Externalities are crucial for the software industry

Externalities exist in any business. We are very familiar by now with the externalities of the manufacturing industries – air and water pollution, noise pollution, depletion of resources etc. But what about the software industry? How bad is the industry’s addiction to the externalities?

In economics, an externality is a cost or benefit which affects a party who did not choose to incur that cost or benefit.[1]

For example, manufacturing activities which cause air pollution impose health and clean-up costs on the whole society, while the neighbors of an individual who chooses to fire-proof his home may benefit from a reduced risk of a fire spreading to their own houses. If external costs exist, such as pollution, the producer may choose to produce more of the product than would be produced if he were required to pay all associated environmental costs. If there are external benefits, such as in public safety, less of the good may be produced than would be the case if the producer were to receive payment for the external benefits to others. For the purposes of these statements, overall cost and benefit to society is defined as the sum of the imputed

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Service: cheap, cheapest… cheaper!

I find it disturbing how even the most normal appearing people are falling for the cheap-cheap-cheap mantra of the day. Take the telephone services. My friend, who would always check the quality of everything he buys and make sure that it is of at least fairly acceptable level, falls for the “we have it cheaper than everyone else” internet and telephony package. Result is very predictable: half a year of wasted time, miserable service, lost money.

Why does this happen? It seems easier to accept the “everything is equal anyway” lie when you cannot assess the quality expertly in advance. It is probably difficult to assess the quality of a used car for a non-specialist, but at least you can see the rust. When you only see the colorful brochures, it becomes near impossible to judge the quality of a future service. And it is, oh, so easy to judge the amount of money you pay.

When you select the services next time, remember, it is not only the money you pay. The service you receive should also be taken into account. You are not just paying money, you are paying money for the service. Make sure the service is …
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Of “digital piracy”…

Wasn’t I saying it all along? The net result of abandoning DRM (Digital Rights Management) would be positive for most companies. Various studies show this again and again from different perspectives. This time it is a behavioral study of an Oxford economist Karen Croxson discussing the potential customer behavior and result of the piracy on the net sales. And the conclusion is still same: piracy does not hurt sales, even helps sometimes.

Really, if one abandons DRM and lets go of the piracy hype, the result must be positive. Here is the list of things to consider:

  1. The customers that buy your product would buy it anyway.
  2. The customers that would not be buying your product will not buy it anyway
  3. The customers that are influenced by the “ease to copy” and decide to copy instead of buying are extremely marginal in number.
  4. The experience with your product, the rumors, the hype, the word-of-mouth advertisement would generate many more customers than you might lose in the previous category.
  5. Customers loyal to you are not annoyed by your silly DRM schemes.
  6. You do not need to waste money and time on the DRM.
  7. People who spent time breaking your DRM schemes

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