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Intangible investment behaves differently

gatesnotes.com

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Re: Intangible investment behaves differently

#31

Post by orbifold »

The fact that replicating a piece of software or music digitally has near zero cost suggests that the fair price according to classic economic theory is zero (the argument being, that the price in a competitive market should approach the limit price). Of course what we see instead is a lot of companies that are now rent seeking and that no longer sell a piece of software to you but rent it out for a fixed price (SaS, Adobe Creative Cloud, Jetbrains, season passes in games etc.), similarly with DRM and Music/Movies/eBooks Spotify/Netflix/Amazon. Uber also fits this pattern in that they rent out capital that other people provide to them for free (insane if you think about it).

What hopefully will happen over time is that these rent seeking entities are squeezed out of the market over time, otherwise we are entering an area of corporate feudalism. This can be prevented as long as the assets needed for production are easily and cheaply available, which is the case thanks to the Free Software Movement.

Re: Intangible investment behaves differently

#32

Post by MoBattah »

mathattack wrote: post #6

I think his straw man for supply and demand is off. Higher demand doesn’t create lower prices. Lower prices creates “more quantity demanded” at a given level. If demand increases, then prices and quantity both go up. This may be semantics, but it isn’t like economics completely falls apart. Similarly, economics is able to handle products with high fixed and low marginal costs. (Natural monopolies) I suspect he gave t…

>I suspect he gave this book review assignment to an intern that majored in something besides CS, business or Econ.

I was under the impression the Gates Notes were written by him, wrong?

Re: Intangible investment behaves differently

#33

Post by Peopleguyintech »

I generally agree with Gates on a lot of things, but there are some generalizations here that don't apply to a lot of software.

1. While the cost to produce N+1 and N+1000 version of the software is same in terms of producing the code, if you have a piece of software that functions more like a specialized tool, training user N+1 and N+1000 can be radically different and therefore more time consuming and costly.

2. Sunk cost of development: IP has a lot of value. If you work in producing custom solutions a lot of these solutions have components (code) that work across customer needs. Development may fail on one project, but helps in another. Overtime you have the components to sell a COTS

3. Goods actually aren't intangible, value is. Electricity costs money and it takes the infrastructure to support a small city to run a large-scale server farm. What's missing in the economic model are the costs we don't always factor in or more importantly that are publicly subsidized. Look at the breaks companies get at MSoft, Google, etc on utilities and land.

Re: Intangible investment behaves differently

#34

Post by LeifCarrotson »

MoBattah wrote: post #26
sytelus wrote: post #23

When I first learned that software had a price during my very young years, I was in quite disbelief. Isn’t it just bunch of invisible bits? Can’t it be copied with almost zero cost? Why someone would pay for it anyway when kids like me can make it? It’s hard to charge money for things people can’t physically posses. In early years, almost all software companies employed a trick to design big attractive boxes with bit…

Elaborate on the boxes? This isn't the old trope by Bob Wallace about 'I sell manuals'?

https://i.ebayimg.com/images/g/azAAAOSwD99av12v/s-l1600.jpg

There's a shrink-wrapped cardboard package that contains Windows 98. It's the size of a cereal box, and at least as colorful.

Today, I'd be intensely annoyed if I had to wait for and pay for a large box to ship - I'd much prefer an instant download, but the box was much more tangible than an email with a download link and license key.

Re: Intangible investment behaves differently

#35

Post by bsbechtel »

orbifold wrote: post #31

The fact that replicating a piece of software or music digitally has near zero cost suggests that the fair price according to classic economic theory is zero (the argument being, that the price in a competitive market should approach the limit price). Of course what we see instead is a lot of companies that are now rent seeking and that no longer sell a piece of software to you but rent it out for a fixed price (SaS,…

I think you are confusing the definition of rent seeking, meaning achieving economic gains by means of regulation that is virtually risk free, with collecting rent as a form of payment for a service or product. These are two different concepts, despite the name they share.

Re: Intangible investment behaves differently

#37

Post by grosjona »

BoiledCabbage wrote: post #30
mathattack wrote: post #6

I think his straw man for supply and demand is off. Higher demand doesn’t create lower prices. Lower prices creates “more quantity demanded” at a given level. If demand increases, then prices and quantity both go up. This may be semantics, but it isn’t like economics completely falls apart. Similarly, economics is able to handle products with high fixed and low marginal costs. (Natural monopolies) I suspect he gave t…

That's bothered me before. It really seems like economists flipped their axes on a basic supply demand curve. They discuss it as if price is the independent variable and quantity (demanded or supplied) is the dependent, and yet any 9th grader would be marked down for putting their independent variable on the "y-axis". It amazes me how something generally accepted as wrong stays that way.

I had the same thought. Also, I'm not even sure that this diagram makes sense overall because supply, demand and price are so tightly interconnected (with feedback loops in both directions) that it doesn't make sense to separate them like this.

Re: Intangible investment behaves differently

#38

Post by sharemywin »

Peopleguyintech wrote: post #33

I generally agree with Gates on a lot of things, but there are some generalizations here that don't apply to a lot of software. 1. While the cost to produce N+1 and N+1000 version of the software is same in terms of producing the code, if you have a piece of software that functions more like a specialized tool, training user N+1 and N+1000 can be radically different and therefore more time consuming and costly. 2. Su…

The laws have be setup so, all the value is trapped in the giant network companies. No liability for content. No portability requirements(you can port your phone number, but not your data or messaging addresses). Rent seeking is blocked for utilities, so they don't capture it from google, facebook etc..

Re: Intangible investment behaves differently

#39

Post by maxerickson »

orbifold wrote: post #31

The fact that replicating a piece of software or music digitally has near zero cost suggests that the fair price according to classic economic theory is zero (the argument being, that the price in a competitive market should approach the limit price). Of course what we see instead is a lot of companies that are now rent seeking and that no longer sell a piece of software to you but rent it out for a fixed price (SaS,…

Software costing a few hundreds of dollars frequently provides tens of thousands of dollars of value.

This is quite similar to "free" (as in beer, let us not go down that tedious path). Say it only provides thousands of dollars of value and it's still pretty similar.

Re: Intangible investment behaves differently

#40

Post by jerf »

rcdmd wrote: post #29
jerf wrote: post #22

Earlier quoted context omitted.

"This book review has a few economic fallacies and was probably not written by Gates." Dunno if they're fallacies so much as oversimplifications. But the oversimplifications aren't really the point; they're just meant to reference the concepts and give a hyper-quick overview if you've never heard of them. The rest of the review remains a valid point if you substitute more realistic economic concepts. This is my pre-e…

You're right to say it's mostly oversimplifications. The fallacy was the first economic concept introduced in the article-- > The first is still more or less true today: as demand for a product goes up, supply increases, and price goes down. Classic econ teaches as demand increases, prices go up. The exception is if the supply curve is flat (for instance, 0 marginal cost).

Sorry, yes, you have a point there. I missed that.
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