JULY 2005 IN

Propping Up Software Prices

Competition is exerting downward pressure on the prices of computer software. Prices for the most popular software categories can be expected to fall in the long run because the cost of producing software is falling, and most of the costs are fixed costs that can be spread out over an increasing customer base. At the same time, it is easy for new competitors to enter the software business, and this limits the leverage that software suppliers can use to control their customers.

In spite of the price pressure, prices in some software categories are holding steady. But software makers are having to employ more and more gimmicks and extras to make this work. You can see this is Mac OS X 10.4. The newer additions to this venerable operating system include a search engine, dictionary, thesaurus, and a systemwide spell checker. Some years ago, each of these features would be a separate software purchase at a price between $50 and $150. They are included in the operating system to help persuade customers to pay its $129 price tag.

Software makers will prop up the prices of their products as long as they can, but there is a limit to what they can do, and eventually the $129 price for Mac OS X and other similar software prices will have to fall. Software companies that wait too long to cut prices will find their products’ market positions taken over by someone new.

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