IT Economics

IT economics is an interesting concept. I was listening to few talks of Bruce Schneier in techEd. His thoughts on IT Economics were really simple. Things we may already know, but yet we never really "thought" about. Bruce himself is a very interesting character. A world renown security expert. But I see him more as a philosopher, a good thinker...You can find more about him at Schneier on Security. I hope to write few blog posts about few thoughts Bruce shared with us in techEd, the ones that are still ghosting in my mind. Most of the content in this blog (and few next ones) don't contain what Bruce said in the exact same way, with same examples. I have actually added my own thoughts, amended few of Bruce's example etc...

Thought 1: Large Networks continue to grow large, while niche networks continue to stay same

Well, IT market seems to be working in an extraordinary way, where the largest network receive most benefits. For example, let's take large telecommunication companies such as Dialog and Mobitel. They are huge (atleast from SL standards). Also, they will continue to grow big. When such a company gives a package like "1000 mins free within the network" , many people would go and buy that package... Why? because most of us use such popular networks. So we get to call many of our friends free! So, more people would actually join such networks... The large networks would continue to grow even large!!! - The niche networks will remain to be niche markets... Think about it... Think about Microsoft... They are the largest network when it comes to pc using communities. Most vendors create their applications to run-on Windows plat form. It is fair from the application vendors point of view: They want to aim their product to the largest market. Now, more and more new comers actually select the windows platform because it has more applications!!! See - the large network continue to grow even larger!!! (ok, I know that high availability of applications is not the ONLY reason for more people joining hands with Windows network. But it is certainly A REASON)

Hm, thinking on the same line, you may think that there is no room for new networks as IT space is crowded....Well, that isn't actually true. Think about Google. When Google started Yahoo was the biggest player. Many people were using Yahoo mail. Many were reading Yahoo news. But Google had a fabulous product!!! Now Google has grown much larger than Yahoo. So yeah, you can penetrate the market and create a large network - but you gotta have good product..!


Thought 2: Seller knows best – buyer knows least
In the IT market, seller knows best...he is the one who designed and developed the product. He knows all pros and cons of it. But the buyer doesn’t know much about the product... Buyer may not even be technically fluent to understand even the basic inner workings. In such a scenario, very often, the buyer tempt to settle for the more flashy and inexpensive product
(Not the cheapest product either). Obviously, Buyer wouldn’t have the knowledge to pick the best product.

Think of the used car market. Imagine there are 20 Toyota corolla’s for sale. Out of them 10 are bad; Sellers know that they are bad, and they would be satisfied even if they are sold at 10 lakhs each. The other 10 are good cars. The sellers of those cars know that their cars are better. They wouldn’t settle for anything less that 18 lakhs for a car. The buyers are not experts in buying used cars. They may not be able to see a huge difference between good and bad cars. Hence at the average price (14 lakhs) all bad cars will be sold. But none of the good cars will be sold!

Same applies to IT market. Most IT products that survived upto date aren’t necessarily the best products. There were many really good products, which were also really expensive, and they never really made it. Eg: Sun Solaris – It is one of the most secure and fast operating systems. But ordinary people don’t know it. Instead of purchasing Solaris, many people settled for Windows Server or Unix. Those operating systems that may be less speedy and secure than Solaris, but more colourful, flashy and less expensive. Firewalls are another example. Most of the firewalls that have survived upto date aren’t necessarily the best ones. There have been many really good ones that never made it, as they were very expensive or complex to configure.
So it is important to understand that in-order to make good profit, your product doesn’t need to be “perfect”. It doesn’t need to be the best product. The buyer will not have technical knowledge to understand the subtle performance advantages of your product or extensible architecture of your product. So you should not spend more money on obtain such minor performance gains etc. All that matters is you have a “good” (not perfect) that is not highly expensive...


Thought 3: Initial product cost is high. This cost needs to be divided into many copies
We all know this, don’t we? Initial cost of creating an IT product is huge. It may require many brainstorming sessions from many experts. It may require a large number of expensive programming time. It may require a long phase of expensive testing. Imagine how much money would it have taken to produce Microsoft Office Package? How much it would have cost to create Windows? Many millions of dollars!!! Still, will a single person buy MS Office if it was sold at one million dollars (one million dollars would still be a small percentage of the actual cost) ? No.

How IT products make profit is through selling as many copies as possible of the product. Although the initial cost of an IT product is high, creating a copy is very inexpensive. Hence, the IT product cost should be divided into many copies. So when developing a product, it is important to aim product to a larger market. More copies you make, more you recover your capital, and eventually more profit you get. However, this wouldn’t mean that you should make your product as much as generic as possible, aiming at the largest market... You need to find the right balance between the market size and specialization of the product. Additionally more emphasis should be taken to produce the product using re-usable components. Then, the producer will be able to create similar products with a lesser cost using the already built components.