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Jim Morris's Thought of the Week (or month, or year, ...)

Friday, March 10, 2006

Sell Service, Not Software

Google, eBay,, Yahoo!, and other successful new companies are built on software., a sales support enterprise, could have sold software licenses to businesses, but it decided to simply sell access to a web site.

The most compelling case for not licensing software stems from the nature of software itself – it’s easy to change and easy to copy.

Changing Software. Traditional software vendors release products that can’t be changed once out the door. It may take years for the customer to be able to buy an update of even the smallest bug fix. In the meantime, vendors must support an expensive system of help desks, work-arounds, and patches.

In contrast, when a pure service provider discovers a bug, the company can fix it whenever it wants to. The diagnosis and repair of problems are much easier because the service provider controls all the hardware and surrounding software. The company doesn’t have to ask questions such as “Do you have an account?”, “What version?”, and “What environment?”
posted - 3/10/2006

Copying Software. The other bugaboo of software is piracy. If you sell someone the code for a product, they can give their friends copies of it. There are huge factories in China that duplicate software. Sellers of software must pursue countermeasures, lawsuits, and negotiations to stem software piracy. The Internet has made the problem much worse by enabling cost-free distribution of any digital material.

Selling a service rather than software, however, eliminates both these problems in a single stroke - the company can update software easily because it’s the only one running the software, and there is no piracy because there is no code to copy.

Furthermore, keeping software in-house ensures that innovations remain trade secrets. Eric von Hippel and Steven Klepper have shown that manufacturers innovate more in their processes than in the products themselves. If the company’s clever ideas remain inside the business, customers and competitors cannot discover trade secrets through reverse engineering.

[1] von Hippel, Eric, The Sources of Innovation, Oxford University Press, 1988.
[2] Klepper, Steven, “Entry, exit, growth, and innovation over the product life cycle,” American Economic Review, 1996.

posted by Jim Morris @ 9:11 PM 


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