Wednesday, May 2, 2007

Do software commodities exist?

The word “commoditization” often comes up in reference to software [one example], especially open source software. The standard notion is that a particular class of software becomes commoditized when there are a number of equally good substitutes. If the software is offered free of charge, then cost strategies based purely on that software itself are not tenable. We tend to think about commoditization as a one way, final process: once a specific type of software is commoditized, it remains so. And, for obvious reasons, those who commoditized the software and those who built on it are happy to sustain this permanent state.

Yet the word “commodization” obscures important perspectives. For example, at EclipseCon 2007, Brent Williams argued that the software market is not a commodity market. His presentation is excellent reading for this and the other points it makes, and has been widely noticed in the Eclipse community. How can we account for the widespread notion of software commoditization in light of Brent’s argument? In my opinion, there are two things going on here. First, the software market as a whole does not behave like a commodity market (as Brent says), but there are specific types of software that do, for certain classes of consumers/users. Simply put, there are certain software components that I would never be able to justify to management building another version of, simply because the existing (often open source) alternatives are good enough for our needs and we do not seek to differentiate based on that particular type of functionality. Secondly, I think the word “commodity” (and its variants) is used in at least two different ways: the technical, investment world usage that Brent cites, and the more broad sense of good enough, undifferentiated functionality. Maybe the second usage would be better phrased as something like “soft-commodity,” but it far too pervasive to change.

Another aspect of commodization is the perceived permanence. In their book, The Innovator’s Solution, Christensen and Raynor argue that commodization is a cyclic process, one which includes de-commodization.* De-commoditization: the word is uncommon and probably strange to most of us. But their model is detailed, backed by thorough research, and very important for the software industry to understand. The key claim is that commodization is accompanied by de-commodization at some location in the Value Chain. Thus, it is vital to predict where de-commodization will occur and to prepare for it, which allows reaping profits from the new opportunity.

The notion of de-commoditization might be unfamiliar, but it has appeared before in a number of cases. An early analysis using this term is found here, which (interestingly) is discussing the suggestion of a de-commodization tactic in the famous Halloween Memo. Unlike the specific lock-in protection tactic mentioned there, however, Christensen and Raynor’s model is much deeper and has many more implication for how we think about open source, especially business models/strategies associated with open source software.

* The relevant chapter is also available as a HBS Press Chapter (#1542BC)

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