Enterprise open source Toolkit

Understanding software as a commodity

Published: 20 Jul 2004 16:05 BST

The "commoditisation of software" was one of the panel topics at the AO2004 Innovation Summit at Stanford University. By the end of the panel discussion, I didn't have a better idea of what commoditisation meant in relation to the software industry. It seemed to be an addendum to the dialogue that began with Nicholas Carr's Harvard Business Review essay, "IT Doesn't Matter", which argued that IT is trending toward commoditisation, meaning that organisations can't gain much strategic advantage versus competitors in applying technology to business problems.

During the panel exchange, Jonathan Schwartz, president and COO of Sun, quipped that "a commodity is a product that you don't ship and your competition does". On a more serious note, he defined a commodity as a product or service for which there is a universal or perpetual demand.

Marten Mickos, chief executive of MySQL, and Zach Nelson, chief executive of NetSuite, argued from the customer perspective that software is a commodity when the product appears to the customer as simple and easy to use. Masking complexity from customers doesn't sound like much of a commodity, unless the pricing is extremely competitive.

For the vendors, the cost of hiding complexity can be high, which makes their cost to deliver the goods less than with a commoditised operation. In the end, the cost to deliver products and services is passed on to customers, so the winners are those products and services that are perceived as high value and at the best price.

Schwartz declared that commoditisation is fundamentally about competition and substitution. Mickos added that creating commodities takes "enormous skill, innovation and competition".