The Future of Software Is Here, And It's Freemium

By Michael Comeau  SEP 22, 2010 12:10 PM

Frugality is all the rage in this industry, as evidenced by the increase in Google App users and the number of gamers on Facebook.


Cheapskate Nation Is Killing Software as We Know It

I think we can all agree that Americans lived way beyond their means for far too long, borrowing way too much money to buy junk they didn’t need.

But if we take a look at the software industry, it’s obvious that in this part of the economy, frugality is all the rage.

Let’s look at some recent software-market happenings:

1. Adobe (ADBE) blew up yesterday on weak fourth-quarter guidance because customers can’t afford the company’s expensive Creative Suite products.

2. Meanwhile, Google (GOOG) announced that 3 million businesses with over 30 million users are now using the $50/year per user Google Apps as their email and office software. Those dirt cheap Google Apps are getting even better, gaining stronger security features, and iOS and Android-platform editing capabilities.

3. Facebook CEO Mark Zuckerberg announced that more than 200 million Facebook users play games each month, and that the top 10 games on Facebook have more than 12 million active users each.

4. Downloads from Apple’s (AAPL) App Store are growing more than twice as quickly as song downloads from iTunes.

5. Sales of smartphones using Google’s free Android operating system have skyrocketed to take nearly one-fifth of the market, outpacing both Apple and Research In Motion (RIMM), and knocking Microsoft (MSFT) and Palm out completely.

The Free Burger Problem Rears Its Ugly Head

In April, I asked the question, “What would happen to McDonald's (MCD) if Burger King (BKC) started handing out free burgers?”

See What Free Burgers Have in Common With Google Apps

Well, the burger market’s expectations of the cost of filling a belly would radically change.

When I add up my previous five points, I see the same thing in the software market. Customers can now expect a lot of productivity and/or entertainment value for a fraction of historical costs -- or worse, nothing!

Focus on Evolution

The software world is being turned upside down.

$500+ packaged software products carrying 90%+ gross margins are clearly not in vogue -- especially in a time when PC sales are clearly slowing. Free and cheap is where the action is.

See also, Why Merger Mania Is Bearish for PC Stocks

Detractors here will focus on features and functionality. Google Docs clearly can’t do as much as Microsoft Office, and the number-one iPhone game, the $0.99 Angry Birds, probably isn’t as impressive as Halo Reach.

But look at what’s happening.

The free and cheap stuff is getting a lot better, and the world is rapidly embracing it.

We’re in the perfect economy for a storm like this. US unemployment is near 10%, people with jobs are afraid of losing theirs, and municipalities across the country are going broke. So I don’t feel crazy for thinking free and cheap software is set to rule the world.

Now there will always be a market for high-end specialized software used in mission-critical applications for financial institutions and the like -- but everything else has been targeted for termination by the free and cheap.

Position in AAPL

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