For the most part I agree with what he’s saying – at least in intent. But I still believe customers should be wary of vendors describing their products as commodities. They’re often implying a level of safety and switching ease that I haven’t seen reflected in reality. What they mean to be saying is that competition in the software industry has heated up, from desktops to servers to middleware – and prices are under intense pressure. Sun is certainly doing its part to drive that pressure.
Ross outlines the conditions under which commodity markets evolve. I’ve outlined them below, as well as why I believe the conditions don’t apply. I’ve used operating systems as a focal point.
- There is a common definition of the good and standardized contract.
There is neither a standardized definition of an operating system, nor a standardized contract for its delivery or quality. Unlike, say, bandwidth.
- There is enough liquidity, or volume of trading in the market
Hard to know – given the absence of a resale market in software licenses. Most software companies forbid resale.
- There is no concentration in supply
This, to me, is where the perception of the majority of (especially technical) users begins to run astray from the reality I see. A precondition that suppliers are interchangeable suggests that markets that tip to one vendor (or a concentrated supply base) cannot be commoditized.
But as we all know, software markets notoriously tip.
And there’s a huge concentration of supply in operating systems. Just look at linux on servers – ISV’s dominantly qualify to Red Hat. That’s why Red Hat’s able to charge $2,000 for a license. There are very high switching costs – not in the porting of the code among distros, but in the qualification of the system for production deployment.
Contrast this to the switching costs for bandwidth.
Now, I’m sure I’ve once again just run afoul of the linux community, which is not my intent. Linux is available in any number of differing forms – but the form of “production ready operating system” (not just a kernel) for which enterprises would generate demand is highly concentrated. They need driver support, ISV’s, etc. And on industry standard servers, there are increasingly three volume operating systems: Microsoft Windows, Red Hat linux, and Sun’s Solaris. Sure, BSD, SuSe, Debian, Mandrake exist – but the volumes and ISV’s dominantly accrue to the first three in the enterprises we serve (desktops, especially developer desktops, are another issue).
Again, I’m not talking about technical users facile enough to type “make install” – or able to live with the consequences of a personalized distro. Datacenters cannot, nor can ISV’s, afford the luxury. Thus, software markets tip.
Hardware markets tip, as well, for much the same reasons – which explains why the x86 architecture (and Intel’s brilliant “industry standard” prefix, so comfortably worn by AMD🙂, apparently commoditized, still generates such generous margins for Intel. And has failed to yield a commodity market (vs., say, the DRAM marketplace).
- Pricing is volitile [sic] and indexed
The software industry hasn’t even agreed upon the meter we’ll use to price. Personally, I favor employees.
And bear in mind what’s above relates only to operating systems – the rhetoric around “commoditization” of the software industry generally references the entire web service stack. Which I’m (tongue planted firmly in cheek) happy to report is commoditizing. Because Sun is commoditizing it with our Java Enterprise System.
But if you run through the same bullet analysis, above, on web service infrastructure, you’ll see how even farther afield of Ross’s original list it would end up. Middleware tips, too. And thus cannot commoditize.
To me, the software industry isn’t commoditizing – any portion of it.
And maybe I’m being too academic in my definition. The software industry is becoming massively more competitive – on desktops, servers, phones, dashboards and networking machinery. For the first time in a long time. Which is good news for customers and developers. And bad news for companies hoping to maintain 90% gross margins.
But if it’s helpful to the industry for us all to coopt the word “commodity,” then let’s get on with it.
After all, we’ve got railroads to run…