Differences between version 2 and predecessor to the previous major change of MarketFragmentation.
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| Newer page: | version 2 | Last edited on Monday, June 1, 2009 3:29:13 pm | by LawrenceDoliveiro | Revert |
| Older page: | version 1 | Last edited on Monday, June 1, 2009 3:22:54 pm | by LawrenceDoliveiro | Revert |
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In economics, we talk about the “fixed cost” of setting up to manufacture something (product design, building of factories etc), versus the “unit cost” of building each piece of product for sale. Clearly, your profit depends on how much you can sell each unit for, minus the unit cost, plus you also have to ''amortize'' (apportion some share of) the fixed cost over the first ''n'' units you sell. For instance, you might expect to recover the fixed cost over the first two years of selling the product, just in time to develop a new version with an new amount of fixed cost.
In software, the fixed cost can be quite high for a large and complex piece of software, while the unit cost is really just the cost of duplicating bits, which is as close to zero as makes no difference.
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+[Proprietary] software relies on recouping the costs through selling the software. Since the unit cost is essentially zero, the costs being recouped are largely fixed costs. Once these have been paid off, the price of the software can be greatly reduced, and the company can still make a profit.
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+But conversely, if there are a number of different competitors with proprietary software products, the price could drop to the point where only the number-one vendor is still making a profit, while all the rest are losing money. This seems to happen sooner or later in every market segment with proprietary products, which is why proprietary software is dominated by a small number of very large companies.
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+With FreeSoftware on the other hand, the fixed cost can be spread out in a number of ways, by reusing code from other projects, and relying on a large pool of contributors to divide up the work between them. This low fixed cost makes it very easy for new players to enter the market: instead of having to develop their products completely from scratch, they can build on work that someone else has done, and just put their own innovative variations on top.
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CategoryEconomics
