Why is Software so Expensive?

Today I stumbled upon this blog post, trying to justify why software prices are so overinflated these days. The author does make some valid points, I disagree with the general notion expressed in the post. While making software is not easy or straightforward, it does not justify some of the prices listed out there.

The prices of proprietary software are not really tied to the actual cost of development and testing but to:

  1. Brand Name – just like with any other product, recognized brand names charge more.
  2. Amount of Competition – software market is very unique when compared to other markets, because it allows near-monopolies to thrive. This is the only market where a very expensive product can be more popular than the free alternatives produced by competition because of compatibility concerns, and sheet market saturation
  3. Customer Expectations – pricing is usually based on the perceived amount of money the customer is willing to pay for that type of a product.

The last point is especially striking. How come Microsoft sells their Office Suite for $400 while most game developers price their products at around $60. Does that mean that an original dynamic 3D game with advanced AI, complex physics and many hours of voice acting is actually less expensive to build from scratch than the newest iteration of MS office?

I’d say the game is more complex to make – or at least as complex as the office suite in terms of programming involved. But, the number of people involved in making a modern game is greater than for a product such as office. Microsoft does not need concept artists, graphical designers, voice actors, voice acting directors, voice acting crew and studio, script and dialog writers and etc. Modern game development usually have this whole extra layer that adds to the cost of development in a real, tangible way.

But, no one is going to buy a game for $400. Of course if you are playing a MMO game you may eventually end up paying more than that in subscription fees – but note that part of the subscription money pays for server upkeep and bandwidth. Games are designed as commodity products – you play them for few days, or few months until you beat them, unlock all the secret features, and get so good at multiplayer that you can pwn n00bz in your sleep. Then you get sick of it, and move on to the next game.

Office on the other hand is a product you are supposed to use for a long time. You buy it once, and then you just keep on using it every day, until the new version comes out and you get to pay $400 for it again. This is how they justify the price tag – it’s not how much it costs to develop the product. They base the price on how you plan to use it.

This is why in some products we have per-seat licensing, and other crazy schemes like that. The truth that all software makers know all to well, and try to hide from the customers is that software does not obey market laws of supply and demand. Supply does not deplete as the demand grows. Making more copies of software does not get more expensive, proportionally to the demand curve. Once you have a software product, your supply is almost limitless, bounded only by costs of distribution (ie. bandwidth, cost of making burning, and boxing CD’s and etc).

To offset this, software makers need to worry about maintenance. Most other industries simply release a product, offer you a short term warranty, and then forget about it. But when you release a software product you are expected to maintain it, fix bugs, plug security holes, and add features for the entire lifetime of the product. But, no one ever said you need to provide this service for free. Microsoft does it for the most part, and perhaps this is part of the justification for the inflated prices. Other software makers can sell you support plans, or simply provide software “as is” without making any promises for future support. So while long term maintenance is costly, no one forces you to provide it to your customers.

As a matter of fact, software can be made for free. You don’t need raw resources, manufacturing plants, manual labor, facilities and etc. All you need to start selling software is a computer, a compiler, an internet connection and lots of time. You will say that time is not free – and of course you are right. But many developers will gladly work for free, and contribute to a project that interests them – just because this work is so god damned rewarding. In what other industry can you find people who are not only willing, but also excited to work for free on their weekends to fix bugs and add features to your project?

So the cost of development may not be zero, but a function of time “donated” by individual developers. Still, in the end the software gets made with no upfront capital, and no tangible expenses that can be traced back to the project. So how much does it cost to develop software? The correct answer is: it depends.

It depends on what type of software you are making, how much are users willing to pay for it, how much money you are willing to put into the project and how much profit you want to make on each copy.

You can develop software collaborating with other people online for exactly $0, and distribute it for free. Or, you can pipe thousands into R&D, hire developers, and build a company (or an empire) around your project and sell it anywhere from $20 to $1000 (or more) a per copy. Its completely relative.

So why do Windows and Office so much? Because, my dear friend, you are willing to pay that price. Because Microsoft is a brand name, with a de-facto monopoly in the OS and Office markets. And of course, most importantly because if they would charge more their sales would drop and piracy would rise, as their product would become to expensive for some people to afford.

And that is the truth.

[tags]software, software development, software development costs, microsoft, software prices, software supply and demand, software economics, software industry[/tags]

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13 Responses to Why is Software so Expensive?

  1. Fr3d UNITED KINGDOM Mozilla Firefox Windows says:

    And of course, most importantly because if they would charge more their sales would drop and piracy would rise, as their product would become to expensive for some people to afford.

