Software Markets--How and When Will the Software Components Industry Develop?

By Patricia Seybold
Technologies: Objects
Companies: George Mason University
Article Type: Analysis Issues and Opinions
Author Biography:

Economists are Studying Markets & Other Related Factors [Summary of Taped Interview with Howard Baetjer, Jr., Executive Director, The Agorics Project, Center for the Study of Market Processes, George Mason University]

Study Launched to Examine Market Direction

The Center for the Study of Market Processes is an independent research center attached to the Department of Economics at George Mason University. The Center has been in existence for 10 years, studying business and government behavior as an ongoing process of entrepreneurship and change. Its economists belong to what is called the Austrian school of economics. Instead of viewing the central economic problem as that of how to allocate scarce resources, they see the central economic problem as that of dealing with the fact that knowledge about goods and resources is very dispersed. Therefore, the problem becomes how to collect and expose both dispersed local knowledge and tacit knowledge so that the greatest number of people can make informed decisions and coordinate their plans.

This spring, the Center is launching a new Research Study to examine the emerging market for software components. The research team is composed of economists, lawyers, and computer scientists. Their basic premise is that object-oriented software design will eventually prevail over traditional programming methods because of the advantages of reusability and maintainability offered by object-oriented design. When that happens, a market for software components should emerge and, along with it, new institutions for buying and selling software components. However, a software components industry seems slow in developing. Legal, cultural, and economic factors may be hindering its development, along with technological factors.

Premise: Software Industry Will Benefit from Increased Specialization According to Howard Baetjer, the software industry would be healthier if businesses bought and sold application subcomponents, and built applications from these, rather than building every piece of every application themselves. He reasons that the most effective industries are those characterized by a lengthy structure of production made up of many players, each of which is highly specialized. "The more subdivision there is into stages in which people can specialize, the more effective the whole works is, because each person--rather than mining his own ore, smelting his own iron, and making his own car--specializes in some piece of the process and gets very good at it."

If software developers could each focus their attention on one small piece of a much larger problem, then the entire industry would be characterized by more innovation and creativity and would be assessed by consumers as delivering greater value. "What we have now is a long process of creating the individual products, whereas we could have a long series of very short production processes with different people contributing at different steps in the process, and you'd get specialization at each level."

Pricing Provides Important Information

An important pre-requisite for a healthy market in software subcomponents, according to Baetjer, is an active pricing model. Consumers of software need to be able to pay on a per-use basis, or on a fill-the-gas-tank model. That way, there will be much more information available to the market as a whole about which components are actually valuable to people.

How a Software Components Market Should Work

Both developers and consumers of software need to be able to find out easily what software components are available and something about their characteristics and performance. Software components need to be able to reveal information about themselves to potential buyers. And market watchers need to be able to determine what needs are not being filled in order to spot new entrepreneurial opportunities. In order to let this discovery process operate at the software component level, rather than at the entire ap plication level, there will need to be much more information made easily available to participants in the market in order to support the discovery process.

Active Electronic Markets May Play Important Role

For these reasons, Baetjer suspects that electronic markets will play an important role in the development of the software subcomponent industry. He also anticipates that these electronic markets will be active, participatory affairs as opposed to passive libraries or repositories.

[Related Reading: Hayek, Friedrich A. (ed) 1937 "Economics & Knowledge," in Individualism and Economic Order, Chicago: University of Chicago Press.

Miller, Mark S. and Drexler, K. Eric. 1988b. "Markets and Computation: Agoric Open Systems," in B. A. Huberman, ed. The Ecology of Computation. Amsterdam: North Holland]

[For more information about the Software Components Industry Study being conducted by the Agorics Project at the Center for Market Processes, contact Howard Baetjer, Center for Market Processes, George Mason University, Fairfax, VA 22030. Phone: (703) 323-3483. Fax: (703) 764-6323.]
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