Software's drive to become like television

Okay, that's a bit of an opaque blog title. People don't usually sit around, mouths agape, watching their copy of Microsoft Word the way I did with "The Twilight Zone" marathon on the Sci-Fi channel this past weekend (which makes no sense, as I own the entire series on DVD, but you have to love those 60s special effects).

On any given day, however, I certainly spend more time in front of my computer than in front of my TV (though I may be somewhat extreme, I'm not completely atypical, either; people aren't watching YouTube regularly on their TVs...yet). Further, I find that more and more of the software products I use don't cost me anything up-front to buy.

That is certainly the case with most of the web applications I use. An orientation towards "free" seems built into the DNA of web applications, a legacy of the Internet's early days. That trend was solidified by a 1990s land rush that was all about market share, with little regard to how online companies were supposed to make money for their efforts.

Companies like Google cracked that nut through its Internet-based advertising network, a network whose revenue-generating roots are buried deep in its market-leading search engine, but whose benefits are spreading to other trees in the forest faster than anyone else's network (helped, in no small part, by incredibly shrewd acquisitions; I read recently in Fortune magazine that 60% of web-sourced video content comes from YouTube). That, of course, is the real reason why Microsoft (again) wants to buy Yahoo, irrespective of Yahoo's lack of new product ideas likely to halt its slide from relevance, much less a clear growth strategy or a culture likely to blend well with Microsoft (though that may not matter so much anymore, as all signs point to a Yahoo that is hemorrhaging employees). Then again, I'm on record as being no fan of the merger (though I'm certainly willing to be convinced otherwise; I'm no Nostradamus).

Lots of traditional desktop software can now be acquired for free, driven in part by the efforts of free software folks who believe that it is wrong to keep the source code for software products private. A healthy percentage of the software market, however, still charges for the right to use their products, and most of these opt to keep their code a secret.

That's a perfectly justifiable business model, and more to the point, it clearly makes money. Free (as in cost) software, however, has the advantage of achieving large market share very quickly, as the consumption barrier is practically non-existent. That's the recipe for the success of both Adobe PDF and Flash, two products that clearly dominate their respective categories, but from which Adobe makes practically no money (practically all their revenue is derived from sale of production tools, and that's a small target market reaching a saturation point).

It's pretty clear that the only way forward, should you choose to release more free desktop software (which I think must happen, as competition with web-based software will force the issue), is via ads. In that regard, software is becoming more like television, not because it holds your attention the way television does, but because it is starting to use the same business model.

Games seems to be on the leading edge of this trend, at least in Asia. That was the take-away from an article I read in the June 28th issue of the Economist. From that article:

Many of these games rely on a business model that is different from the way the video-games industry works in the West. Rather than selling games as shrink-wrapped retial products which can then be played on a PC or games console, the Asian industry often gives away the software as a free download and lets users play for nothing. Revenue comes instead from small payments made by more avid players to buy extras for their in-game characters, from weapons to haircuts. In this way, a minority of paying customers subsidise the game for everyone else.

I think that there will always be a place for software which creates something sufficiently unique that people are willing to pay for it. Even so, uniquely innovative software can still benefit from the customer reach that "free" (as in cost) gives them.

That's why ad platforms are so critical to the software market of the future. That's also why Microsoft executives are obsessed with finding a way to circle around Google and have a large stake in the platform that drives that ad-based future.

But I still can't figure out what Yahoo offers to Microsoft. Consider gaming. Microsoft has a rather successful gaming platform in the form of the XBOX. Isn't that a better avenue through which to grow Microsoft's ad-based market share? For that matter, Microsoft has a rather large and growing presence in the television space. Wouldn't that be a better lever by which to ratchet up the market share of Microsoft's ad platform than the purchase of a sagging (albeit historically trend-setting) Internet giant?

Google has search as their ad-based backbone. I am surely repeating myself, but it is worth reiterating: What does Microsoft have in its product lineup that, when plugged into Microsoft's ad platform, would help it to grow into a sufficiently credible counterweight?