    MS Software is already too expensive though, and even more so in the UK (and other countries too I imagine). For example, Vista Ultimate was pretty much the same price in GBP as it was in USD around launch date.

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  2. Luke UNITED STATES Mozilla Firefox Ubuntu Linux says:

    Wait… You mean they just kinda covered the $ mark with £ on the Vista price tag? I don’t know what is the current exchange rate, but that would make the software like what – little bit more than twice as expensive as in US?

    That’s crazy.

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  3. Starhawk UNITED STATES Mozilla Ubuntu Linux says:

    Ah but some of us are not willing to pay that much. And I agree with Fr3d they, Win xp et al, ms-office are overpriced by far. This is really true if one looks the global level what is the average global income anyway? I don’t know but ya know its low, poverty stricken countries more than make up for more affluent countries. But from Microsoft’s standpoint I’m sure they accept both “the capitalist economic model” as well as the nebulous concept of Intellectual property. So within that framework they wish to maximize profits and minimized privacy. But one can’t achieve both simultaneously so they try to find a price where some if not most would pay after all. It’s sort of a balancing act and in all likelihood they have some “mathematical economic model” of this they try to use.

    But I don’t really accept the IP concept, it stands in opposition to over 2000 years of academic tradition. No one owns human knowledge. That’s crazy. Even worse is the obvious fact software or any digital data is in reality nothing more than a binary representation of a number. No one owns 4 or 7 or whatever. Hackers say information should be free and I agree. Ideology is more important to me than any “economic” consideration or more pragmatic concerns such as over paid programmers whining how am I gonna make a living if Software is free. Honestly I don’t care get a job digging ditches I’m sure somebody needs ya. Economic disparity is one the problems with capitalism and perhaps a job like that would wake them up to that fact.

    Nor do i in all honesty accept the capitalist business model. I see that as a failure both pragmatically (our environmental problems demonstrates that clearly) and as a philosophy. As mathematics as in economic theory it is an abuse of reason. Its assumptions I can’t accept and its reasoning is overly simplistic.

    But Luke your right in your central idea, The prices of proprietary software are not really tied to the actual cost of development and testing.

    Hmmm

    Most other industries simply release a product, offer you a short term warranty, and then forget about it. But when you release a software product you are expected to maintain it, fix bugs, plug security holes, and add features for the entire lifetime of the product.

    But in most other industries the product is expected to WORK. I’ve used windows since windows 3.1 and lets face it it is to this day kind of unreliable. esp when installed on machines with minimal memory et al. The infamous blue screen is a fact of life for windows users. (the problem of unreliable software is by no means limited to Microsoft). But nonetheless some industries would be sued if they sold such an unreliable product if not imprisoned … build an apartment building and it collapses and kills hundreds for example.

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  4. Luke UNITED STATES Mozilla Firefox Ubuntu Linux says:

    Seriously, I hate the idea of Intellectual Property as much as the other guy. I just didn’t want to get side tracked in that whole discussion while trying to make a point about software prices.

    Intellectual Property is abhorrent travesty that is not only killing the software industry, but also slowing down scientific progress and destroying our cultural legacy for future generations. It actually frightens me that one can exclusively own an idea, scientific method and etc.

    But thats’ a whole other discussion.

    Btw, I love that “How am I gonna make a living if software is free” argument. Classic piece of FUD. It reminds me of these classic arguments:

    1. How am I going to make money if people can just listen to my song on the radio for fee?
    2. How am I going to make money if people can just copy my song off the radio with the cassette recorder?
    3. How am I going to make money if people can just watch my movie on public TV for free?
    4. How am I going to make money if people can just tape my movie from TV using VCR?
    5. How am I going to make money if people can just download my song/movie from the internet for free?

    But it turns out that nothing is ever really free, and things work out for the best in the end. Oh, except that last one – that one seems to be still going on.

    It has been proven, over and over again that:

    a. people will buy a superior product even if it’s more expensive
    b. piracy cannot be extinguished, stopped or slowed down
    c. there is no copyright protection that cannot be broken

    Logical conclusion here is to give away your software for free to those who would pirate it anyway and to offer more attractive deals to paying customers. Note that few people bother pirating copies of “enterprise” editions of linux distros – most people are content with the basic free editions

    Once you stop thinking about piracy as “lost sales” but as free promotion, free testing and means to build a critical mass on the market you can start sleeping better at night.

    I mean, look at WinZip – they are still around and making money despite the fact that Vista and XP have a ZIP functionality built into the windows explorer. Not mentioning that there is about a zillion free (and often better, more feature full and less bloated) alternatives out there.

