Is Software a Good or Service?

The debate over whether software should be classified as a good or a service has been raging for decades. With the rise of SaaS (Software as a Service) business models, the question has taken on even greater importance. In this comprehensive guide, we’ll examine the arguments on both sides, analyze the implications, and try to reach a definitive conclusion. Strap in, because this is a complex issue with high stakes for the software industry.

What are “Goods” and “Services” Anyway?

Before we can determine whether software belongs in the “goods” or “services” category, we need to define these terms.

Goods are tangible items that can be physically delivered. Some examples include cars, clothing, or packaged software shipped on a disk. Goods can be resold or transferred between owners. The purchaser takes permanent ownership and possession of the good.

In contrast, services involve intangible actions that fulfill a customer need. Services cannot be held or transported. Examples include haircuts, tax preparation, or SaaS subscriptions. The service provider retains ownership, and the customer purchases temporary access or experiences.

So in basic terms:

• Goods are tangible objects you obtain ownership of
• Services are intangible experiences provided on demand

This distinction gets murky with digital goods like software, ebooks, and digital music. While physically intangible, they can still be permanently owned like traditional goods. Software blurs the line even further, as we’ll see next.

Arguments for Classifying Software as a Good

Let’s start with the case for software being a “good” rather than a service.

Software Shares Characteristics of Traditional Goods

In many ways, software functions similarly to physical products.

• It’s created once and then duplicated for distribution.
• Customers obtain a license that allows permanent use.
• The license can be transferred or resold.
• Patches and updates are similar to repairs and maintenance.

For example, when you buy a packaged copy of Microsoft Office on a disk, you obtain the right to install and use that software indefinitely. The purchase model mirrors that of books, cars, or appliances. Unlike haircuts or taxi rides, the softwaredoesn’t disappear after use.

Legal Precedent Favors Software as Goods

There have been several court cases centered on whether software qualifies as a good or service. So far, most decisions lean towards classifying software as goods.

In the 2001 SoftMan v. Adobe case, the court determined that unpublished software constituted a good. The judge stated that “computer software…is tangible property” since it can be “perceived, weighed, measured, and touched.”

Other cases like 1998’s Novell v. Network Trade Center have reinforced this notion. The court ruled that software purchases were “transactions in goods” since they involved transfer of licenses, not services.

These outcomes suggest that current legal precedent favors software as a good rather than a service.

It Allows Sale of Physical Software Packages

Another factor favoring software-as-a-good is the existence of packaged software sold in stores. As mentioned earlier, boxed programs like Microsoft Office are clearly modeled as goods.

While less common today, retail software sales still make up $27 billion of the market. The goods treatment allows these physical products to be lawfully distributed and resold.

Benefits Developers Through First Sale Doctrine

Classifying software as goods also benefits developers through a concept called the “first sale doctrine.” This provides owners of lawful copies the right to resell or redistribute that software without requiring permission from the creator. This legal theory supports secondary software markets that open up additional sales channels for developers.

For all these reasons, many argue software logically fits the goods category. But others make convincing counterarguments, as we’ll explore next.

Arguments for Classifying Software as a Service

Now let’s examine the reasoning for categorizing software as a service rather than good.

Software Lacks Tangibility of Physical Goods

While software may share some characteristics with tangible goods, the lack of physicality is a major distinction. As the rise of SaaS has shown, software’s core value comes from its intangible functionality rather than any physical components.

Unlike a chair, you can’t touch, weigh, or physically grasp software. This ephemeral nature lends itself more towards a service model.

Direct Customer Benefits Define it as Service

With traditional goods, ownership and possession provide the main consumer value. But software directly provides value through its functioning and capabilities. This aligns closer to the service model where benefits come from the provider’s efforts.

For example, a spreadsheet program produces value through analytic features. An AI assistant provides benefits through conversational capabilities. The software itself simply enables delivery of these intangible services.

Software Requires Ongoing Maintenance

Software also behaves differently from goods in requiring continuous maintenance and updates. When you purchase a good, you don’t expect the manufacturer to regularly push out fixes and improvements.

But software vendors issue a constant stream of patches, upgrades, and feature updates. This shifts software towards an ongoing service model rather than one-time good transaction.

SaaS Dominance Supports Service Model

The rise of SaaS also boosts the notion of software as a service. SaaS products like Salesforce or Slack treat software as subscription services rather than owned products. This shows that service can be the most natural model for software monetization.

With SaaS accounting for over 20% of business software revenue, its growth supports the idea of software as an intangible service.

Court Rulings Increasingly Acknowledge Service Role

While some court cases classify software as goods, rulings like 2020’s VoterLabs v. Delaware demonstrate shifting perspectives. This case noted that software involves “both goods and services” and acknowledged its service capabilities.

As software expands beyond packaged products, courts are recognizing its intangible service dimensions. This trend will likely accelerate.

Service Model Enables Flexible Distribution

Classifying software as a service also enables more flexible distribution models. For example, branding software as a service allowed Adobe to shift Creative Cloud to a subscription model. This expanded access and better aligned with customer needs.

The service model liberates software from physical packaging and ownership restrictions. This gives vendors more options to provide user value.

