So, following on from my comments about value I want to look at software in particular. Simplistically, a new product from a software supplier faces four main competitive threats.
1. Other companies who offer a similar product.
2. Other companies who offer a radically different product which could make their product obsolete.
3. Open source projects who offer similar products for free.
4. The last version of the companies own software.
To explore this, let's look at a fairly high profile example : MS Office, the great cash cow of the Microsoft Corporation.
Tens of billions of dollars have been generated by different incarnations of Word, Excel and the rest, and it's still one of the companies largest earners. Beyond mere financial impact it's fair to say the suite has had a cultural impact. Almost every business I have visited has used MS Office in some capacity and the one example of a government department I know which tried switching to Open Office actually switched back after staff complaints. And this is very much the point - it's so widely that almost everyone knows how to use it (quirks and all) and this in turn means it is widely used. On a personal level I've personally been using Microsoft Word since 1991 and I'm embarrassed to say that it remains on at least one of my PCs at the moment, although I tend to use a text editor for most purposes these days.
So...could anything unseat Office? I'm certainly not aware of any commercial desktop office suite which could even remotely be said to be close to challenging Microsoft in this area. So of our threats above, we can eliminate 1 straight off.
Two is a different story. For years people have predicted the end to large locally stored applications and the development of true Web Applications. And recently, there's been some movement in that direction - the most high profile recent additions to this field being Google Spreadsheets. And such products do indicate a new way of doing things where you wouldn't have to have large client installations on your home or office PC. Instead (the theory goes) you would simply login anywhere in the world and be able to interact with the same system. And if that sort of future develops, Office as we know it could become unstuck. Of course, MS would be (and are already) offering their own alternate products.
However, I think anyone who has used something like Google Spreadsheets at any great length would concede they are not quite ready to replace programs like Excel - at least not in the corporate environment where the big bucks are earned. And indeed there are still PCs out there which do not have a persistent reliable connection to the internet (although this figure must be falling rapidly in terms of proportion of total PCs). For these reasons and others I think it's unlikely that web apps will realistically challenge MS Office within the next three years.
Skipping onto #4 for a moment, I would say the main competitor to MS Office 2007 is MS Office 2003 (followed by Office XP and even '97). The biggest threat to MS's revenue stream is not that other companies will produce an Office killer but that users will simply not bother upgrading. Office for a while now has been dangerously close to "good enough" for a great many users (even though it's still maddening to use at times). If a product is "good enough", even if it's not great then why bother upgrading?
Yes, 2007 is better than it's predecessors but in the eyes of many users, it's not good enough to justify a new licence. Using the terms from my last entry - there simply isn't enough perceived utility value in upgrading. Of course, one cannot explain such an attitude by labour value - the £200 to upgrade to MS Office 2007 is undoubtedly a tiny fraction of the development costs - but it would still represent poor value for some consumers.
Again, this is not to say Office is perfect. I am still mystified why after fifteen years and many billions of pounds worth of investment the automatic numbering system is still so dreadful in Word in Office 2003 at least the tabling options are at the very least non-intuitive. But are those problems enough to convince people to upgrade? Seems doubtful. (Especially given at least numbering still seems terrible in Office 2007 from what I've seen).
So, undoubtedly marketing hype will convince some to upgrade. Others may genuinely need the new features offered in the new edition. But is that sustainable indefinitely? What about Office 2009 or whatever that itiration is called?
Case in point. At my workplace we upgraded to Office 2003 recently. This was not because of extra functionality nor because of users demands but simply because MS stopped supporting our previous edition. Unless we wish to use unsupported products (given our risk averse IT department this is unlikely) we had to move up. Effectively MS boosted the utility value of Office 2003 by deliberately reducing the utility of their older product.
Will that work indefinitely? It seems unlikely.
Which brings us finally to the point. Much like exhausted oil reserves, the prospect could loom that revenues could dry up. Sure, it might not happen now, or even in Office 2020 or whatever we'll have by then. Either way, I think it's fair to say that the commercial desktop office application could eventually become an unviable business prospect (at least in the form it exists now). New business would offset some of this, but again that can't go on forever - you might get to the stage where everyone in the world has a copy of Office, but could you get them to buy two? This isn't Coca Cola we're talking about now.
One solution which could offset a lot of these problems is a different model for selling software (and other content). Much like our datasets described previously we'l pay a charge for the software which won't buy the licence outright but will instead be renewable on a monthly / annual basis. It won't be phrased this way of course. Instead, you'll be paying for server maintenance, free upgrades and unlimited technical support. And a bit like World of Warcraft, if you stop paying your fee, your software simply won't work.
Is that a feasible model? Whether the numbers can be made to work is another issue, but from a consumers perspective this would seem like a dreadful deal. Even if the cost was absurdly low (say, £1 for a year of Office) you would be in the position where the product could be withdrawn at any time and could undergo price changes in the future. You also could get interesting political consequences where software functionality could be removed centrally and affect everyone simultaneously. This is even more worrying with regards content - imagine watching Star Wars one morning and finding out that Greedo shot first? Or, more seriously that Eurasia has always been at war with Oceania.
Paranoid fantasies aside, what about value? If we've got to the stage where the applications are (almost) good enough now, it's going to take some pretty compelling reasoning to persuade people to pay a montly fee for the rest of their lives.
And here is where we return to the Open Source alternatives. Yes - Open Office is not as good as MS Office 2007 - I've said it. But when compared to a software which (theoretically) could have a continuous charge levied with it, surely this advantage will shrink rapidly? Many users may simply keep old version of MS Office of course, but those who want access to XML document types or whatnot will very quickly see that Open Office is "good enough". And so unless Microsoft make their software incredibly easier to pirate (hardly unprecedented but not easily feasible with online applications) their home-consumer market will slowly vanish. I suspect their business market will not be far behind it either.
Of course it might be that MS can develop enough new features in their products to keep up the utility value in a monthly subscription. At present, it's not clear this will be easy though.
And so, the overall problem can be stated as thus : How do businesses ensure that consumers continue giving them money after they've already supplied the product? If the product is good enough, the consumers may never need another one. Given all businesses require a continuous stream of revenue to maintain their operations how can this be resolved?
Obviously it's not just a Microsoft problem. Outside of the mainstream it's interesting to see the different approaches undertaken by different suppliers to this overall problem. Our asset management system cost something in the region of £60k when first bought. There is an additional support cost of something like £4k per year which obstensibly pays for our access to support services but perhaps more importantly is a condition of the original licence. We cannot opt out - not if we do not wish to cease using the software. It's fairly obvious that in the first year or so we contacted their support desk several dozen times. The second year probably involved about fifteen calls. This year I will be surprised if we exceed five. Now, I am not complaining that we do not have many problems with the software, and our fee pays for additional updates to the software, made intermittantly. But the value of these updates (at least in my opinion) is steadily declining. The software is not doing anything particularly special, and there is no patented secret formula at it's heart which couldn't be reproduced in a non-intellectual property infringing manner.
And indeed, in time, the inevitable will come. Someone young scamp will produce a FOSS alternative. Such a project will gain momentum and (fairly quickly) will approach the point where the additional utility provided by our software will not justify the annual expenditure. Only companies which enthusiastically innovate and develop their products (i.e. leading their markets) will have a chance at retaining profitability. The rest shall perish.
