Is Software High Tech? If not is it a Commodity?
Great posts by Vincent in December of last year investigating the ‘High Tech’ nature of Software. Click here and here to read those posts. It got me thinking and I decided to post my thoughts. Before we can answer the question – Is Software High Tech, we need to ask a more fundamental question – What is ‘High Tech’? According to Wikipedia’s entry, High Tech is the most advanced technology that is currently available. Now, any innovation first starts as high tech but turns into low tech gradually over the period of time. I guess when the paper was invented, it was quite high tech. Today, from Post It to tissues – paper is ubiquitous and no one gives another thought asking if that product is high tech anymore. Same is true with telegraph, radio, TV etc. Yesterday’s high tech is today’s low tech. Once it becomes low tech, it’s a matter of time before it becomes a commodity product.
How fast it dives into the depth of commoditization depends on how profitable the product is going to be. These products are so out of the box that most of the people don’t see how that product is going to be useful. Here is classic example how IBM’s CEO Thomas Watson once quipped that there is “need for 4 or 5 computers in this world”. You can also read how Telephone and Telegraph were first dismissed as some fancy non useful applications. Just few years back Craig Barrett the then CEO of Intel said that at $100 Computer (OLPC) proposed by MIT Media Lab was a ‘toy’ and not going to be useful. When people figure out the product’s usefulness, the innovators that had the audacity to have the vision for that product will end up make lot of money. Bill Gates’ vision of ‘computer on every desk’ ended up making a lot of money for Microsoft. But those hefty profits will attract more competition and the profit slowly erodes.
Andy Grove, the ex CEO of Intel made a poignant point when he said “He who commoditizes last wins”. This was in the context of intense competition of Semiconductor industry. So, even a very ‘High Tech’ microprocessor will some day becomes a commodity. Same is true with respect to Software. At one point, Microsoft Office was the cutting edge application that dramatically improved office productivity. Today, software by itself is no longer high-tech.
If software is low tech, is it commodity yet? Some people belong to the camp that contends Software has already become a commodity. This is where Nicholas Carr created furor when he called software (IT in general) a commodity (just like electricity) in his infamous Harvard Business Article ‘IT Doesn’t Matter’. I strongly differ in my views. In fact, I dedicate my personal blog writing on how to align IT with Business Strategy (a shameless plug!). Even though software is low tech, it does need some qualitative intervention to create differentiation. Think of Google and its Search Engine. Not only it’s search and indexing algorithm are unique (somewhat), it has created an entire ecosystem of advertisers bidding for keywords, search engine optimization techniques, and a new way to market online. Another example is Apple. With its ingenuity aided by unique combination of software and hardware, it had redefined mobile phone (which has begun to become a commodity product) to create a very differentiated must have product.
Some day when Intellectual Protection is no longer an issue, when every innovation is shared and distributes seamlessly, only then software will become a commodity. Until that day, in my humble view, even though software by itself is not high-tech, it’s far from being called commodity product.
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Tags: Commodity, High Tech, IT, IT Doesn't Matter, Nicholas Carr, Software
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A very nice write-up! I’ll have to re-read it several times to digest all of it. And of course, my thoughts back then are not my thoughts now and I’m still planning to publish more on this subject, though using some of the practical data I collected for my thesis as proof.
First let me explain why I wrote the original posts. Apart from certain projects on a massive scale that I’m very impressed by (e.g. Amazon DB), the world of software seems very drab to me. Not only do updates add little value, for plenty of software the value in everyday productivity is questionable.
Whether or not a product is a commodity, depends on several factors aligned on two dimensions, I think: production & consumption. On the production-side, we have labour, tools, and distribution. More and more is becoming automised, less skills are needed (this point is debatable) to produce software, and distribution-costs are minimal. It is very easy to see how the production of software is become trivialised.
On the consumption-side, we have three phenomena that are quite telling: bundling, piracy, and open source. When was the last time that you bought a PC without an OS? Would people upgrade to a new OS without a new PC? Some would, but that brings us to a second phenomenon: piracy. It’s pretty safe to say that the majority of consumer-software is pirated. It would suggest that customers attribute little value, apart from the legal kind, to software. And there’s open source, which for some incalculable reason has produced free alternative to most consumer-software.
That people are not paying (or paying less) for software should have two consequences for producers: a. that producers will work hard on their copy-protection (good luck with that) and lobby politicians for legal protection (on a global scale? good luck with that also). And b. that producers will have to push the cost of production down. There is a pressure to automise more and more, build on existing framework and fill in the rest with real or artificial code-monkeys.
I think that were more innovation must happen is in integrating software and hardware solutions into real life. You speak of paper, but I can do way more with a piece of paper than I could ever do with the blank canvas of a word-processor or a paint-program.
The problem with my vision is that it is expensive and complicated. And it is expensive and complicated because it is high-tech.
More on this in a few weeks when I’m back on the clock.