Those margins are disappearing today because the Internet has swept away the high barriers to entry that once existed:

• Some of the world's best developers collaborate to hone and refine top-class tools and platforms using open source methodologies and licensing
• These open source products provide a low-cost, rapid development environment that small teams and individuals can use to quickly and cheaply create sophisticated business applications
• Internet delivery frees software publishers from the need to invest in physically pressing and distributing CD-ROMs

Hiding Behind Intellectual Property Laws
Software developers have always assumed that the high margins they earn reflect the value of their intellectual property, but they are about to discover that they have been deceiving themselves. Once the barriers to distribution are swept away, their margins will deflate virtually to nothing. The only thing they can still cling to is the disproportionate protection afforded them by current intellectual property law.

Although I'm an author, and therefore my livelihood depends absolutely on the protection of intellectual property rights, I believe it's possible to take a good thing too far. The past hundred years has seen a series of extensions to intellectual property rights that have now reached alarming proportions. U.S. copyright once lasted 14 years; it now extends for 70 years after the death of the author. Patents, once restricted to the protection of specific designs, are now issued by the U.S. Patent Office with near reckless abandon for all kinds of processes, many of them far from innovative (for just one example, see No Justice In McAfee's Patent).

As I argued in that earlier article, intellectual property owners have to be careful to strike a balance. Too much protection is a barrier both to creativity and to distribution. In the end, it ends up hurting both individual profits and common prosperity. Yes, authors, inventors and software developers should be able to earn a fair return for their original creations. But they should not be too greedy. They're going to find it very hard indeed to give up the disproportionate rewards that the current system guarantees them, but they must either do it voluntarily now or else end up yielding far more (perhaps too much) some time down the road. (A worthy example was set two weeks ago with the formation of the Creative Commons, a group set up to foster the vountary sharing of copyright material).

Pricing Like It's 1999
A small glimpse of the deflation the software industry faces came in August 1999, when two of the first Internet-native ASPs unveiled their offerings. At the time, the only applications available from ASPs were enterprise applications offered on three-year contracts at a monthly subscription rate ranging from $500 to as much as $1000 per user, plus hefty setup fees. On August 3rd of that year, Upshot launched its sales automation service at a monthly rate of $29.95 per user per month, with no setup fee and no contract period (see Intuit backs $1-a-day SFA). A week later, NetLedger launched its online financials service, priced at $4.95 per company per month (see Debut by $5-a-month accounts app).

In just eight days that August, the cost of software had been sliced a hundredfold, from a monthly subscription of $500 to just $5. Eight months later, it reached zero, when design collaboration service Alibre announced it would give away its client software to customers who signed up for its service. "We're giving away the software, we're selling the service," CEO Paul Grayson told ASPnews (see ASP gives away CAD package).

In retrospect, we know that dot-com financing and optimism meant that those companies were premature in being so aggressive. Adoption has been slower than they assumed it would be at the time, and their prices have risen in the meantime. But the day of reckoning for the software industry has merely been delayed. Lower development costs, cheaper distribution, higher volumes and more efficient competition inevitably mean that prices will plummet. Individual developers will still receive fair and generous compensation for their efforts, but the potential to accumulate billions of dollars of personal wealth through developing software will become a curiosity of a bygone age. In the future, the real money will be earned by service providers.

Welcome Back
PS: On that note, it was good to see USi emerge from Chapter 11 last week (see USi Completes Reorganization With Interpath Merger, and seemingly fully recovered from the harrowing experience of the past year. Never noted for its humility, USi last week was already describing itself as "the nation's largest ASP," despite numbering a mere 130 customers even after merging with Interpath as forecast here in January. Welcome back, old friend.