Pay-per-use your own computer?

Gregg Keizer, Microsoft specs out 'pay as you go' PC scheme, Computerworld

The idea is something that might have been a story problem in a class on welfare economics: assuming the cost of metering computer usage is negligible, discuss the merits of such a proposal. MS filed a patent for a proposal to sell computers (presumably well below the cost of production), then bill customers for both the use of installed programs and the use of computer power.

Microsoft's plan would instead monitor the machine to track things such as disk storage space, processor cores and memory used, then bill the user for what was consumed during a set period.

So you would be billed x per MIPS-hour, even though this would require you to have the highest-performing processor installed all the time. Also, it would allow you to briefly use premium softwares for hourly (?) rates.

At first blush, this does sound a lot like MS is at it again, trying to squeeze more revenue out of customers for software that is costlier and buggier. A major benefit for MS would be stimulating computer revenue by offering pay-per-use options; note there's an extremely severe recession approaching. With respect to hardware, there would be an obvious relative increase in the incentive to get the most powerful devices, since there would not be a price premium... except on the occasion that you used their full capability. Semiconductor fabricators like AMD might grumble about the price squeeze value-added retailers like Dell were imposing, but really, they'd really only need to ship a larger number of top-of-the-line chips, rather than a mix of different premium chips.

Where the idea gets interesting is software, since the object would be to create a market for much higher-end programs (most likely games, but also business applications). MS could allow users to download "riskfree" programs that had been recently developed, collect revenues, and perhaps stimulate demand. Which opens the question, what exactly would this scheme do for software demand?

Solving a Three-Good Utility Function
Section excised and put in another post

Findings

Usually discussion of utility functions present them as indifference curves between two similar goods. I prefer to think of utility functions as part of firm's production function, in the sense that there's more money to be made with an optimal expenditure on different items. But in the case of an actual business strategy, it makes sense to begin with the understanding that customers can spend money on

1. high-end software (z)
2. low-end software (y)
3. everything else (x).

Usually I use the x-axis to represent "everything else" (example). Textbook writers, sometimes in an effort at humor, will select two very similar items (pizza versus hamburgers) , but assume consumers' expenditures on the two items together will remain the same regardless. I remain curious, though, as to what would happen if you're looking at a market for two similar items, in which most income will be spent on neither. If the price for one goes down, demand for the other may not necessarily go down (as it would if there were only two items).

Another deviation from usual practice is to use the linear expenditure function instead of a Cobb-Douglas function. The Cobb-Douglass utility function is unappealing to me because, while it's easy to use mathematically, it results in a fixed share of income being spent on each good. Logically, if the price of a thing is sharply reduced, you would expect people to spend a larger share of their income on that thing; spending the same amount of money as before now yields more satisfaction, so people will find more occasions to use spend more money on it, not merely buy more units. For some products, the opposite may be true (health care), in which case the threshold level of consumption can be made negative.

The threshold level of consumption is a phrase I made up to refer to what x₀, y_o, and z_o represent: a minimum level of consumption of these respective goods. Consumption of x < x₀ means that x ties up income but contributes nothing to utility. As is often the case, extreme conditions are seldom relevant: we aren't usually interested in situations where x < x₀. Instead, we're interested in situations where x >> x₀, and we're making a modest shift in position. Technically, a negative threshold level of consumption implies that even negative consumption of a thing contributes to utility, to say nothing of no consumption at all. That's absurd. On the other hand, the curve created by a negative threshold may realistically describe conditions in which an increase in prices leads to an increase in total expenditures.


I set up the equation so that threshold levels of consumption were positive for all goods; the price of "everything else" was fixed; high-end software yielded a higher utility per unit, and software generally had a higher utility per unit than "everything else." I found that increasing prices for y actually reduced spending (demand) for z, albeit much more slowly than reducing the price for z.

A lot of this has to do with the coefficients of the utility function: α, β, γ, x₀, y_o, z_o, and I. The values of α, β, and γ determine the gradient of the utility function at I. When creating the graph above, I chose values for β and γ that were much higher than α; that reflects an assumption that ongoing expenditures on low-end software (not to mention high-end software) provide more bang for the buck than money spent on "everything else." That's an intensely controversial proposition, but I doubt it would face controversy at Microsoft.

