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Article:
  Calculating the True Price of Software
Subject:   The Manufacturing Delusion
Date:   2005-07-26 08:29:40
From:   Thomas_Barregren

Your article clearly demonstrates what Eric S. Raymond called "The Manufacturing Delusion" in his essay The Magic Cauldron (see below). According to Raymond, "software is largely a service industry operating under the persistent but unfounded delusion that it is a manufacturing industry." He argues that this delusion encourages price structures that are pathologically out of line with the actual breakdown of development costs. With your article you have shown how Black-Scholes formula can be used to support Raymond's proposition. Very elegant. Very convincing.


As Raymond point out in his essay, as well as Gregg Tavares in his comment on your article, the manufacturing delusion don't apply to quite all software. I believe Black-Scholes formula can be used to understand that as well.


The sale value of a software is determined both by factors intrinsic to the software itself and by factors outside the software. Examples on intrinsic factors that affect the price are the software's theoretical use value and the development cost of a functional equivalent. Examples of factors outside the software itself that affect the price are the availability of support, updates, consultants, training and third parties services and add-ons.


The price that most professionals and enterprises are willing to pay for a software is very sensitive to conditions outside the software itself. Consider for instance what happens with the maximum price that professionals and enterprises are willing to pay for a software when its vendor goes out of business or discontinue the development. The price will rapidly fall to near zero regardless of its theoretical use value or development cost of a functional equivalent. This sensitivity gives high volatility, which in turn gives low sale value by Black-Scholes formula.


But this sensitivity doesn't exists for some other software. Consider for instance what happens with the maximum price that consumers are willing to pay for a game when its vendor goes out of business or discontinue the development. The price will probably not be affected as long as the game is worth playing. This sensitivity gives low volatility, which in turn gives high sale value by Black-Scholes formula.


Finally, I want to point out some articles related to what you have written:



  • The Magic Cauldron by Eric S.Raymond (http://www.catb.org/~esr/writings/cathedral-bazaar/magic-cauldron/)
  • The Care and Feeding of FOSS (or, The Lifecycle of Software Technology) by Craig A. James (http://www.moonviewscientific.com/essays/software_lifecycle.htm)
  • Open Source Paradigm Shift by Tim O'Reilly (http://tim.oreilly.com/articles/paradigmshift_0504.html)
  • The Emerging Economic Paradigm of Open Software by Bruce Perens (http://perens.com/Articles/Economic.html)
  • Strategy Letter V by Joel Spolsky (http://www.joelonsoftware.com/articles/StrategyLetterV.html)
  • Why Open Source Software / Free Software (OSS/FS, FLOSS, or FOSS)? Look at the Numbers! by David A. Wheeler (http://www.dwheeler.com/oss_fs_why.html)