Sunday, November 23, 2008

Open Source Economics

I was talking to jason a few weeks ago, actually it must be more like 6 or 8 weeks ago, about open source software and he was questioning how it actually works from a business point of view and I didn't have a very coherent answer to give to him. I've never really thought much about it and I am sure that someone somewhere has probably delved into it in great detail. My answer may still not be that coherent but for what it is worth; here it is.

Restating the question so I can keep in mind what I am trying to answer; the question is "How can I make money if I open source my creative work, thus enabling my potential or real competitors to compete with me on a level playing field?"

I think that this should be split up for the sake of discussion into several statements;

1. "The objective of the person making the statement is to make money; not indulge in an altruistic venture."
Although some people are altruistic in parts of or in some rare cases all of their lives; most people are not and I would find it pretty hard to believe that all open source developers are entirely altruistic. Since open source software doesn't seem to be going away something must be driving it and I think that to answer this, one should consider the net benefit of open source to the creators of the creative works rather than the benefit of the created work in isolation. If one were to give away a small value, being the time invested in creating the creative work, but in return receive a much larger value being the time invested by other people in their creative works which one uses; although no money has changed hands, value certainly has and one would be a net beneficiary.

2. "Releasing a creative work under an open source license really is "giving it away" for other people to use pretty much as they please within the limits of the open source license."
Software, like knowledge, has an unusual property in that it may be shared as in "given away" with both the giver and receiver maintaining full use of or access to it. I think one of the basic problems with understanding open source is the very human resistance to "giving it all away" which is in essence what one is doing as the author of an application or work released under an open source license. Again, one really needs to look at net benefit rather than the isolated return from the creative work in question because although you are indeed "giving it all away" the "all" only describes what is being given away and not what is being received. As long as what is received is of more value than that given away, there is a positive reason to participate.

3. "Competitors really would have access to your creative work and therefore be able to compete against you on a level playing field."
True, competitors really would have access to your creative work but that does not necessarily mean that they are competing against you on a level playing field. There are many aspects that together contribute to the succcess of an enterprise and only some of them relate to the actual product being sold. Alternatively, if what one is giving away isn't in the same playing field that one competes in, the whole question goes away altogether because it may not be possible for a competitor to really use it against you.

I would like to divide businesses up into two categories for the sake of this discussion; those that develop and sell software (open or closed source) and those that don't actually sell software but use software in the production of something else that people pay for be it a services or physical goods. I think that the first category of software creators is in for a rough ride and may even be doomed mostly because the second category of businesses are constantly looking for ways to decrease costs in the production of their services or physical goods. If one way for them to do this is to create applications that are open sourced and in return they gain access to a much higher value by being able to use other peoples open sourced applications; they will do so. Moreover, since they are not trying to derive income from the sale of the actual software produced as it is a almost a by-product of whatever they are actually producing, it is going to be very difficult for the first category of software developers to match. In other words, it is in the interests of those businesses whose products are not software to support open source initiatives since for relatively small amount invested, they can derive substantially more value than invested. Of course there are always going to be free-loaders, those who use but do not contribute anything in return but aside from the unfairness of this, as long as there is a net benefit to those that do contribute; they will continue to do so.

For those that produce software products that they sell and in turn pay for the software products used in the production of their own products there is no moral dilema between closed and open source but they had better hope that their product isn't or doesn't become someone else's by-product. By "someone else" I am not meaning the monolithic business typically thought about but could be universities, businesses or just groups of interested individuals whose interest in the product isn't monetary.

For those that produce services or physical goods, it is in their interests to support open source software since by doing so they are able to derive disproportionate value for the value invested and if they don't have a moral backbone, this ratio tends towards infinity since they don't pay for anything but simply decrease costs.

So, the simple answer is "You can't" but that is not to say that open source does not have a valuable part to play in business in the future.

I feel sure that I will revise this at some later stage but these are my thoughts to date.

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