The values for threshold spending (x₀, y_o, and z_o) are naturally a mystery; high values for x₀ and y_o (i.e., both "everything else" and low-end software) lower z*, while high values for z_o increase z*. All this means is that, if thresholds are high, a price reduction causes expenditures on the good to increase. If threshold = 0, then a price reduction causes expenditures to stay the same. For computers generally, there is strong historic evidence that falling prices have sharply increased expenditures, leading to the conclusion that the threshold value is large but is offset by a high coefficient of utility.

The effect of the original business scheme of Microsoft would lead to a shift in software expenditure from low-end software to high-end, and stimulate spending on software generally. The logic of this is intuitive: access to high-end functionality would be on tap, but users would not have to actually commit to owning the whole package. This would increase the overall utility of software per se.

Mac & Windows

I'm going to have to admit that I do everything in MS Windows. For years I dreamed of a Macintosh, but put aside those dreams when Steve Jobs ended licensing of the Mac OS, and insisted on a monopoly of the proprietary operating system. Since then, the user base of Mac OS has dwindled as a share of the total, and Job's focus has been on Mac as an expression of profound individuality. However, I have observed repeatedly that there is an awful lot of really good creative blogging out there being done by Mac users. I've noticed that the Mac user base, far from being the group of technical novices I would have expected, is actually more technically competent and shrewd than the Windows user base is.

I still have this big ugly pool of frustration with Steve, because I think he spent so much energy marketing Apple products as fashion accessories, but I've gotten older and increasingly I recognize that Apple products have retained a crucial technical edge over Intel ones in many respects. The anarchistic piece of patches and bugs that is Windows essentially uses up all of the skill and talents of coders. The hideously dysfunctional business climate for Windows software developers consigns entire cohorts of coders to arbitrarily-inflicted obsolescence. There's a great Japanese word for this, muda, which IMO describes about 75% of the effort in Windows development. Here we are, twenty years after the development of the GUI, and we're taking up Linux as the alternative to Windows. The fact is that Windows is not a programming environment, it's a cross between the Cold War and the Bosnian Civil War. The Mac OS community is, by this analogy, a stable productive society. So Steve handled the technical issues successfully.

As to the marketing: I have a really tin ear. My ability to anticipate the effect on the public of a certain thing, like the presidential debates, is so poor I've had to give up on the exercise entirely. The sort of reasoning that win arguments nowadays is not my reasoning.

That's where we're going with this: the market of ideas and products as a programming environment—a civil OS, as it were. I'm used to thinking of operating systems as a bunch of specialized code that you install on a computer so the damn thing can open Word files. But it turns out operating systems are a metaphor for society. The components of the program (institutions) work by collecting what we know about pieces of data (individuals) and associating that data in ways that serve the survival of the institution. The system files mostly evolved in different places, and they don't necessarily work together very well together, but it's much to late and too difficult and too controversial to revise them so they make any sort of sense. There's also the core of the OS, which gradually absorbs more functions of the system software (software drivers, social welfare systems and child protective services) but there's always going to be things that the OS cannot do, that have to be done (things that the state cannnot do, that require spontaneous or traditional associations).

And I notice that the programming API (the standards that applications have to fit into in order to run in a programming environment) for our society is set not by political philosophers like John Locke or Thomas Aquinas, but by fashion. This is not a terribly original idea, but it's something I keep overlooking. Karl Marx, John Stuart Mill, W.E.B. DuBois, and Joan Robinson came up with really compelling analytical models to explain how societies interact with their institutions—yes, they did. But these models are terrible at predicting the future, and people who understand them become worse, not better, at reading the responses of their neighbors.

The Mac OS deserves to beat out the Windows OS because it works like a properly engineered design. It's a more effective, waste-avoiding strategy of doing what programmers and computers are supposed to do, than Windows ever will be. It spawns creativity; the anarchy of Windows, as we've seen (and seen, and seen, and seen again) spawns drudgery and frustration. This is not because Windows programmers are stupid; nor do programmers code for Windows because they're masochists. They do it to earn incomes and get their ideas on people's desktops. Windows is the world in which we live; Mac OS is an enclave of sanity. It's like a tiny little corner of Bosnia where Serbs, Croats, and Bosniaks live in harmony. The rest of the country is chaos, and that's the world of computing: massive waste of potential because of chaos. People never actually chose chaos, but that's what we get. So we plan for it, and we assume it.

And that's why fashion sense—a system of hierarchy that explicitly repudiates any logic—is the law of the jungle. Jobs understands that. Why did I not see this before?