Modularity and the Conservation of Profits

David Stutz has a very insightful piece on "The Natural History of Software Platforms". It's a good conceptual starting point for thinking about the evolution of the software industry. It sheds some light on controversial issues such as "open source" and "off-shoring". Both, deflationary forces, that provokes the ultimate question of course is this "can I continue to earn a living doing software?".

Well the good news according to David Stutz is that despite the commoditization of software, profits will continue to exist. That the essence of Christensen's Law, that is the "conservation of attractive profits":

In line with Christensen's theory, I would assert that every "pure software" company that has had large-scale success first offered their customers enhanced productivity in the form of packaged proprietary software, followed later by a redefinition of that software as a platform to be used by customers for rapid customization and their extensibility needs.

Now, juxtapose this description of software evolution with Clay Shirky's "Situated Software". Thus, software evolves from "quick and dirty" to "good enough" to "rapidly customizable and extensible". The cheaper and quickest way you can build software to test a market (i.e. fail but fail quickly) leads to an the opportunity for high margins. It happens between the commoditization phase of a mature technology and the exploration phase of an emerging one.

However, David Stutz exposes the blind spot of the American software industry.

The sandwiching of highly proprietary and value-laden pieces of code between standardized module boundaries is the process that sets up Christensen's theories about the migration of value over time. [snip] the value chain acts as a carrier for slowly traveling waves, on which higher-margin business opportunities move both up and down.

In other words, those components of your software or even your business process, that you've previously thought had been commodotized, may become the profit centers of the future!

Just witness the multitude of foreign software companies that have been making a decent living in markets that have been previously thought to be commoditized and therefore unprofitable. Take a look at JetBrains for IDEs, Exceslsior for Java Compilers, Opera for Web Browsers and StarDivision for Office Suites; that's just the tip of the iceberg. American software industry seems to have bequeathed component development to countries in favor of higher margin integration activities. However, as argued by David Stutz, there will be a time when profitability swings back to the component makers.

However, there's still reason to be hopeful, Davis Stutz ends with this conclusion:

There is huge value to be captured from commodity networks, but it is not to be found in the production of the underlying software resources. Instead, this value can be found in the distribution of platform-standardized information, and also in the form of political power.

In other words, he who controls the linkages with in the architecture, stands to profit in the near future. Which reminds me, I should take another look at "classification of links".