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41126-piy-ch10-01.pdf_18891 - CHAPTER 10 Software in Flux...

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Marginal Cost The cost of producing one more unit of a product. CHAPTER 10 Software in Flux: Partly Cloudy and Sometimes Free 1. INTRODUCTION LEARNING OBJECTIVES After studying this section you should: 1. Understand how low marginal costs, network effects, and switching costs have combined to help create a huge and important industry. 2. Recognize that the software industry is undergoing significant and broadly impactful change brought about by several increasingly adopted technologies including open source software, cloud computing, and software-as-a-service. For many, software has been a magnificent business. It’s the $200 billion a year juggernaut [1] that placed Microsoft’s Bill Gates and Oracle’s Larry Ellison among the wealthiest people in the world. Once a successful software product has been written, the economics for a category-leading offering are among the best you’ll find in any industry. Unlike physical products assembled from raw materials, the marginal cost to produce an additional copy of a software product is effectively zero. Just duplicate, no additional input required. That leads to businesses that can gush cash. Microsoft generates a $1.5 billion a month from Windows and Office, alone [2] . Network effects and switching cost can also offer a leading software firm a degree of customer preference and lock in that can establish a firm as a stand- ard, and in many cases creates winner-take-all (or at least winner-take-most) markets. Personal PDF created exclusively for fangxin ([email protected])
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Open Source Software (OSS) Software that is free and where anyone can look at and potentially modify the code. Cloud Computing Replacing computing resources—either an organization’s or individual’s hardware or software—with services provided over the Internet. Software-as-a-Service (SaaS) A form of cloud computing where a firm subscribes to a third-party software and receives a service that is delivered online. Virtualization A type of software that allows a single computer (or cluster of connected computers) to function as if it were several different computers, each running its own operating system and software. Virtualization software underpins most cloud computing efforts, and can make computing more efficient, cost effective, and scalable. But as great as the business has been, the fundamental model powering the software industry is under assault. Open source software offerings—free alternatives where anyone can look at and po- tentially modify a program’s code—pose a direct challenge to the assets and advantages cultivated by market leaders. Giants shudder—”how can we compete with free”, while others wonder “how can we make money and fuel innovation on free”? And if free software wasn’t enough of a shock, the way firms and users think about software is also changing. A set of services referred to as cloud computing is making it more common for a firm to move software out of its own IS shop, so that it is run on someone else’s hardware. In one variant of this approach known as
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41126-piy-ch10-01.pdf_18891 - CHAPTER 10 Software in Flux...

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