Software Commoditization: Tech Industry’s Race to the Bottom Threatens Long-Term Sustainability

The commoditization of software is driving a race to the bottom in the tech industry, with market forces pushing prices down and eliminating less competitive suppliers.

The commoditization of hardware laid the groundwork for software commoditization: The invention of microprocessors in the 1970s made computers cheap and plentiful, leading to an explosion of software variety in the 1980s. However, competition soon led to consolidation, with only the strongest hardware and software vendors surviving.

• Standardized GUIs eliminated much of the distinctiveness among applications, and few vendors survived the transition from console to GUI apps.
• As applications grew more complex, they paradoxically became cheaper, partly due to operating systems providing more supporting components and development tools offering more assistance to developers.

Commercial software underwent commoditization and consolidation: Mass-market commercial software followed a similar pattern to hardware, with standardization driving many software vendors out of business.

• Operating systems gradually incorporated previously third-party tools, further killing off vendors. Software vendors resorted to bundling and lock-in tactics like changing file formats to maintain sales.
• Ubiquitously online computers now enable even tougher restrictions, such as subscription schemes requiring ongoing payments just to access one’s own files.

Free and open source software (FOSS) has also been commoditized: Open source operating systems and server software have not out-competed each other on user-friendliness, but rather on being good enough and cheaper than commercial rivals.

• FOSS succeeded because it made expensive software cheap, not because it made hard things easy. It still requires more effort from users.
• With open source licenses, if developers or vendors attempt to impose pricing, users can simply fork the last free version, driving prices down to zero.
• Commoditization has extended to network protocols, with almost everything now running over web protocols, the lowest common denominator.

Analyzing deeper – challenging times lie ahead: As costs of storage, software, and datacenter capacity shrink to near-zero, executives must find other ways to cut costs, increase margins, or gain an edge. This is driving concerning trends like the rise of Software-as-a-Service, which offers convenience at the cost of data ownership and long-term access.

Though painful for many in the industry, this price war and race to zero-cost is likely to continue. FOSS paved the way by making expensive things cheap, and market dynamics will keep driving prices down and eliminating players until only a few giants remain standing. Finding ethical, sustainable alternatives to this cut-throat race to the bottom is one of the great challenges the tech industry faces in the years ahead.