Durable Goods and Secondary Markets

"It's a durable good. Software's the ultimate durable good, which of course in economics makes it a very, very competitive market"
   --Bill Gates, Washington Post, March 9,1998

Economists will say there's no such thing as a monopoly in  durable goods.  Theoretically,  monopoly prices can't be maintained for durable goods because of competition with your own product.  They didnt imagine a company making infinitely durable goods who could afford to pay twice book value for used, force old products into retirement through creative incompatibilities, or get away prohibiting  loans, rentals, or resale on the secondary market.

Pay Twice Book Value

Imagine if GM could afford to buy back old cars at twice the Blue Book value just to melt them down. There would be no blue book, because there would be no used cars. Of course, because there is hardware involved, GM can't afford to buy its way out of its own secondary market.

The actual retail price of Windows98 is $200. The "Upgrade" price, if you destroy a windows95 or windows 3.1 license is $90. That means that Microsoft is buying back its used software at $110/copy, an incredible markup over what a legal used copy of windows3.1 would fetch on an open market like Ebay.com. 

When I was young, I attended a going-out-of-business auction with my father. He was hunting for a bargain on a specific brand of sewing machine required for his business, and expected that it would be sold at around $700, because the new ones cost $1500. At the auction, two men, who were otherwise not participating, outbid everyone for  these machines, getting them each at an absurd price of $1200. 

"Why?" I asked my dad, "would anyone pay so much more than the market value for used machines?"

It turned out, of course, that they were from the manufacturer. It is rational for a monopoly to buy back durable equipment to prevent a secondary market so the price of perfectly good used equipment does not drive down the monopoly price of the new items.

Force used goods obsolete

Why is windows 3.1 obsolete anyhow? Obviously,  many new programs are written to exclude it, even though there are millions of computers still running it. Is it just because it is an inferior product to Windows95? Couldn't a adaptor be developed which allows new programs to run under the old operating system? The answer is of course a Windows95 emulator, like Win32S, could be deployed under Windows 3.1, just like a telephone or electric plug adaptor.

But it was never deployed, and the market value for permanent licenses to windows 3.1 was forced to near nothing before being bought back for $110.

My son had a wonderful edutainment software from Microsoft  MusicPen called "
"Scholastic's Magic School Bus explores the Solar System" running on a 486 computer and Windows 3.1. He liked it so much, one day in a computer store we just grabbed a copy of another in the same  MSB series without reading the package. 

Later when we tried to install it, we got the message "This program requires Windows95". My 4 year old son cried "Upgrade now, Daddy!" 

I wrote to MusicPen to ask if there was a Beta version to trade the disk for. They replied that the development software they use was upgraded, and no longer could even generate programs which run under Windows 3.1. By controlling the compiler, Microsoft could convince  its developers  to abandon their own interests in selling to the 16 bit market.

Prohibit resale, loan, rentals

Why is there no secondary market in permanent software licenses? There is no difference in value between new and used software, besides a creased paper manual. The  EULA's (pronounced "you lose") which accompany software bundled with new computers threaten consumers if they try to sell the unused licenses without the computer. You can sell the monitor, the floppy disk drive, the keyboard, etc, just not the software. It contains a clause that if you don't accept the rule you should return it to the manufacturer, which doesnt work. Any auction service which provides a marketplace  for the legal exchange of licenses is threatened with litigation as accessory to piracy. 

The validity of such shrink wrap licenses which abrogate consumer rights and prohibit resale are patently illegal, yet are becoming more and more normative. See Cem Kaner's site www.badsoftware.com  for interesting discussions.

Software licenses are perhaps the only product besides half-eaten food, underwear and toothbrushes, which can't be resold. 

 Copyright © 1999 J. B. Pollack