Rent-extraction threshold

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The Devil’s Advocate


In which the curmudgeonly old sod puts the world to rights.

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The rent-extraction threshold is a function of your user catchment, not the total amount of money at stake. If you have large number of users you can take a small rent, each of them will tolerate it, even for low/no value processes. We suck up our Microsoft 365 subscriptions even though you could do most of it for free on Google.

Likewise, a rich ecosystem of music software — genuinely staggering software it is too — thrives, at manageable cost, because there are so many home recording enthusiasts prepared to spend a couple of hundred quid to muck around at the weekend with no hope of ever making money out of it. It’s fun.[1]

If there relatively few potential end-users — limited scale — you must extract a lot of rent from each one to make money. The few of the users, the more each must pay. This is generally not tolerable, even for users who stand to generate significant value themselves.

Home recording hobbyists are a paradigm case of the first kind of renter: numerous — hundred of thousands it not millions, each prepared to pay small amounts to keep excellent products updated, even though they generates little of tangible value over the population. Smokers are another. There, the tangible benefit derived from the rent is patently negative.

The paradigm case of the second kind of renter is the global financial services institution. There are comparatively few of them, but each has a desperate, ongoing need, to regularise, standardise and automate and meet complex regulation in an operation that costs hundreds of millions to run.

The bang for buck they stand to gain is immense, but the number of bucks they are prepared to part with is miniscule.

Thus: the rent extraction threshold.

See also

References

  1. I may be wrong about this but I sense that exactly no-one is going to tool around with contract automation software at the weekend for fun. Though the idea of document assembly home hobbyists is an appealing one.