    And regarding maintenance: you are right. It’s funny how software is just about the only industry where you can rush a half finished, untested product out the door, and then release a patch 6 months later to fix the most glaring security issues, and away with it.

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  5. Starhawk UNITED STATES Mozilla Ubuntu Linux says:

    Software developer’s and companies are seldom held accountable for half finished, untested products being rushed out of the door and the public has came to expect it, take it for granted. Interestingly enough in the same blog that inspired this one I found this:

    You can talk about investing more time in testing, to reduce the costs of defects as early as possible, and they’ll still be more interested in beating a competitor to the market with a bug-riddled application than they will be in sparing users a frustrating experience and corrupting their data.

    After reading Creating my own personal hell i started feeling sorry for him, lol. But if buggy software trashes your data perhaps they ought to held legally accountable. Instead of having ya click ok after reading some legal mumbo jumbo claiming they are not responsible for anything. lmao I suppose part of it is the mystic of the computer, we are talking about a technology that is not very well understood outside of certain circles. I was talking to of all things a school teacher the other day and he noticed my desktop did not look like ah Windows. And it of course was Ubuntu and I have it looking the way i want it to. So i told him it was Ubuntu and then linux and then explaining what linux was and so on. But the shocking thing was the teacher did not know what the phrase Operating system meant, he thought windows was kinda built into the machines one buys at like a hardware level. He was unaware of other Operating systems completely. A perception that things are one way that one has no other choices and such this sort of perception causes a alot of social damage. Wake up is about all I gotta say on that one!! Mind you the school teacher would swear up and down he was educated , master degree even and yet he on more than one occasion has demonstrated quite clearly to me to lack basic cultural literacy. And there’s the problem computer illiteracy in particular helps perpetuate a lot of false concepts and absurd arguments.

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  6. Luke UNITED STATES Mozilla Firefox Windows says:

    LOL! I talked to people like that too! Actually, I work with a lot of people like that. But you know what is really interesting? The people who have no concept of OS, and who think Windows is “built in” still see the Apple comercials on TV.

    I mean do they think that OSX runs on windows? Or what?

    Actually, most of the time, people don’t bring up the fact that my OS is different at all. I suspect they just don’t know how to phrase the question.

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  7. Starhawk UNITED STATES Mozilla Ubuntu Linux says:

    I was wondering the same things about the apple ads myself, I suppose Apples multimillion (or is that billion?) dollar advertising campaign really hasn’t sunk thru people Microsoft induced cultural trance. Sadly they’ve had some damn good ads too over the years, made me even want an apple :D And i suppose only geeks see those linux ad/videos on youtube. lmao

    Actually the teacher (HS btw) asked me what i had did to windows to make it look and act like that, multiple desktops esp. In the past I always did “strange” things to my windows machines so they maybe didn’t look exactly like win outta the box. Stuff like that sorta scares me tho he is responsible for teaching our kids but surely he has students more computer literate than him by far! And sorry to hear ya gotta work with people like that, i know ya blog on it often, but it would seriously get on my nerves.

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  8. Luke UNITED STATES Mozilla Firefox Windows says:

    I never really cared for the commercials. I never wanted a Mac until OSX rolled out. And even then, the selling point for me was the unix core inside.

    Essentially you are running BSD, but with a nice and shiny UI an everything just works out of the box – especially on a laptop. No hassle with wifi setup, no issues with a weird mobile video card, and etc

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  9. vacri AUSTRALIA Mozilla Firefox Windows says:

    Starhawk – The infamous blue screen is a fact of life for windows users. Pre-XP this was the case, but it’s just not true these days, and hasn’t been for years. Windows has plenty of problems, yes (such as the ‘just restart it’ culture), but BSODs are pretty much a thing of the past.

    Luke -

    One thing to add about software prices is that if it’s productivity software that people use to create wealth, it can justifiably cost more – just like a mechanic will spend hundreds or thousands of dollars on a good set of tools. A game, on the other hand, is entertainment. And unless you’re going on holiday, entertainment should never cost that much (to most people’s way of thinking).

    Also, it’s not really true that game development requires more people than Microsoft needs to make its products. Witness the 43 people involved in deciding how ‘shutdown’ should be presented in the Vista start menu.

    Don’t forget that Office also has to work in multiple languages, on non-windows platforms, and that there are a lot of interacting programs in office. I don’t use Office much, but the complexity of the environment it dwells in far exceeds even the most complex computer game. Besides, office may not need artists for things like 3D models, but it does need artists for icons, guis, clipart, and so forth. Theoretically they also do usability studies (which are distinct from beta testing), and a bunch of other things a game simply doesn’t need.

