And software is abundant not quite in the same way that air is, but like water is. Sure it does need some 'producing',
Incorrect. It is "abundant" in the same way, say, as movies are abundant. The marginal cost of reproducing a movie after it's filmed is near zero (well, maybe not zero if you make a million copies, but still negligible per copy). But the cost of filming the first copy is very much not zero, in fact frequently in the millions of dollars. You analogy would work if water was, say, only obtained from wells, and to build a well would cost tens of millions of dollars. We have such liquid, actually, it is called "oil". Do you think oil is abundant and oil companies should not be rewarded with profits for extracting it? I mean, after they built the oil rig and while they maintain it, anybody could come to the oil pipe and take oil from there, so it's abundant, right?
Why do software companies have high profit margins then?
There are some high-margin and low margin industries. IT is among the former, but largely on par with Financial, RE and Energy. It doesn't look like software is up there in the sky and the rest is down there in the dirt - it's one among many industries with margins slightly higher that the average. Given it's also pretty high-risk industry - if you make a software program and nobody needs it, virtually 100% of your invested capital is gone, unlike many industries that could still recover something from stock, materials, etc. And it's not an exceptional occurrence - failed startups are extremely common. So, it looks like we have a classic situation of high risk - high potential reward vs low risk, and lower but more steady returns.
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Notes -
Incorrect. It is "abundant" in the same way, say, as movies are abundant. The marginal cost of reproducing a movie after it's filmed is near zero (well, maybe not zero if you make a million copies, but still negligible per copy). But the cost of filming the first copy is very much not zero, in fact frequently in the millions of dollars. You analogy would work if water was, say, only obtained from wells, and to build a well would cost tens of millions of dollars. We have such liquid, actually, it is called "oil". Do you think oil is abundant and oil companies should not be rewarded with profits for extracting it? I mean, after they built the oil rig and while they maintain it, anybody could come to the oil pipe and take oil from there, so it's abundant, right?
But do they really have margins that are huge outliers? Let's take a look at: https://www.yardeni.com/pub/sp500margin.pdf
There are some high-margin and low margin industries. IT is among the former, but largely on par with Financial, RE and Energy. It doesn't look like software is up there in the sky and the rest is down there in the dirt - it's one among many industries with margins slightly higher that the average. Given it's also pretty high-risk industry - if you make a software program and nobody needs it, virtually 100% of your invested capital is gone, unlike many industries that could still recover something from stock, materials, etc. And it's not an exceptional occurrence - failed startups are extremely common. So, it looks like we have a classic situation of high risk - high potential reward vs low risk, and lower but more steady returns.
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