With so many middlemen taking their bite out of the pie, someone with a modestly-priced piece of software isn't really looking at making that much money selling software the traditional way. For every software billionaire, there are a thousand would-be entrepreneurs who never made any money. In many sectors of the software industry, though, the big money isn't made from licenses, but from consulting, support contracts, and other services. In these cases, some entrepreneurs have made the calculation that it's better to give away the software altogether and hope that free redistribution and word of mouth will do all the marketing for them. Then, they can offer an array of services to the users. This business model has been modestly successful for smaller software companies, though it hasn't yet been proven on the large scale.
Other companies have set up the same kind of services based on already-existing open source software, developing an expertise, contributing to the projects, and even hiring the key developers and putting them on salary. Some examples: Red Hat, IBM (and now Novell) with Linux, Covalent with Apache.
Red Hat, whose "product" has always been as much p a service as a product, now operates exclusively under a subscription-based service contract. So although strictly speaking an ongoing license fee is not required to use Red Hat Enterprise Linux, you pay an annual fee to get maintenance, upgrades, and support from Red Hat, and the primary conduit for maintenance and support is a proprietary service called Red Hat Network.
Software as Service + Open source
The combination of open source software and software-as-service has made it easy for new companies to enter the market. A well-implemented idea can be put into practice with almost no capital expenditure. Even though open source software often requires more expertise to set up and manage than commercial software, with its polished installer, professional documentation and well-staffed customer support center, all those advantages are for naught when it's all managed behind the curtain by skilled engineers and admins who are comfortable with the open source tools.
So how has the software industry dealt with these challenges? They've had a long time to try to deal with illicit copying, with limited success. One sector that has long been the most affected by unauthorized sharing and has had a back-and-forth battle with crackers for decades is the game industry. The internet intensified that challenge, but has emerged as a savior. One of the hottest new software segments is networked games, and game companies have either used those networks as a verifier of legal licensed software or have even set up monthly subscription services that are required to pay. But most of the other software makers have relied on the legal liability that businesses would have if they get snitched on to the Business Software Alliance.
The reaction to the open source threat has been more pronounced. After an initial stage of denial, the availability of quality open source alternatives eventually lit a fire under the commercial vendors, who were forced to pay attention to quality, slash their prices, reform their licensing schemes, and overhaul their sales practices in response. Therefore, the fact that so many businesses searched for an alternative made a huge difference even for those that stuck with the commercial vendors. Windows Server 2003 is the best OS Microsoft has ever made and Sun sells a $995 server now. Coincidence?
But let's not forget the old standby that technology firms use when faced with a vibrant new competitor: a massive PR campaign. Microsoft is in the midst of a concerted effort to tout its advantages over Linux. In fact, there may be an ad right at the top of this page promoting Windows' superiority. Steve Ballmer and Bill Gates have been flying all over the world for the past couple years trying to keep large firms and even entire countries from adopting Linux. But they've also been (at least giving lip service to) making security a much higher priority at the company.
There's still plenty to gripe about when you need to buy software these days, but the consumer is in a much better spot today than they were ten years ago. There are more licensing options, pricing has improved a bit, there's always the open source alternative for some software, which will at least give you some leverage at the negotiating table, and even the option to not buy and install software at all, but simply pay a monthly fee.
The internet is really the culprit here. It made the producer-consumer relationship so potentially frictionless that other industries that thrived on that friction are feeling the squeeze too: music, newspapers, teleconferencing, wireline telephones, real estate, travel agents, even the movie, television, and book industries are all seeing their roles as the conduit between customers and producers be subverted. Some of the intermediaries may not survive at all, while the rest will be forced to change.
Only time will tell, but I think that we're seeing an inevitable pendulum swing over to software consumers having a bit more power over the sellers than in the past. And we may not see the easy billions to be made in the software industry. They may just have to work a little harder for their money. Would that be a bad thing?