David Stutz and Software “Commodification”

David Stutz and Software “Commodification”


In my first post, I said that I probably wouldn’t be posting
any treatises on Economics. Well, I’m sorry to say, I’m posting one now. Why?
Because yesterday the O’Reilly Network
Developer News
, pointed to an href="http://www.synthesist.net/writing/commodity_software.html">article
written by David Stutz. For those who don’t recall, David Stutz headed up the
Rotor project before leaving Microsoft, and was a vocal advocate of open source
both before joining Microsoft and when he was employed at Microsoft. His href="http://www.synthesist.net/writing/onleavingms.html">parting open letter
to Microsoft, written a little more than a year ago, found some cachet within
open source circles.


My only personal contact with David occurred just before he
left Microsoft. The lead program manager for Mac Word, Jason Webber, was
leaving Mac BU to join the Visual Studio.NET team. One of us had the brilliant
idea of sending Jason off with the, then yet to be released, version of Rotor
that ran under Mac OS X, so I fired off a piece of e-mail to David asking where
we might find the bits. David was more than accommodating, and very easygoing.


I’m inclined to think that David’s really a very nice guy,
which is why I’m so very disappointed with his whole concept of software “commodification”.
Besides the fact that “commodification” is the wrong word (the correct word is
“commoditization”), he really fails to grasp the essential details of the
concept. As a result, his conclusions are misguided at best and procrustean at
worst. Hence, this post.


If you’ve slogged your way through David’s essay and found
yourself saying, “Huh?” don’t feel bad. He’s talking about the process by
which certain goods and/or services become “commodities”. As David correctly
points out, commodities are fungible regardless of the producer. You can
substitute one producer’s output for another producer’s output without noticing
the difference. As such, commodity producers tend to compete solely on the
basis of price, and relative profit margins are determined by each individual
producer’s costs of production (what accountants call “cost of goods sold” or
COGS). Commodity markets tend to most closely resemble what Economists call “perfect


For example, milk is a commodity. Given a taste test
between Lucerne 2% milk and Wilcox 2% milk, only a very small percentage of the
population would be able to tell the difference. Between various stores, you
might find as much as a 50% difference in prices for a gallon of 2% milk, but
that’s mostly because some retail sellers use milk as a loss-leader to bring
people into their stores.


Contrast this with, say, DVD players. If you go to PC World’s
grabber, you’ll find the most expensive player priced at just under
$4100.00. The least expensive DVD player is $49.00. With a price differential
of nearly two orders of magnitude, clearly the market for DVD players is not a
commodity market. If we’re going to understand the process of commoditization,
then our understanding had better account for the difference between the market
for milk and the market for DVD players.


One way to understand that difference is to claim that all
goods and services either are commodities already or will eventually become
commodities, and that goods and services in markets with huge price
differentials simply haven’t become commoditized yet. This seems to be David’s
stance, though he doesn’t explicitly say so. The problem with this stance is
that some markets appear to never become commoditized, and there is no real way
to see how they can become so. Consumer electronics has resisted
commoditization since the invention of the radio, and there’s no sign that
commoditization is near. While overall prices in the market for consumer
electronics have dropped steadily over the years, a wide variety of prices
continues to be a feature of that market. Indeed, if anything, the price
differentials have increased, not decreased.


Another way to understand the difference is to note that
some goods or services lend themselves to something called “product
differentiation.” This concept is predicated on the idea that consumers have a
wide variety of tastes, and that some are willing to spend more than others to
satisfy those tastes. Goods and services marked by product differentiation
tend to compete on the basis of “features” rather than price. Economists tend
to not like this idea, because it makes for very messy mathematical models.


That David’s argument fails to grasp this distinction is
bolstered by the fact that David quotes Karl Marx. Marx, along with most of
his 19th century contemporaries, was mired in an effort to arrive at
some objective notion of “value,” and all of Das Kapital style='font-style:normal'> is predicated on the idea that this objective definition
exists. Without it, the whole idea that the proletariat even has something
that can be called an “excess value” that can be appropriated by capitalists fails
to make any sense (which is probably why so many people fail to get past
Economics 101).


But I digress. Our question is whether the market for
computer software (which is a stratified market) more closely resembles the
market for milk or the market for DVD players. We might note the lack of
variety in, say, desktop software, and conclude that software more closely
resembles the market for milk, but I think that would be a mistake. The
difference between a commoditized market and a non-commoditized market does not
lie in the variety of products in the market at any given time. Rather, the
difference is whether or not products within that market lend themselves to
competition on the basis of features.


I don’t know that there’s any more conclusive evidence on
this issue than the fact that everything we talk about in the software industry
has to do with features. Every religious debate from vi vs. emacs to Macs vs.
PCs is really a debate between differing individual preferences. Even the
discussion involving “total cost of ownership” is really a discussion about
features, or, more precisely, it’s a discussion about the way in which certain
features justify a differential in price. We can “taste” the difference, which
means the market for software is not like the market for 2% milk.




Comments (14)

  1. Steve Hall says:

    Oddly enough, the software market IS similar to the milk market…at least in California!

