Category Archives: Open-Source

Open Source Economics

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Since we are talking about open source, a definition of the subject from Wikipedia is in order:

“Open source is a set of principles and practices that promote access to the production and design process for various goods, products, resources and technical conclusions or advice. The term is most commonly applied to the source code of software that is made available to the general public with relaxed or non-existent intellectual property restrictions. This allows users to create user-generated software content through incremental individual effort or through collaboration.”

In the area of computers and Internet, open source movement is almost as old as computers themselves. In the beginning there was Multics, Unix, BSD, Minix etc. Than came Richard Stallman’s GPL, GNU and FSF. That was followed by Linux, Apache and many more projects. Over time open source movement has begun extending to things beyond software and technology to include media (video, pics and blogs etc.), creative content (creative commons) and communities.

Since open source movement affects our lives in more and more ways, let’s take a look at how the open source model is interacting with our market driven economic system.

Open Source Business Models

The heightened level of interest in open source model has lead companies to start looking for ways to add value to the process of open source development and distribution in order to make money from it. Some of the models/approaches that have emerged are:

  • Develop the product and open it up to the community: The main goals for the businesses here are two fold:
    • Generate marketing buzz
    • Leverage the skills/people in the community to enhance the product.

Businesses make money by selling add on software modules or services to customers using the open source technology. Some of the examples of this model are Eclipse (IBM), Netscape, Linux, and recently Solaris (Sun) etc. While this model sounds attractive as a way to reduce development costs, there are plenty of other expenses for the businesses. Businesses need to create and participate in boards (Sometime controlled by the business, sometimes not) to chart a sensible product direction, to manage licensing issues and to put together a well tested base distribution bundle. Working on a board staffed with community members and sometimes even competitors can be an expensive and time consuming process.

  • Take an Open Source product and provide support and services to enterprises: There are a number of companies like MySQL, Zmanda, RedHat etc. that provide such services. The business model is all about building up the volume and driving up the percentage of paying customers (typically less than 2% of the customers pay) for customer support or other services.
  • Provide open source platforms: There are a number of sites/projects like sourceforge.net, google code and even YouTube or FaceBook that provide platforms for open source like collaboration. The business model typically is to provide the basic services for free and make money via ads by driving the page views.

The value of the open source is pretty clear to customers as they get the product and services they want without having to pay for the underlying product…But who else is extracting the rents in open source related economic activity? Let’s look at the value accruing to three important stakeholders – Businesses, Customers and Contributors.

Value to open source businesses

Some have argued that businesses are capturing the lion share of the value of open source at the expense of contributors and customers. This point of view is expressed by Dirk Riehle (leads the open source research group at SAP Research) in his recent paper on the topic. Dirk argues that businesses derive the maximum benefit because:

  • Customers want a deployed solution, so service companies (like IBM) that use the open source software, just make up for the free open source software by increasing the price of the service. This increase directly goes to their bottom line.
  • Businesses benefit as employers, because larger talent pool due to non-proprietary nature of open source, enables businesses to have a stronger negotiating position compared to the individual developers.

Besides the obvious conflict on interests (Dirk works for SAP which isn’t big on open source and competes with IBM which is), Dirk makes the first point without pointing to any data. I find it hard to believe that customers don’t see a lowered bill when open source software is used compared to proprietary software.

For his point #2, Dirk again, provides no facts but makes a general assertion. I believe that the people who contribute to open source are self motivated people who enjoy programming and as such get a higher salary compared to people who do not participate in open source.

Also from the open source businesses point of view, if we consider the costs associated with managing, engaging and participating with the community, I am not sure the open source businesses will come out with lower costs, compared to non-open source businesses.

Overall it seems to me that open source businesses have significant costs and barriers to profitability and are certainly not capturing the majority of value in open source transactions.

Value to Customers

Customers using open source benefit a great deal.

  • Free software makes it easy to get started.
  • Using open source enables customers to avoid the dreaded vendor lock-in. So if customers are using open source they are able to change providers if they are not particularly happy with the service provided by the vendor. Open source provides them with huge leverage with service providers.
  • The customers benefit as they have a larger talent pool to hire from and they don’t have to pay proprietary vendors for all sorts of “certifications” etc.

Overall the customers come out well ahead by using open source technology. In fact, were it not for the LAMP (Linux, Apache, MySQL and Php, Python, Perl etc.) stack, startups costs would have been a lot higher then they are today and we would not be seeing the amount of innovation we are seeing in the field of Internet and Technology.

Value to Contributors

Contributors to open source also benefit from participating:

  • It used to be the case that contributors did not get paid for their contributions and had to work on their own time, but things are changing. With the popularity of the open source projects, more companies are paying contributors to support the community or are even contributing proprietary modules to the community. This provides direct incentives to contributors to work with the community.
  • Open source participation is a great way to establish creadibility of you are a programmer…Have you seen ads like these?“With your resume, please include some php and javascript code snippets or refer us to an open source project you’ve worked on.”
  • Most good open source developers have an opportunity to become public voice of the project. This extended role for engineers not only means an ego boost but also translates to higher salaries etc.