Implications of Software Classification

The goods vs service debate matters because the classification carries real economic and legal consequences. How would treating software as a good or service impact the industry?

Legal Protections and Responsibilities

If considered a good, software would continue falling under UCC (Uniform Commercial Code) standards for warranties and liabilities. But as a service, it may require specialized regulations like those imposed on investment advisors or healthcare. Legal responsibilities and protections differ greatly between goods and services.

Revenue and Tax Treatment

Taxation also varies significantly based on software’s designation. Sales tax applies to goods but not services. Software revenue gets recognized differently for bookkeeping purposes. Moving from goods to service would impact how vendors account for earnings.

Resale and Distribution Rights

Classifying software as a good permits end-user resale and transfer rights under the first sale doctrine. But if viewed as a service, these rights could be restricted or eliminated. Distribution models would shift from ownership to subscriptions. This strongly impacts both vendors and consumers.

Ownership and IP Rights

Goods can be owned and freely used after purchase. But services involve limited access rights. IP ownership would potentially have to be reexamined if software is a service. This creates uncertainty around rights to modify, decompile, or resell software.

Customer Expectations

Consumer expectations differ greatly between goods and services. Goods are generally “as-is” after purchase, while services involve ongoing support and updates. Users expect more involvement and ongoing value from service providers.

Industry Structure

Goods and services have different competitive dynamics. Goods allow fragmented markets with resale. But services tend towards consolidation and vendor lock-in. The shift could concentrate power among mega-vendors like Microsoft, Salesforce, and Adobe.

The goods vs service designation has profound impacts spanning economics, law, accounting, IP, and customer expectations. How this shakes out will reshape the software landscape.

Conclusion: Software Sits Between Goods and Services

So where does this lengthy analysis lead us? Is software a definitive good or service?

The most reasonable conclusion is that software exhibits qualities of both and can’t be cleanly classified on either side. Developers sell software products and offer software services. Software spans the continuum between tangible and intangible.

Ultimately, it comes down to usage context and distribution model. Packaged desktop applications sold outright are closer to goods. SaaS products provided on subscription resemble services.

But most software involves components of both. Microsoft Office is a packaged good you install locally. But Office 365 delivers cloud services on subscription. Adobe Creative Suite is downloaded software, while Creative Cloud offers online file storage and sharing. Software merges aspects of goods and services into new hybrid models.

This means debates over “software as a good” vs “software as a service” create a false dichotomy. Software can rightly be considered both a good and a service depending on context. Attempting to shoehorn it into one category or the other is an oversimplification.

Software’s ever-evolving capabilities continue to outpace legislative definitions. Courts are increasingly acknowledging its dual good and service aspects. Software will likely necessitate entirely new legal frameworks rather than fitting established molds.

For now, the goods vs service question remains unresolved. But the vibrant software industry isn’t waiting around for bureaucratic debates to conclude. Real world usage and economics continue accelerating ahead. The most pragmatic path forward is acknowledging software’s hybrid quasi-good quasi-service nature.

Rather than forcing simplistic binary categorization, the law should evolve to accommodate software’s complexity. Users increasingly rely on software services while legally purchasing software products. Usage and commerce patterns demonstrate that both models coexist.

So is software a good or a service? The most accurate answer is that it’s an innovative new hybrid straddling both domains. Software is a novel beast requiring fresh perspectives, not attempts to cram it into the same old boxes. The goods vs services debate highlights limitations in existing legal constructs.

By escaping restrictive classifications, the software industry continues pioneering new possibilities. While traditional models struggle with binary distinctions, software fluidly navigates both worlds to serve customer needs. It effortlessly glides between the tangible and intangible, the owned and subscribed.

This flexibility is software’s superpower. Rigid debates over goods and services aim to restrain that dynamism. But software laughs at these attempts, shape-shifting in whichever way best fulfills user desires.

So rather than limiting possibilities with unimaginative classifications, we should encourage software’s continual metamorphosis. The goods vs services question is ultimately unimportant next to the ever-expanding value software creates. Software defies simplistic categorization and thrives in the uncharted lands beyond.

Frequently Asked Questions about the Classification of Software

Q1: Is software a good or service?

A1: It depends on the law and how it is classified.

Q2: Can software be both a good and service?

A2: Yes, according to the USPTO.

Q3: How should assignments of software be registered with the USPTO?

A3: It is helpful to register them with the USPTO.

Q4: Why is it difficult to determine whether software is a good or service?

A4: The volume of trade in software and its prominence make it challenging to classify.

Q5: What are the implications of software being classified as a good or service?

A5: It affects software development, distribution, and legal and economic implications.

Q6: Is open-source software considered a good or service?

A6: It depends on the specific open-source license and how it is used.

Q7: How does the classification of software affect its pricing model?

A7: It can affect the pricing model, depending on whether it is classified as a good or service.

Q8: Can software be trademarked?

A8: Yes, software can be trademarked if it meets the requirements for trademark registration.

Q9: How does the classification of software affect its revenue model?

A9: It can affect the revenue model, depending on whether it is classified as a good or service.

Q10: What are the legal implications of software being classified as a good or service?

A10: It affects the legal status of software, including licensing, regulation, and intellectual property rights.