High-Tech Warranty Project -- Comment, P994413

1. Conclusions

Warranties don't make sense for software. Vendors don't provide them, and consumers don't rely on them.

2. Manufacturing defects

Manufactured goods--e.g. garments, refrigerators, automobiles--are subject to defects in materials and workmanship: manufacturing defects. These occur essentially at random. Manufacturers can typically reduce defect rates by spending more money; however, defects can never be entirely eliminated.

3. Selling and buying

On this analysis, a manufacturer does not sell a product per se; rather, a manufacturer sells a product with some defect rate. Similarly, a buyer does not buy simply a product, but a product with some defect rate.

4. Large quantities

This situation causes no special problems as long as the buyer is purchasing a product in large quantities. A manufacturer sells a product with some defect rate; the buyer discovers through experience what that defect rate is. Knowing the defect rate, the buyer can assess the true cost of the product, and take that into account when budgeting or making competitive purchase decisions. In short, the buyer can buy what the seller is selling.

5. Small quantities

This model breaks down when a buyer is purchasing a product in small quantities. For example, consumers typically purchase automobiles in quantity one. A manufacturer may sell automobiles with a 1% defect rate, but a consumer who buys one automobile does not get a 1% defect rate--they get one automobile, and it either works or it doesn't. In an important sense, the buyer cannot buy what the seller is selling. This is a kind of market failure.

6. Warranties

Warranties remedy this market failure. A warranty binds the seller to repair or replace defective units. This allows the seller to sell a product with an effective defect rate of zero, even though it is not physically possible to manufacture such a product. By providing a warranty, the seller can sell something that the buyer can buy, even in quantity one.

7. Non-purposes

It is important to emphasize that the sole purpose of a warranty is to remedy this market failure. A warranty does not force manufacturers to bear the cost of their manufacturing defects: the cost of warranty service is passed to the buyer in the original purchase price. Neither does a warranty force manufacturers to produce high-quality products.

In fact, a warranty allows manufacturers to produce low-quality products, if that turns out to minimize the total of their manufacturing and warranty costs. (Sofa-bed manufacturers appear to take this approach.)

8. Software

Software is not tangible, it is not a manufactured good, and it is not subject to manufacturing defects. Furthermore, each copy of a software product is, by definition, identical.

9. Distribution media

Some software products are distributed on physical media, such as floppy disks or CD-ROM. These distribution media are tangible, manufactured goods, and are subject to defects. The actual defect rate is quite small; nonetheless, virtually every commercial software product warrants its distribution media. These warranties are simple, straightforward, and uncontroversial; buyers and sellers have a common understanding of them. Warranty service usually consists of exchanging defective media for a working copy, usually at the place of sale.

10. No warranty

Virtually no commercial software product warrants its functionality. The reason for this is that there is no market failure for a warranty to remedy.

11. No market failure

As discussed above, there is a market failure when a consumer buys a manufactured product: they cannot know whether the one they get will be defective. This cannot happen with software. Every copy of a software product is identical: every buyer will experience exactly the same benefits and suffer exactly the same deficiencies, whatever they may be. Good or bad; working or broken: every buyer gets exactly what the seller is selling, even in quantity one. The market failure that a warranty remedies simply does not occur with software products.

12. The grapevine

In principle, a consumer takes a risk when they buy a software product, because they do not know whether it will do what the seller claims. In practice, information about the performance of software products is available from many sources: vendor demonstrations, consumer testing organizations, reviews in industry publications, web sites, on-line discussion groups, mailing lists, friends, colleagues. In any case, there is no reason to think that the markets cannot provide whatever information about software products consumers may demand. If consumers have information about the performance of a software product, and every copy of the product performs identically, then consumers know exactly what they are buying, and again there is no need for a warranty.

13. Structural differences

Many commercial software products are unreliable--they have bugs. Their is some view that software vendors do not warrant their software because they are, variously, too inept to product reliable products or too greedy to bear the cost of warranty service. However, this view is inconsistent with the low defect rates and near universal warranties provided for distribution media. A better explanation is that there are fundamental structural differences between distribution media (tangible) and software (intangible), and that warranties are appropriate for the former but not the latter.

- SWM