One of the mysteries in business modeling is how to do pricing, or any financial modeling, for your developer network offerings.

Developer networks are a marketing channel. Firms create developer networks to encourge 3rd parties to create products that complement their core offering. The presumption of these efforts is that the complementing products will increase the overall value of your offering. Businesses that use this approach refer to their offering as a platform, network, or toolkit. There are probably other names that get used. If you know some please tell me.

The puzzle around the pricing has three parts. First – Pricing provides a feedback, a signal, and if you subsidize the pricing how do you know if your actually generating value? Second – if you subsidize the price the firm automatically treats the developer network as a cost center rather than as a profit center. The standard way to manage a cost center is cost control; and that leads to the brilliant insight that if you shut down the developer network you save money – and that can’t be right.

The third problem is one of time and distance. The model that developer network leads to compliments and that leads to an increase in core offering value is all well and good. It’s not hard to pile on additional bits of optimism. A successful complement will create sales for the core offering. A rapidly evolving innovative new complement will force upgrades for the core offering. The third problem is that these feedback loops are very long and very diffuse. Or in Net Present Value terms they have high hurdle rates and low present value because they are, well, out there. This is a kind of options pricing problem.

So when I look at Microsoft’s recent pricing changes around their developer network I read into some conclusions. First – their management has fallen victim that ever popular fetish – market are the best model of any system – and are forcing the developer network to tie it’s self more tightly to a pricing signal. Second – that they have broken up the company in ways that treat the developer network more as a cost center and less as a marketing channel.

The third thing it appears to say is the most interesting. I believe that Microsoft is one of the few places with a financial model that can solve the options pricing problem. So raising their price maybe a signal that either they lost the model; or that the model is generating a less positive output. Climbing even further out on a limb. I think the model says that fewer developers are taking them up on the the offers implicit in the developer network offering, they are loosing developer mind share.

In summary, I see the raising of prices Microsoft developer network prices, as a the sign of weakness in their developer network business. That is really really bad for for a platform company.