    The milk market in California is an example of market forces (in this case, the California Milk Advisory Board and the Western United Dairymen) pressuring the state legislature into requiring certain "features" to be in a product, in order to prevent it from being commoditized. (Essentially, milk in California must be "fortified" in order to be called "milk". See the webpage http://www.moomilk.com/archive/feature_50.htm for details.)

    This, along with the Milk Board’s infamous "happy cow" ads on TV, help to distinguish California’s "feature-rich" milk from all that (crappier?) commodity milk produced in other states (or Mexico).

    Consumers have apparently been successfully convinced of the need for these "fortification" features in milk…or are just too lame to complain about $4/gallon milk prices. (The $4/gallon prices are justified by the Milk Board as being the increased cost to deliver this additional feature…)

    Last year, there was another attempt by consumer groups (and milk producers in Oregon, Washington, and Mexico) to dismantle the milk fortification requirement, but after everyone heard from various medical professionals, became convinced once again that the feature was necessary.

    Another great example of features in commodities would be food safety issues: here in California we routinely run into batches of fruit or vegetables that are imported from countries with lax laws about pesticide use (e.g., DDT) and produce cleanliness (e.g., E. Coli or Hepatitus A from farm workers hands). The knowledge that the produce came from a DDT-free field and was properly washed could certainly be considered a "feature" and deserving of a higher price. Consumers regularly pay MUCH higher prices for "organically grown" produce or "California grown" produce.

    In short, "features" are "market discriminators" and obviously affect even what most think of as commodity products.

    A great example of using "features" in discriminating similar products are those produced by Sony. Sony long ago perfected the technique of producing a "line of products": e.g., each year Sony has anywhere from 12-18 different portable CD player models, with varying features. They retire 4-5 models each year and introduce 4-5 new models each year…each with the newest features that their market research indicates will tap into the fad-buying consciousness of Japanese and American buyers. Essentially, they discovered that Americans are willing to replace their 2-year $30 CD player every 2 years to get more/better features.

    In summary, "features" drive low-end commodity products even more in some cases than high-end non-commodity products.

  2. Eric Albert says:

    A quick correction on the organization of Rotor — David was our GPM, but for the last half of the project he was part-time. Geoff Shilling was our PUM. While David was a great evangelist and really helped get the project going (and helped write the book), Geoff was the leader.

    Oh, and David’s definitely a great guy.

  3. Matt Warren says:

    David Stutz was a God, but not infallible. I would not agree that software is a commodity, or will soon become one. The best example is that most software is still written for specific vertical markets, and within that are huge markets for software customization of even those products.

    Shrink wrapped products are the closest thing to a commodity, but only in as much as one can be replaced for another. To some people on the margin, OpenOffice might be an adequate replacement for Word because their specific needs require nothing more than a general text editor with a option to print. Most others, however, find themselves demanding more specific features, and certainly that’s driven a lot of baggage into MS Word, but for every feature there’s a group of users that can’t live without it. You start to delude yourself into thinking these products are commodities because of their ubiquity. These closest you’ll ever come to a commodity market for software like office or windows is if the US Government did find a way to break the company into different parts, or to force Microsoft hand over the code to different vendors. Unfortunately, this would only become a short lived artificial commodity. Eventually these separate vendors would compete on features, not price and soon specific versions would not longer be replaceable in any user’s eyes.

  4. Derek says:

    Computer software is not a commodity, but personal computers certainly seem to be — or at least a certain segment is. Basic computers for home or small-business use are, in many people’s minds, interchangeable. As long as it runs Windows and will read e-mail, surf the Web, etc., price is the determining factor in the purchase — they don’t care about Intel vs. AMD, motherboard chipsets, graphics processors, etc. That doesn’t extend to Mac users, gamers, developers, and others for whom specific features are important and worth paying for, but for many other people one entry-level PC is as good as another.

    It’s the reason why Dell and local "white box" PC assemblers eat everyone else’s lunch in the mass PC market: they can make substantially the same machine for cheaper than HP, Acer, and IBM. Laptops aren’t yet quite commodities, but they’re getting there.

  5. Derek says:

    I should add that, for many people, DVD players _are_ a commodity. Yes, people who care and have done research will pay more for a DVD player, but in the general mass market of those who just want to watch a DVD from the video store, $29 is better than $150, and some will stomp other people nearly to death at Wal-Mart ( http://www.gizmodo.com/archives/010650.php ) to get the lower price, features (or lack of them) be damned.

  6. Ian says:

    But don’t some software components become commodities like these DVD players? Many years ago, you used to have to buy tcp/ip stacks. Or file and print services can be handled using Samba. For most people, the difference between WinDVD and PowerDVD is negligible. When the feature set is sufficiently ring-fenced, you do seem to get commoditization.

  7. T says:

    On a side note:

    "…some will stomp other people nearly to death at Wal-Mart (http://www.gizmodo.com/archives/010650.php)"

    I thought that ended up being a scam. The woman was a con artist who did this sort of thing before.