Overall developers working on open source come out ahead by participating in the open source projects.

Conclusion

Open source movement has become a powerful value creator. In addition it has created an interesting and somewhat egalitarian wealth distribution mechanism, where on one hand it has made it hard for one stakeholder to extract inordinate rent, on the other hand it has created right incentives for a lot of people to participate and have a stake in its success. No wonder it is becoming a popular model for more and more businesses and social activities.

Who benefits from open source?

Fascinating piece from Nick Carr where he refers to a study by Dirk Riehle, a researcher with SAP, on the subject on open source software. Besides the obvious conflict of interest, the piece raises some interesting questions.

A new article in IEEE Computer, “The Economic Motivation of Open Source Software: Stakeholder Perspectives,” sheds some interesting new light on an old question: Is open source software development good or bad for programmers?

The author of the IEEE Computer article, Dirk Riehle, a researcher with SAP, doesn’t look at that question directly. Rather, he examines, in a theoretical way, how open source changes the economics of the IT markets in which programmers participate. He first looks at why big systems integrators and other “solutions” providers, like IBM, have been promoting open source. He argues that these companies, which sell bundles of products and services to their clients, like open source because it allows them to reduce the amount of money they have to pay to software vendors without requiring that they pass along the savings to customers in the form of lower prices. In other words, the software savings turn into additional services profits, which fall to the solutions providers’ bottom lines. Ultimately, that means that open-source software developers are subsidizing the big solution providers at their own expense. Writes Riehle: “If it were up to the system integrators, all software would be free (unless they had a major stake in a particular component). Then, all software license revenue would become services revenue.” (I would think it’s an overstatement to say that all software license revenue turns into services revenue; assuming there’s competition between solutions providers, some of the savings would go to the customers.)

Riehle also looks at the economic effect of open source on software markets themselves. He argues that, by tearing down the barriers to entry in software markets (by obviating the huge up-front investments required to create a proprietary program), open source spurs competition, which in turn reduces prices and erodes the profits of software vendors. Riehle writes: “Customers love this situation because prices are substantially lower than in the closed source situation. System integrators love the situation even more because they can squeeze out proprietary closed source software.” For the programmers themselves, however, much of the savings reaped by customers and added profits taken in by integrators comes out of their own pockets.

Riehle also notes that open source (because of its openness) tends to diffuse knowledge of particular programs among a much broader set of programmers. That will tend to increase competition among the programmers and hence depress their pay: “Technical skills around the open source product are a key part of determining an employee’s value to a [vendor]. Anyone who’s smart enough can develop these skills because the open source software is available to people outside the firm. Hiring and firing becomes easier because there’s a larger labor pool to draw from, and switching costs between employees are lower compared with the closed source situation. Given the natural imbalance between employers and employees, this aspect of open source is likely to increase competition for jobs and drive down salaries.”

Its a very odd conclusion to an interesting analysis…I would have though that as open source software become popular, engineers who work on open source, can develop and sell their skills to a larger market…this makes their skill set more valuable over a longer period of time. Also the fact that open source reduces cost of the software means that more and more people will be willing to pay for people with skills with open source software…In my experience that is indeed what is happening.

Even the large enterprises seemed to have learned a lesson from the excesses of the boom times and seem reluctant to sign huge deals for proprietary software and then pay through the nose for services. In such situation the economic rent is accruing more widely and evenly to the open source engineers.

What do you think?

Microsoft Vs Open Source Community

There was a great piece on CNet news.com about Higgins project waiting Microsoft’s approval for creating a Windows CardSpace’s open-source equivalent:

Higgins awaits Microsoft’s blessing

An open-source rival to a Microsoft identity tool has been in limbo for months, awaiting the software giant’s go-ahead on certain patent-related issues.

Developers working on the Higgins project want to create a tool equivalent to Microsoft’s Windows CardSpace, but fear the software giant’s legal wrath if they don’t receive permission on certain features. Although parts of the project continue to move forward, proponents say it may not reach its full potential without Microsoft’s help.

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While CardSpace is available on Windows, one goal of the Higgins project is to cover other operating systems. Higgins wants to offer an open-source alternative that works on Windows and on alternatives such as Linux and Mac OS X. The application would work similarly to CardSpace.

“We don’t intend to duplicate CardSpace, but a user should be able to sit down in front of the open-source implementation and feel comfortable and understand how things work, like Firefox versus Internet Explorer,” said Dale Olds, who holds the title of distinguished engineer at Novell, drawing a parallel to Web-browsing software.

Also, Higgins developers want to include the capability to take identity information from Linux systems or Macs and use it with CardSpace, and vice versa, Olds said.

