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Intangible investment behaves differently

gatesnotes.com

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Re: Intangible investment behaves differently

#51

Post by simonh »

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,…

>that the fair price according to classic economic theory is zero

I don't think any economic theory is that naive.

It's actually the cost of production divided by the number of sales, where the cost of production can be many millions of dollars worth of development and testing and the size of the addressable market can in some cases be very few.

Re: Intangible investment behaves differently

#52

Post by pjc50 »

sonnyblarney wrote: post #21

1) The first two paragraphs about 'assumptions' are essentially false. There are no assumptions in supply and demand, it's not a dynamic equilibrium, it's a snapshot. Yes - over time supplies tend to change due to demand, of course, but that's 'long run' stuff ... not in that chart. The author is kind of misinterpreting the chart. 2) It's not 'sunk cost' that's the issue, this is about 'fixed' vs. 'unit' cost. Softwa…

> There are no assumptions in supply and demand, it's not a dynamic equilibrium, it's a snapshot.

It absolutely is an equilibrium in normal economics: https://en.wikipedia.org/wiki/History_of_microeconomics

Re: Intangible investment behaves differently

#53

Post by losvedir »

There are two assumptions you can make based on this chart. The first is still more or less true today: as demand for a product goes up, supply increases, and price goes down. If the price gets too high, demand falls.

Er, no. I guess even smart people like Gates get simple economics wrong sometimes. It's understandable, though, I've always felt the P/Q axes should be switched, since people always speak about the price as the independent variable.

He's conflating the idea of pricing along the line with the demand line itself. Yes, at higher prices, less quantity is demanded and vice versa. Similarly, if you can sell the thing for a higher price, more people will be interested in and able to sell it, so the quantity available will increase, and vice versa.

However, "supply" and "demand" refer to the whole lines themselves, not points along the lines. Changing supply and demand means the lines shift. If "demand for a product goes up", the demand line shifts to the right, the equilibrium quantity increases, but so does the price, the opposite of what he's saying.

His misconception then leads to an even larger error in understanding with the next part:

The second assumption this chart makes is that the total cost of production increases as supply increases.

This is false. What it says is that with if the price you can get for a good is high there will be more suppliers. The canonical example is oil: when it sells for $20/barrel, only Saudi Arabia and places with it easily accessible will be able to profitably drill for it, and so the quantity supplied will be low. But at $120/barrel, you can now use fracking, deep water drilling, and other much more expensive processes, and so the quantity supplied will be higher.

Supply and demand is not about any individual producer producing more, and so it's not particularly useful in analyzing the behavior of a single firm. It's about the aggregate effect of multiple different parties, each with their own respective infrastructures and costs, profitably contributing to the supply (or not) at different price points.

Re: Intangible investment behaves differently

#54

Post by pjc50 »

MoBattah wrote: post #48
LeifCarrotson wrote: post #34

Earlier quoted context omitted.

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.

"Well all games used to come as a CD in a box, simply because it wasn't viable to download them from the internet." Was this not the reason software was distributed in CDs? I can understand MSFT/Apple using that packaging for customer experience.

At one point the packaging was required by the retailers, who wanted it to conform to a standard shelf size. Eventually it could shrink to CD or DVD jewel case size. Might be a discussion of this on filfre.net somewhere.

Re: Intangible investment behaves differently

#55

Post by bluGill »

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 costs of producing N+1 and N+1000 should in fact be different. With N+1 you train the user, with N+1000 you bring in some UI experts to design a better interface that doesn't need to be trained in the first place.

Re: Intangible investment behaves differently

#56

Post by baq »

bsbechtel wrote: post #35
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.

Photoshop, being nearly a monopolist, seems to almost fit the definition. Regulation is the only thing here that doesn't match, but being a de facto industry standard would be close enough for me.

Re: Intangible investment behaves differently

#57

Post by ehnto »

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,…

Adobe products are continually worked on. Most subscription software is. You get continued support and feature updates, and the subscription model makes more sense for that kind of development than the yearly waterfall version releases.

JetBrains has the best of both worlds with a fallback license to let you keep using an old version, or a subscription to get continued updates.

Games are becoming increasingly long lived pieces of software as well. With bugfixing and updates continuing for years. The industry is struggling to find novel ways to make money in that environment, which is why you get things like loot crates. I would prefer an honest subscription over that.

What I see is a devaluing of software as a product. I should be able to spend a couple of hundred hours on a package for a framework and sell it, but there is always someone offering a free version and then using weird and sometimes shady ways to make money. I wish it were more common to just sell code for money, instead of people pretending they are altruistic and then selling your data, selling your eyeballs or locking you into their ecosystem. Subscriptions are at least an open and honest transaction.

Re: Intangible investment behaves differently

#58

Post by dwighttk »

melling wrote: post #19
ggambetta wrote: post #8

Earlier quoted context omitted.

I'm sure a man as smart as Bill Gates could find a way to write it in a way that is accessible to non-technical people and still not so egregiously factually incorrect.

Here’s another discussion of the book that discusses the same book and example. https://www.imperial.ac.uk/business-school/knowledge/finance... He’s just using the example from the book and doesn’t feel the need to restate it?

Gates' says "it combined Apple's MP3 technology...", your example says "Apple combined MP3 technology..."

Re: Intangible investment behaves differently

#59

Post by losvedir »

grosjona wrote: post #37
BoiledCabbage wrote: post #30

Earlier quoted context omitted.

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.

> 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.

How so? Econ major here, and I agree the axes should be swapped, but I don't follow your other point.

Re: Intangible investment behaves differently

#60

Post by mjw1007 »

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.

It's quite common to have a situation where in the short term y is a function of x, and in the longer term equilibrium-x is a function of ambient-y.

The cylinder-with-a-piston used to teach Boyle's law in secondary-school physics is a familiar example: in the short term pressure is a function of volume; in the longer term volume is a function of (external) pressure.

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