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A cup of coffee is much more expensive than a glass of water.
That’s true even though we can’t live without water. (Most) people can live without coffee.
This is true even though building the infrastructure to purify and supply clean water costs billions of dollars.
An important reason for the difference is marginal cost.
It costs the town virtually nothing to deliver another glass of water. Less than a penny.
But delivering another cup of coffee requires more beans, more roasting, more electricity, more cups, more oats, more cows, more staff. It’s… when you add it all up, there’s no way Starbucks could make a profit selling coffee for a nickel.
The first thing you need to understand about free software is marginal cost One more email, one more download, one more bit is vanishingly low, close to zero.
Given the low incremental cost for different users, most software may not be a very good business if that is the only factor. Although development costs a lot of money, market forces keep prices low.
The second factor is fix. Unlike coffee, software rewards users who continue to use it. Over time, the software you use becomes more familiar, it opens files you created yesterday, and it becomes increasingly difficult to switch. As a result, companies that make software strive to create situations where people are encouraged to start now, only to find it difficult to switch later.
But the real miracle of modern software is that network effect. Simply put, software works better for each user when others use it too. Network effects can give you a dramatic head start. Opening a colleague’s files is part of my job, so I want to use the same word processor as her. We want to use the same phone system, the same social networks, and the same protocols.
In some cases, software is built by teams within a community and is sometimes referred to as open source. These projects exist to solve problems and provide services to users. But software can also be a business.
Community-built open source projects can be successful even if they are free. But software can also do a lot of good work when it creates enough value that people choose to pay for it.
Business-driven software projects require similar choices.
And when all three factors come together, you’re left with two extreme situations that most software businesses face.
- Free software is the best way to get a head start. The low marginal cost of new users means that you can quickly gain large scale (100 million new users of threads in one week!). But this isn’t just a problem, and it’s important, some companies choose to treat these new users as products rather than customers.
Lock-in made it difficult for them to leave, and network effects allowed the system to continue to grow and now they could make money in other ways. In particular, they make money by providing services to people other than free users. As they grow, they make the product a little bit worse while rewarding their sponsors and agendas. (An important exception: if you have enough mostly free users paying that you are willing to provide them with the support and services they need…this requires constant focus and attention.)
- Expensive (not free) software rarely gives you the magical global scale. However, you need to fully collaborate with users who are also your customers. That’s the point. Instead of locking people in, you can focus on rewarding them for staying. This is how almost every business in the world works, and it applies to software as well…if we decide we want to align with the people who use what we build.
So for companies, there is a free or nearly free path that aims to make money in other ways, or an expensive path that aligns the company’s decisions with those of its users.
Community-driven software also has the magic tweakability that comes from open source.
There is no clear answer, but a clear choice is required.
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