Into the Matrix

Brad DeLong: “Perhaps the most interesting thing shown by the ‘components’ figure is that the 1990s–the decade that saw the steepest decline in the prices of computers–saw a tremendous growth not in the share of spending on computers but on computers’ complement, software.”

The good news is that as computing becomes a commodity, more of the value shifts from hardware to software. Software is generally more flexible than hardware, and lends itself to new models such as utility computing (see the entry earlier today) that abstract out the hardware underneath. That promotes, innovation, wealth creation, etc.

On the other hand, the rising share of investment going to software should raise warning flags. Software value doesn’t reduce to a single metric of computing cycles. Moreover, because the legal structure governing software is licensing rather than sales, it’s not subject to the market pricing pressures we would normally expect. The first issue leds to the situation where an entry-level PC today costs about a quarter of what it did five years ago, but the operating system (Windows) costs the same. The second issue leads to oddities like clickwrap agreements, Microsoft’s insistence that it can cancel K-Mart’s Windows licenses if it sells its subsidiary in bankruptcy, and the fights over digital rights management.

Software is, well, soft. It doesn’t have hard edges, which makes it a round peg in the square holes of the law. As David Weinberger thoughtfully points out in the latest JOHO, society functions because we all have leeway to break the “rules” when they don’t make sense. Software + law = no leeway, and that’s a problem.

So we’re going to face a business challenge and a social/policy challenge. As hardware costs tend toward zero and software costs tend toward infinite, we’ll see power shifts in the IT industry and enterprise IT customers worrying about escalating software costs the way they now look at pension liabilities and health care expenses. Meanwhile, we’ll have more cases where people’s assumptions about how the world works conflict with the way it actually does. Of course, by clicking on that button or listening to that music file, you gave up all your rights — didn’t you read the licensing agreement??!?

If I were a pessimist like Larry Lessig, I’d say we’re going to wake up one day and find we’re living in the Matrix — a prison built of software. But I’m an optimist. Unfortunately, I haven’t yet come up with the counter-argument.