The In-House and Contract Development Paradigm

In-house development is done by customer’s own programmers, while contract development is done by an outside company. In both cases, the programmers are generally paid for the act of writing software, rather than for the software as in the case of the retail paradigm. The customer can dictate whether the software will be exclusively for that customer or will be made accessible to others. So, the customer controls distribution, and the paradigm is differentiating software. Generally, the contractor will try to use some of the work done for a customer in other projects. So, the cost can be shared between more customers, each being charged less. However, it may happen that the contractor sells business differentiators, which may damage the business. Also, the customer sustains the cost and risk of development. But in order to be justified, the new software must not have a duplicate (re-inventing the wheel) because it would be a waste of money.

The Retail Paradigm

The retail paradigm is responsible for less than 30% of all software development. The cost of the software development is usually borne by a single manufacturer and the risk of failure is borne entirely by the manufacturer. The cost of development is distributed to customers if the product is successful on the market. Since it cannot directly distribute cost and risk until the product matures, manufacturers turn to investment markets as an external mechanism to distribute cost and risk. The need for outside capital is of long duration. Successful companies may re-invest profits in the development of subsequent software products rather than return to investment markets.

The overhead of the traditional brick-and-mortar retail sales paradigm is extremely high, with less than 10% of the money paid for the software by the end-user actually goes into product marketing, software development, and documentation. Microsoft spent only 16.8% of its 2004 revenues on R&D. The rest went into items such as the very expensive process of finding customers for Microsoft’s products: advertising, design and manufacture of an attractive package that that is discarded after the sale, payment to the retailer for shelf space, sales staff, and profit.

The retail model can only be used economically to create products for a mass market. A mass market will mask the inefficiency of the paradigm, as each customer can pay a relatively small cost compared to the cost of software development. Many software products cannot be created because they would not provide a large enough market to amortize both the cost of development and the large overheads. Moreover, many new products that could eventually build a large market will not be considered, because companies and investors cannot be convinced that such a market would develop, or the risk of failure is too high. This tends to damp innovation within this model.

The most important innovation in the last decade of global computer business, the web server and the browser, had to be developed as an open source product at a federally-funded university research laboratory. No company was convinced that it would be profitable. The only company that did invest in the project (Autodesk, Ted Nelson’s Xanadu Project) chose not to complete it due to the uncertain future revenue model.

Economic Paradigms of Software Development

There are four economic models for software development: retail, in-house and contract, efforts at collaboration without open source licensing and open source. The differentiating issues are: how they distribute the cost of development, how they distribute the risk of failure, their efficiency in funding software development rather than overheads of the process and the degree to which others can be excluded from using the software. A comparison regarding the below four paradigms can be consulted in the appendix section.[1]

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[1] See Appendix no. 6 to learn about advantages and disadvantages of each of the four paradigms

P4KO, OK?

P4KO is coming at cha' from San Luis Potosi, Mexico. Discovered this guy and found his tunes to rock, hard core. Not quit sure what the moniker stands for, but who cares? What's in a name, especially when the music speaks the ancient tongue of le Daft Punk?

P4KO started producing tunes in Oh Seven after holding it down on drums and guitar for several local bands in Mexico. The 'P' traded analogue for digital at the influence of MSTRKRFT, Daft Punk, DANGER!, and all those other pesky French fellows. He's also quit the graphic designer, you can check his work here.

If you peep his myspace, you can sample much more tunage, but the dude was nice enough to lend us the following frequency frickesy:

P4KO - A.Y.B.

Miami vibe, through and through! Where yer Wayfarers at??

P4KO - Where is my Mind?

Have I mentioned Daft Punk with this guy yet? Total groovy number on this one.