What if software was never free?

June 14, 2004

Ten years out, in terms of actual hardware costs you can almost think of hardware as being free
-- Bill Gates

We've all been reaping the benefits of Moore's Law for the last 20 years, but there is one unintended consequence of this rule: as hardware becomes cheaper, software becomes more expensive.

In other words, it was OK for a retail copy of Windows to cost $99 when computers regularly cost $2,000 to build, circa 1997. That's only five percent of the total cost, after all. But in this era of cheap, $500 computers (with monitor!), that same $99 license is a whopping one fifth of the total cost. Perhaps the more relevant question is, What if software was never free? One answer, obviously: Linux.

Microsoft's response is.. a little more complex.

"[in Thailand] Microsoft offered a special price of 1,500 baht ($38) for XP Home and Office XP combined," recalled Jumrud Sawangsamud, chairman of affordable computing working committee. Normally, Windows XP Home Edition sold for 4,500 baht and Office XP cost 15,000 baht.

We've already seen Microsoft do something like this, informally, with their "student" licenses for Office XP. However, what immediately struck me about the Thailand pricing is the obvious parallels with the pharmaceutical industry-- that is, subsidizing development costs differently in different markets.* And, sure enough, a few paragraphs down:

Setting prices based on geography is not new in other industries. Pharmaceutical firms charge lower prices in developing markets like Africa than in mature ones like the United States. Even McDonald's sets different prices for Big Macs based on geography.

Unfortunately, what isn't mentioned here is how profoundly unpopular this pricing strategy is. It's also an increasingly difficult strategy to enforce in a global market, in the age of the Internet. Ignorance is bliss, at least, when it comes to someone in Thailand paying less than one-tenth what I am for Office XP and Windows XP. Granted, software may make my life easier, but it sure won't save or prolong my life-- but a drug can. So you can imagine the intense pressure for illegal "grey market" drugs, imported from countries with socialized medicine (eg, strict price controls and/or much lower drug prices, such as Canada or Mexico). These illegally imported drugs are sold in the US through websites at significantly lower rates. It is a huge issue, and there is legislation working its way through the senate to legalize the drug importation process. In an election year, and with the clout of older voters who need these lifesaving drugs, you'd have to be a very gutsy politician indeed to oppose its legalization.

I have no comments on the ethics of the "grey market"-- I think in a global market, it's inevitable-- but I don't see any reason why, given a strongly tiered per-country pricing structure, the same problems (and pressures) won't come up in software, too.

* In the interests of fair disclosure, I should mention that one of the largest drug companies in the world is the second largest employer in this area, and I currently work for that company.