“This is the equivalent of the user’s wallet. You want to be able to take your cards and use them in whatever system. How to do that has now been fully documented, but we need that included under the open-specification promise,” Olds said. Without Microsof’s acquiescence, import and export will only be possible between Higgins systems, he said.

I really like Microsoft Cardspace (see our review here) …Microsoft has done a lot of new groundbreaking work here. The issue with the Higgins project is that its gonna provide a card management client based on the Java based Eclipse platform. This would ensure that the product works for Linux and Mac and any other client that supports Java including Windows. This makes it tricky for Microsoft, as by giving up the patent rights, they will be essentially creating an open-source competitor for one of the key technologies in Vista. Not only will Higgins based CardSpace product take away one of the major selling points of Vista, it might even provide a web client implementation, which challenges the raison d’etre for an expensive desktop OS like Windows. On the other hand, an open source implementation of CardSpace functionality might generate a lot of free buzz and user education for a fairly new and unknown CardSpace functionality.

Overall, I can see the reasons for Microsoft’s reluctance in granting a license to Higgins. This is a complex decision…I won’t even be surprised if Microsoft rejected the request altogether, although I do think the right course of action would be to work with Higgins and try and advance this crucial technology together with open-source community.

Getting Rich off Those Who Work for Free

Fascinating piece in the Time Magazine, titled “Getting Rich off Those Who Work for Free” by Justin Fox, about how the new wave of open-source kind of projects are creating real riches for some:

It might seem very odd to look to a long-dead Russian anarchist for business advice. But Peter Kropotkin’s big idea–that there are important human motivations beyond what he called “reckless individualism”–is very relevant these days. That’s because one of the most interesting questions in business has become how much work people will do for free.

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Open-source, volunteer-created computer software like the Linux operating system and the Firefox Web browser have also established themselves as significant and lasting economic realities. That’s not true yet in the worlds of science, news and entertainment: we’re still figuring out what the role of volunteers will be, but that it will be much bigger than in the past seems obvious.

“The question for the past decade was, Is this real?” says Yale law professor Yochai Benkler. “The question for the next half-decade is, How do you make this damned thing work?” Benkler is a leading prophet of today’s gift economy, and he fits the part:

What might those things be? Take the case Benkler makes in his 2006 book, The Wealth of Networks (available, free, at www.benkler.org) for the economic benefits of “peer production” of software and other information products–from journalism to scientific research to videos of people mixing Mentos and Diet Coke. Peer production by people who donate small or large quantities of their time and expertise isn’t necessarily great at generating the original and the unique, but it’s very good for improving existing products (like software) and bringing together dispersed information (Wikipedia). Often better, in Benkler’s telling, than corporations armed with copyright and patent laws.

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Clever entrepreneurs and even established companies can profit from this volunteerism–but only if they don’t get too greedy. The key, Benkler says, is “managing the marriage of money and nonmoney without making nonmoney feel like a sucker.” In software, where IBM and other companies charge billions of dollars to install and run otherwise free Linux systems, this seems to be working–in part because Linux volunteers can make money from their expertise and there’s a clear understanding of what one can charge for.

In other fields, it’s not so clear. In a critique of Benkler’s work last summer, business writer Nicholas Carr speculated that Web 2.0 media sites like Digg, Flickr and YouTube are able to rely on volunteer contributions simply because a market has yet to emerge to price this “new kind of labor.” He and Benkler then entered into what has come to be widely known in Web circles as the “Carr-Benkler wager”: a bet on whether, by 2011, such sites will be driven primarily by volunteers or by professionals.

I usually love Nick Carr’s blog, but on this one I tend to agree with Benkler…People who set up open source systems do setup schemes to reward the participants in a number of non-monitory ways. Some of these rewards are recognition as a leader in the community, or enabling users to connect with other members or to enable user to share their content (youTube) with their family and friends. Most of the users find these to be suitable reward for their efforts and don’t worry about the owners of such establishments getting huge chunks of money.

I think a good parallel for the community sites on the web is hot night clubs…These clubs (like club 52 in NYC) attract a lot of people and charge substantial cover charges in addition to obscene amounts for beverages etc. and still typically have a line of people wanting to go participate. Going by Nick Analysis, such popular establishment are just exploiting their visitors (much like youTube etc.) and don’t really deserve the profits they get. I tend to think that instead of disparaging such businesses, we should be appreciating and learning from them as they are able to create an environment where community members want to participate. I think they fully deserve their riches and their rock-star statuses.

I think at the bottom of it, we need to recognize that non-monitory rewards can just be as effective as financial incentives. Human beings are really social creatures, and social interaction and recognition can be a powerful motivators for most people. Its no wonder solitary confinement is considered a punishment…I know its a hard think for most efficient market advocates to admit(full disclosure, I actually studied at U of Chicago) but I think the facts are stacked against them…

What do you think?