Tuesday, July 04, 2006

Software Lessons from High Fuel Prices

While we were watching the dollar meter spin on the gas pump that was re-fueling the boat after an offshore fishing trip this weekend, a couple of my fishing buddies commented on the devastation of the boat and SUV market brought about by high fuel prices. Buyers that would have jumped into the market for a Chevy Suburban, Ford Expedition, Grady-White, or Boston Whaler just one year ago are now on the sidelines, perhaps permanently, because it is simply too expensive to operate these vehicles and sea going vessels with gasoline prices in the $3/gallon range. The concept of price elasticity of demand applied to the total cost of operating a SUV or boat is obvious to these good ol' boys from South Carolina. Funny that the geniuses that are the executive class of the software industry often don't get it.

It is obvious that rising prices shrink markets. The corollary is that falling prices expand markets. Price is not just the cost to acquire a product; it also applies to the cost to operate that product. The lesson for the software industry is that lowering the cost of integration and maintenance for a product will expand the available market for that product. The on-demand SaaS companies and the appliance companies are currently reaping a windfall from this simple lesson in economics while most software application company executives stand on the sidelines, knees knocking over the prospect of changing their distribution, licensing, and revenue model. It's time to get over it. The invisible hand of Adam Smith is either going to shove these companies forward to embrace the on-demand SaaS or software appliance concept, or that same invisible hand is going to shove them over a cliff into competitive oblivion.

I do not believe anyone questions the turnaround prospects for GM and Ford in the face of $1/gallon gasoline. Funny that this same logic does not lead more folks to the obvious conclusion that the current malaise of the software industry could be cured by a large dose of simplicity.

3 Comments:

At 12:08 PM, Blogger legacycode said...

Billy,

Should we expect server based pricing to go thru a shake-out in a Virtualized world? If RedHat or anyone else for that matter - say Oracle - price per CPU, then going to Xen would require some form of a discount off of their original models. I wonder if that's why RedHat is waiting another 6 months to ship Xen.

Thx.

 
At 4:26 PM, Blogger Billy said...

I think pricing is going to be, as always, a topic of fierce debate. The likely outcome will be some combination of physical capacity, (i.e. physical CPUs and memory) which is a proxy for potential output value, and some upcharge for each virtual instance that receives maintenance and support.

The reason RHAT is waiting to ship Xen is because Xen is not yet technically ready for prime time. Give it another 6 months to a year.

 
At 6:48 PM, Blogger legacycode said...

Billy,

The answer then is Virtualization is another deflationary trend, just like multi-core processors. VMWare claims many RFPs come back with 800% ROI. I know RedHat feels volume will raise all boats, but their own field personnel is pishing recovery, redundancy, performance and other benefits of Xen. If server growth slows so will their business.
I had my first industry contact mention potential "soft landing" as a reason for some channel under performance. The claim is anticipation alone can slow down business trends. Hope it doesn't happen though.

 

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