There are two ways of making money. Profit seeking and rent seeking. Profit seekers increase their wealth by creating new wealth (usually through innovation). Rent seekers increase one’s share of existing wealth without creating new wealth.
The classic example of rent-seeking, according to Robert Shiller, is that of a property owner who installs a chain across a river that flows through his land and then hires a collector to charge passing boats a fee to lower the chain. There is nothing productive about the chain or the collector. The owner has made no improvements to the river and is not adding any value. All he is doing is finding a way to make money from something that used to be free.
In the software / IT business, the pace of change is so astounding, that cutting edge softwares of the last decade have become commodities today that can be offered almost for free. Take for example, relational databases. They were pieces of innovative software in the past, but today you can get a fully managed relational database for free.
In the cloud, you do not pay anything for a relational database except for the computing costs. That is because the cloud providers have automated most of the management tasks and the open source versions are quite stable and reliable.
The licensing costs of a typical on-premise database are a significant component of the overall costs – sometimes up to one third of the total costs. These costs are a classic example of rent-seeking behavior. They are able to do it because the databases are linked to operational (day-to-day) business and companies find it tough to replace them easily.
To me, it is not surprising that the companies engage in rent-seeking behavior. What is surprising is that their clients allow them to get away with it. Unlike the river or the railroad, software is not a physically scarce resource. The companies can switch to a license-free cloud version anytime they want. Heck, the cloud providers may even pay for the migration costs.
Even more shocking is that they realize that they will have to do switch at some point anyway. Unlike their software vendors, their customers will pay only for the value that they get. They still need to deliver value for their customers.
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