    I don’t disagree about the ‘what the market will bear’ pricing (it’s true for most things, really), but even without the Microsoft bloat, a product like Office is going to require a hell of a lot of developers.

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  10. Matt` UNITED KINGDOM Mozilla Firefox Windows Terminalist says:

    Stuff is expensive until it gets hacked, then its free :mrgreen

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  11. Matt` UNITED KINGDOM Mozilla Firefox Windows Terminalist says:

    oh.. :mrgreen not working..
    test: :) :D :( :wink: :P

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  12. Starhawk UNITED STATES Mozilla Ubuntu Linux says:

    vacri I agree windows stability problems are not as bad as they used to be. I can’t speak for vista as I don’t use it nor do I ever plan on ever using it. XP will be the end of my windows days. Really 2000 pro is the version of win I use on my own machine and the only time I see or use XP is when friends came by or call saying help my machine is screwed would ya fix it for me. So my perception is prob a little skewed cause i do see XP machines with all kinds of problems, and in all honesty these would be problems i prob wouldn’t have if i used XP on my machine. The the 43 people involved in deciding how ’shutdown’ should be presented in the Vista start menu is probably not a fair comparison as that reflects bureaucratic corporate nonsense as much as anything else.

    And btw I don’t play computer games but i do think some killer programming goes into many games. While office applications are complex, so too are many games and they are growing in complexity. And I only had to laugh at the statement “entertainment should never cost that much (to most people’s way of thinking)“, hmm you’ve obviously never known any junkies or crack heads or anybody like that. but anyway i know what you’re trying to say. lmao

    and yeah “productivity software that people use to create wealth usually does cost more in the software for money business. witness autocad photoshop et al . And btw I’m not really satisfied with the open source CAD programs I’ve found and i certainly need one for Linux. If anyone has any suggestions let me know. I’m also looking for a good recipe program comparable to AccuChef, I used to work as a Vegan chef and I’m not so far happy with the Linux recipe programs I’ve found so far.

    And Matt` I certainly have nothing against pirated or hacked software, but i chose not to use it … cause the LAW don’t like my ass and I am not giving them any more ammo than I gotta. I’m an activist and do not live by their rules and they know it and that is the reality I gotta live in at least as long as I live in a police state.

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  13. Luke UNITED STATES Mozilla Firefox Ubuntu Linux says:

    [quote comment="5336"]One thing to add about software prices is that if it’s productivity software that people use to create wealth, it can justifiably cost more – just like a mechanic will spend hundreds or thousands of dollars on a good set of tools. A game, on the other hand, is entertainment. And unless you’re going on holiday, entertainment should never cost that much (to most people’s way of thinking).

    Also, it’s not really true that game development requires more people than Microsoft needs to make its products. Witness the 43 people involved in deciding how ‘shutdown’ should be presented in the Vista start menu.[/quote]

    True. I agree with that, but there are 3 caveats that you need to keep in mind:

    1. They are not designing a brand new Office suite. Large parts of the code base are in place, the public and secret API’s are there for them to use. Granted, there is a lot of work to be done, but building a product from scratch is always more difficult than polishing out a new edition of existing one.
    2. When I talked about game design, I mentioned that a lot of the expense and man power needed there is external. Having 43 salaried full time software developers argue over start button is different from brining in talent to design artwork, do the voice acting and etc. I mean look at C&C3 – can the cost of hiring Sawyer from Lost, 2 Cylons from BSG, that dude from Starship Troopers, and Lando Clarisian can be really compared to the cost of MS developers debating a button?
    3. Having 43 developers/designers/manages working on a shutdown button is a great example of “to many cooks”. It might have worked for microsoft, but in my experience, if you have 43 people arguing over a small detail like that, nothing is really getting done the way it should.

    [quote comment="5336"]I don’t disagree about the ‘what the market will bear’ pricing (it’s true for most things, really), but even without the Microsoft bloat, a product like Office is going to require a hell of a lot of developers.[/quote]

    Yes, but as illustrated by the efforts of the Open Office group, it does not have to be that expensive.

    [quote comment="5338"]oh.. :mrgreen not working..[/quote]

    mrgreen has two colons – one at the beginning, and one like the end. Just like wink. :mrgreen: :wink:

    [quote comment="5339"]The the 43 people involved in deciding how ’shutdown’ should be presented in the Vista start menu is probably not a fair comparison as that reflects bureaucratic corporate nonsense as much as anything else.[/quote]

    Yup! That’s exactly what it is.

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