Strategy Letter V – Joel on Software

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Your host<br>I’m Joel Spolsky, a software developer in New York City. More about me.

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Read the archives in dead-tree format! Many of these articles have been collected into four books, available at your favorite bookstore. It’s an excellent way to read the site in the bath, or throw it at your boss.

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For my day job, I'm the co-founder and CEO of Stack Overflow, the largest online community for programmers to learn, share their knowledge, and level up. Each month, more than 40 million professional and aspiring programmers visit Stack Overflow to ask and answer questions and find better jobs. Stack Overflow is also the flagship site of the Stack Exchange network, 160+ question and answer sites dedicated to all kinds of topics from cooking to gaming. According to Quantcast, Stack Overflow is the 30th largest web property in the United States and in the top 100 in the world.

I also founded Fog Creek Software, one of the most influential small tech companies in the world. As an independent, privately-owned company, we’ve been making customers happy since the turn of the century. We share what we've learned about how to make great software, both by writing about our ideas and by creating products, like FogBugz, Trello and Gomix, that help others make great technology. As a result, Fog Creek's impact on the world of developers rivals companies a thousand times our size.

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When I was in college I took two intro economics courses: macroeconomics and microeconomics. Macro was full of theories like "low unemployment causes inflation" that never quite stood up to reality. But the micro stuff was both cool and useful. It was full of interesting concepts about the relationships between supply and demand that really did work. For example, if you have a competitor who lowers their prices, the demand for your product will go down unless you match them.

In today’s episode, I’ll show how one of those concepts explains a lot about some familiar computer companies. Along the way, I noticed something interesting about open source software, which is this: most of the companies spending big money to develop open source software are doing it because it’s a good business strategy for them, not because they suddenly stopped believing in capitalism and fell in love with freedom-as-in-speech.

Every product in the marketplace has substitutes and complements. A substitute is another product you might buy if the first product is too expensive. Chicken is a substitute for beef. If you’re a chicken farmer and the price of beef goes up, the people will want more chicken, and you will sell more.

A complement is a product that you usually buy together with another product. Gas and cars are complements. Computer hardware is a classic complement of computer operating systems. And babysitters are a complement of dinner at fine restaurants. In a small town, when the local five star restaurant has a two-for-one Valentine’s day special, the local babysitters double their rates. (Actually, the nine-year-olds get roped into early service.)

All else being equal, demand for a product increases when the prices of its complements decrease.

Let me repeat that because you might have dozed off, and it’s important. Demand for a product increases when the prices of its complements decrease. For example, if flights to Miami become cheaper, demand for hotel rooms in Miami goes up — because more people are flying to Miami and need a room. When computers become cheaper, more people buy them, and they all need operating systems, so demand for operating systems goes up, which means the price of operating systems can go up.

At this point, it’s pretty common for people to try to confuse things by saying, "aha! But Linux is FREE!" OK. First of all, when an economist considers price, they consider the total price, including some intangible things like the time it takes to set up, reeducate everyone, and convert existing processes. All the things that we like to call "total cost of ownership."

Secondly, by using the free-as-in-beer argument, these advocates try to believe that they are not subject to the rules of economics because they’ve got a nice zero they can multiply everything by. Here’s an example. When Slashdot asked Linux developer Moshe Bar if future Linux kernels would be compatible with existing device drivers, he said...