2005-10-02
Open sources effect on product development
so.. I was wondering on what the bigger effect of open source had on companies releasing software.
First of all companies need to pay a development team (+marketeers and managers) to write a new product. Now normally they would do a cost benefit analysis, and some kind of NPV calculation to figure out if it was worth it.
eg.. using a 10% discount rate if you spent 500k today, you would have to be doing the following in sales to break a small profit.
where the NPV in this case would be 41k. (NPV is used as a dollar in the hand today is worth more than a dollar in the hand in a years time).
In my previous post the original author forgot about the 500k of development costs. which is why it looked like such a great thing, and microsoft was ripping people off. (they probably are, but not as badly as he makes out)
ok.. now assume that you stagger your product development so that you release a new product say every 2 years (that would explain the large drop between 2-3 year timeframe)..
right now we have described the typical software house's product release cycle.
now.. imagine if you had a new competitor who didn't have the product startup cost and could sell their product for free, and could take 20-30% of your business away from you... all of a sudden you have a choice.. you can drop the price and get the customers back (and hopefully more customers who weren't willing to spend that much in the first place).
But what happens to your next product on the drawing board? your going to have to drop the product development cost so that you next one doesn't lose money, or increase the release cycle so you have longer to recoup it.
So that means less cool new features, resulting in a lower price, or a easier to duplicate product... which can result in a pretty vicious cirlce.
So how to save your product line. you can look at how the open source people make money and copy them. charge for consulting, support, and custom work.
OR you can spend more on the product development and make harder to duplicate features (or use patents to stop duplication)
OR release more often basically the Davidow's Law / Red Queen strategy, and not give the open source movement enough time to compete. (they don't have the benefit of a team of dedicated programmers after all).
OR you can just reduce your profit margin and be thankful your still in the game.
OR you can just stop making your product.
the last one is the one I dislike the most, as it means less choice for the consumer, and some starving programmers who are willing to take less pay to do their job, and less impiteous for software houses to write new software. (which all result in me getting less money, as I work in IT)
So this is the reason I don't wont open source to succeed 100%. I don't belive the world would be a better place without Microsoft Office & NT. I belive it would be a better place if they held a smaller share of the market (say between 23 and 73%) and not the near monopoly they currently do.
| year | 0 | 1 | 2 | 3 | 4 | 5 |
| Sales/(costs) | -500 | 300 | 200 | 75 | 50 | 20 | Present day value | -500 | 273 | 165 | 56 | 34 | 12 |