way, by mindset.  Maybe some of the real engineers around me can back me up on some of that. (Please?)

So it is with a heavy heart that I say that software technology has become a commodity.  Evidence is everywhere:

  • Increasingly, technical work is contracted out to third-party developers, sometimes offshore.  “Here’s a spec; how cheaply can you build it?”
  • Platforms are getting faster every day.  You can stand up a Rails site now orders of magnitude faster than what you could do just a few years ago.  Hell, you can configure a WordPress site to do almost anything you want orders of magnitude faster than a Rails site, for free.  Why stop there?  You can pick-and-click your way to a Ning site orders of magnitude faster than configuring a WordPress site.  (I know all those technologies/platforms don’t serve the same need, but you get the idea.)
  • Software technologist supply is increasing; i.e., there are more software developers now than ever.  The ease of building things is dropping the bar so low that a 17-year old kid can build Chatroulette in a few days.  Culture and technology is changing so that everyone can be, and is becoming, a technologist.
  • Costs of apps are dropping.  Mobile apps cost $0.99, not per use, not monthly, but once ever.  That’s because it takes a 17-year old a few days to build it.  If you make $500 on your app, you’re ecstatic.

There’s nothing terribly radical about this observation; I’m sure it’s out there everywhere.  It is very interesting to me, though, to take it to its logical conclusion.

Imagine if technology becomes so easy, so ubiquitous, so accessible that if you can imagine it, you can build it (or have it built) for nearly free.  I think we would all agree that that’s where we’re headed, amazingly quickly.  How would the software/internet industry change?

My take (thanks for asking) is you end up with something like the mass-market clothing industry (forget haute couture for this comparison).

Stick with me for a bit. Now, I won’t pretend to really know the clothing industry, but my naïve view is that it’s driven by designers and marketers.  The “builders” are outsourced to the cheapest suppliers possible such that if a designer can imagine it, they could have 20,000 units drop shipped to their warehouse in a week.  The success of a designer or a retailer or a brand is never about whether it can be built, or how efficiently it can be built, or how cheaply can it be built, but is only about whether enough people will buy it.

You can already say the exact same thing about the software industry, and I run into this all the time at Intuit.  An engineer or architect will have or hear about an idea and jump straight to the standard question: how are we going to build it?  They start thinking about data models, class structures, engineering processes, etc., stuff that I personally love arguing about.

But whenever I’m in these conversations I ask the same questions: what is the big unknown about whether or not this will be a successful idea? “Can it be built?” or “How efficiently can it be built?” is almost never the issue.  Put another way: if you ask the engineer/architect if they think it can be built, their answer is always “Of course”; if you ask them if people will actually use it/pay for it, the answer is typically “I don’t know”.  Voila, your big unknown.

I’ve rambled on for long enough, but I’d love to know what people think.  I actually have many, many more thoughts of what the software/internet world would be like with free technology, but strangely, they all have one common theme: we’re here already.

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Making money in the app store

03 Wednesday Mar 2010

Posted by Thai Bui in Mobile, Web 2.0

≈ 5 Comments

Tags

App Store, business model, iPhone, mobile game, revenue, subscription, Words with Friends

So I finally got an iPhone (yeah, I know, I know…).

I considered writing a post about the pros/cons of it, but there are just too many of those and frankly, we all already know what they are (I still can’t type well on that thing).  By far the coolest thing about it is the App Store.  While the app discovery interface is incredibly bad, the sheer number of cool apps is amazing (as you already know).

The thing that has me scratching my head this morning is how to make money in the app store.

It used to be that consumer software was purchased and installed.  The software company created new versions from time to time, hopefully enticing you to purchase the latest and greatest.  Support was either really cheaply provided or was charged for.  In essence, the software company had little to no ongoing costs associated with previously shipped versions (occasional bug fixes were it).  Ongoing revenue was from upgrades and new user acquisition.  The company I work for (Intuit) is still partially there.

Then there were subscription models. Ongoing service for ongoing fees. Simple enough and very effective.  My previous company (Homestead) did this all day long.

The apps in Apple’s app store (and I imagine every other mobile device’s app market) are a different financial model altogether. Case and point: my current #1 time waster, Words with Friends.

First, the model starts simply enough: it’s free with ads, and you pay $2.99 to get rid of the ads. OK, while the price is high relative to what most apps cost, this is a model proven to work. Check.

Then, it gets a bit strange. This is not a standalone application but includes a service that connects you to friends so you can play socially. That means we are getting ongoing services (and the company is incurring ongoing costs) with out any ongoing payment.  Would the market accept an ongoing subscription to play Words with Friends?  I don’t know, but it’s not prevalent in the culture of the app store currently to charge a subscription fee for a game.

Then, it gets really interesting. Again, this is a social game where the company is paying for servers for the game communication. That means that while their revenue grows linearly with the number of users who play, their costs grow linearly with the number of connections in the graph (the number of games played).  Net results: their costs grow exponentially (roughly) as their revenue grows linearly.

The assumption has to be that the company makes enough money in the linear revenue to offset the exponential growth of the cost.  I hope that’s true because I love the game.

But put it all together:

  • You have a game that some users buy for $3 not monthly, not annually, but once. Ever.
  • You have ongoing costs associated with maintaining servers.
  • You have costs that grow faster than revenue.

In the short run, it works.  But in the long run, what’s going to happen?  At some point, revenue from the game will start to decline but costs will continue (fewer new users buy it, but existing users still play it).  And at some point, it will become unprofitable for the company to maintain the servers for this game. Maybe they’ll shut it down, or more likely, try to move to a subscription model ($3/year?).

Clearly, other models work (e.g., Zynga), but I think this one in particular needs work to survive in the long run.

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