"So people will go out of business, and the people who remain will raise their prices to the point needed to support themselves."
This sounds a lot like what newspaper people were saying a decade ago: current prices couldn't support professionals, so prices would have to rise. But that's not what's happened, in most cases.
The tools one needs in order to build and sell software are accessible to more and more people every year. The barrier to being an indie programmer is getting lower and lower. You can build and sell an app on the app store without having ever heard of quicksort. Indie developers may well go the way of indie journalists: while a few flourish, most wind up working for beer money.
Journalism is an interesting parallel, its further along the transformation path. When I was at Google I was really excited about being able to build a better newspaper with e-readers. I did a lot of research on that topic and talked with a number of different folks. As it turned out, if you threw out the printing presses, the delivery trucks, the newsprint, the facilities that held the printers, the people that maintained the printers, and all of the recurring costs like ink, maintenance, and pest control, and charged the same amount to advertise you would have a fabulously profitable business for the same subscriber base. But here is the rub, you don't have the same number of subscribers (the advertisers pay by subscriber) and trying to negotiate print prices for what someone perceives as a web site, doesn't go very far.
Now that isn't really a problem because all things being equal you can be fantastically profitable at lower ad rates if you keep the subscriber base. But you need the subscribers. And for that you need people that have e-readers. The publisher of the NYTimes pointed out they could be wildly successful if they gave all of their subscribers an e-reader for free and took away the paper copy. Not everyone was willing to go there.
So you've got an industry in transition. I expect the Economist to be the first 'old world' journalism outfit to flip its profitability from the print publication to the digital one (they are furthest along the curve), but the Wall Street Journal has some great trending numbers as well.
Truth be told, people still read the news. And the folks who appreciate good news, are willing to pay for it, and if they are willing to pay for it they are pretty good folks for advertisers to have their ads in front of. But its all about stepping across that chasm of print to e-print.
The 'app' market was hugely disruptive because it kicked a huge chunk of infrastructure to the curb. That chunk added no value to the product they just did distribution and duplication. So you can sell a product for less than you would have if they were taking their cut, and still make money. Except Apple bends you over for 30%. Once the opportunities open up that price will fall, its not supported by actual costs (meaning others can get under it and still make a fair profit). But there are other pieces in the puzzle that have yet to fall out (like the horrible platform diversity on Android). The key though is that people continue to want to 'own' software and largely resist 'tax' type features. So as the business models flourish and die we will get to the place where things stabilize.
This is a similar problem to what you can see at etsy: people are willing to take minimal profits because being paid anything for their hobby is reward enough.
This sounds a lot like what newspaper people were saying a decade ago: current prices couldn't support professionals, so prices would have to rise. But that's not what's happened, in most cases.
The tools one needs in order to build and sell software are accessible to more and more people every year. The barrier to being an indie programmer is getting lower and lower. You can build and sell an app on the app store without having ever heard of quicksort. Indie developers may well go the way of indie journalists: while a few flourish, most wind up working for beer money.