Subject: Re: Option & Software Pricing
From: "Stephen J. Turnbull" <stephen@xemacs.org>
Date: Mon, 01 Aug 2005 15:20:18 +0900

>>>>> "Laurent" == Laurent GUERBY <laurent@guerby.net> writes:

    Laurent> http://www.onlamp.com/pub/a/onlamp/2005/07/21/software_pricing.html

Interesting, but the model is almost pessimally bogus.  It assumes
that value = price, which is true at the margin, but false (ie, an
underestimate of value) for almost all purchasers.[1]  Furthermore,
for many software products which are purchased in exactly quantity one
(1), this underestimate can be arbitrarily large for *all* purchasers.

More important (and this is a mistake that finance experts make all
the time when they stray into economics), the policy discussion simply
ignores the effect of licensing and pricing on _supply-side_
incentives.  But that's what the whole argument is about! (except for
the irredeemably greedy on both sides who merely want something for
nothing).

    RL> For the open source movement, perhaps a better way to position
    RL> the change that OSS is making is this: we're converting
    RL> warrants on future maintenance and enhancements into options,
    RL> which means that instead of having a sole supplier (warrants),
    RL> we have created a third-party market (options) of these
    RL> derivatives.

*chuckle*  If that wording doesn't scare CTOs off of OSS, nothing
will!  (Last I heard, CTOs and CFOs were natural enemies. :^)

    RL> How capitalistic is that?

Do CTOs care about "capitalism"?


Footnotes: 
[1]  The idea underlying the arbitrage model of option pricing (aka
Black-Scholes) is that for derivatives of financial assets, it _does_
make sense to assume that the only real good is money[sic], all
traders are risk-neutral and monotone in money, and that volatility is
objective.  Those three assumptions mean that _all_ traders have the
same preferences for the option, and if the price is "wrong", the
option will be untradable (either everybody wants to sell it, or
everybody wants to buy it).

That does not sound like a software maintenance contract to me!

-- 
School of Systems and Information Engineering http://turnbull.sk.tsukuba.ac.jp
University of Tsukuba                    Tennodai 1-1-1 Tsukuba 305-8573 JAPAN
               Ask not how you can "do" free software business;
              ask what your business can "do for" free software.