Taking the Bazaars out of the Cathedral

by Petr Hrebejk

As the success of Linux, Apache and other open software grows, corporate participation in open-source projects and use of open-source software is likewise increasing. Not surprisingly, so are the attacks from open source's critics. After dismissing open source as a fringe movement for years, these critics now seek to thwart its growing success by, among other things, casting doubts upon the economic viability of open-source business models.

These criticisms--that open-source business models are built on nothing more than the hope that by giving software away vendors will be able to sell users something else, such as service and support--raise some fundamental questions, such as:

  • What is the motivation behind developing open-source software?

  • Why are big companies joining and initiating open-source efforts?

  • Why would a software Goliath request the protection of law against an open-source David, from the same government that intends to penalize that company for antitrust violations?

  • Are any of the companies involved really profiting from open source?

There are some easy, emotionally satisfying answers to the questions above, such as "The good side is winning, and volunteers working for free will save the software world." But reality is rarely so simple, and economic reality never is. Businesses (at least those that survive) do things because it is in their interest to do them.

Are there volunteers who work on software for free? Of course. Do they derive some benefit from that? We'll answer that in a moment. But no matter how many volunteers are involved, there are probably not enough to write all the code needed in the world. So even though open-source adoption is growing rapidly, it is not realistic to forecast the imminent demise of commercial software. However, the definition of what constitutes viable commercial software is changing dramatically.

At the dawn of the Open Source movement, writer Eric S. Raymond made an interesting business case for open-software development in his essay "The Cathedral and the Bazaar." That was several years ago, before Netscape, influenced by that essay, made its landmark move of releasing the Navigator source code and starting the open-source Mozilla web browser project that recently produced Netscape Navigator 6. We'll take a complementary approach to Raymond's, addressing these issues from the perspective of economic theory, in a world where there is increasing corporate involvement in open source.

An Economic Analysis of Open Source

Let's start with an analysis of the current state. In the world of PC-based software, Microsoft enjoys what's called a "natural monopoly". There is nothing unusual about this situation; in some areas of economic life, there are circumstances that naturally lead to a monopoly. In software, a number of the criteria are satisfied:

  • Barriers to entering the market--if a company is already using an implementation of something they need, it is very hard to convince them to start using a different one.

  • Barriers for competition--patents, proprietary (non-open) standards, etc., limit a potential competitor's ability to exploit the innovations of those with whom they would compete.

  • As a vendor's business grows, the average cost for reproducing software decreases--this is perhaps the most important criterion. With downloadable software, it is cost-free to produce as many copies of the software as you want, and each download reduces the unit cost for producing that software.

So each unit of software shipped both reduces the vendors' per-unit cost, and each unit increases the barrier to competition. The economics of such a situation dictate that the vendor will be motivated to produce more and more, to gain greater and greater market share and ideally eliminate all competitors. It is predictable that there will be only one winner of such a battle if the average cost is decreasing.

There are three primary ways for a natural monopolizer to defeat its competitors: first, it can buy the small ones. Second, it can start a price war of attrition with the larger competitors. With everyone selling their products without a profit, or perhaps even at a loss, someone will eventually have to give up and concede defeat. The third way to defeat competitors is to secure legal protection against them.

The current monopoly holder in PC software has tried all three approaches, its behavior exactly matching economic theory. It buys a lot of small companies. It sells its products for relatively low prices. And, true to this model, Microsoft is currently agitating for the US government to impose a ban on its greatest competitor--open-source software--and initiated a PR campaign to brand it as "un-American" and a threat to business and intellectual property.

We said that in the end there would be only one winner in an economic environment as conducive to natural monopoly as the software industry. But, the ways of defeating competition outlined above rest on some assumptions:

  • A nonzero cost associated with producing software.

  • The vendor of that software will pass that cost on to consumers of software.

  • The vendor of that software is a legal entity, which itself is controllable via economics.

What happens when a business built on these assumptions encounters a competitor that plays by a different set of rules? Open-source projects are not held accountable by a single set of owners or investors. A price war isn't an option against open-source products being offered for free. There is either regulatory intervention, or there is nowhere to run.

Let's say, for argument's sake, that the software Goliath did succeed in convincing its government to ban open-source software. What would happen then? Not much. Such laws stop at a nation's borders, and in a world where most countries have yet to build an information infrastructure, this would quickly lead to incompatibility and balkanization. It is the software equivalent of economic protectionism--indeed, it is economic protectionism--the same kind that created disastrous economic conditions for the United States in the 1930s.

The companies now promoting open source also have nowhere to run. But they have much more to gain by breaking the existing monopoly and replacing it with an era of open source.

Myths and Realities

There are several myths propounded in the software industry, including the notion that open source-software is "magic pixie dust" or a way to dispose of software a company no longer wishes to maintain. There is also the idea that open source is a way to get developers for free. These myths are patently untrue, and building a business strategy on them would be economic suicide.

All participation in open source can be traced to self-interest, and participation in open-source software development can be seen as a type of barter. Participants donate the code they've developed in exchange for value--the opportunity to be part of something bigger than their own work, to influence the direction of a project to suit their needs and to achieve some measure of social status among their peers. Result? Both the participant and the open-source project get what they need. This is a system of economics, rooted in self-interest. And that self-interest includes, ironically, the desire to see oneself (or be seen by others) as altruistic. Whether a person or business participates in open-source development to make a difference in the world, or to achieve membership in a kind of club, that person is acting in his or her own self-interest.

One benefit that all participants and users do get from open-source software is robust, modular and stable architectures. The reason for this is that all of the participants need to have their needs met. Modularity both reduces the learning curve required for participation and allows individual participants to concentrate on the functionality that directly serves their needs. And, stability is in the interest of everyone.

The Profit Motive

Can anyone really make any money in open source? To answer this question, we have to go back to the basics. Generating sales is one road to profits, but expenses are the other key piece of the equation. So cutting costs can help the profit picture.

Open-source software projects are built on robust, maintainable, self-managing architectures. Companies leveraging these projects have more choice in the labor market, need fewer buildings and use less energy. Best of all, participants in an open-source project are also users of the software. This means that members contribute to the design and creation of the software, providing instant market feedback on product needs. Commercial vendors can still sell support, configuration, consulting and extension software, and their business is that much stronger for the real gains won by participating in open source. All of these factors translate to cost savings.

Conclusions

It is ironic that, by acting as a common enemy to rally against, Microsoft has probably inadvertently done more for advancing the benefits of the Open Source movement than any other company.

There are a number of diverse motivations for getting involved in open source, but the motivations do not affect the outcome. As is usual in a market economy, market forces select the most effective option for getting a job done. When you look at it this way, open source is a set of simple but highly evolved best practices for software development.

Petr Hrebejk is a senior software architect and developer on the open-source NetBeans Tools Platform project at www.netbeans.org, working for Sun Microsystems in the Czech Republic.

Tim Boudreau is a software developer, writer and marketing manager on the same project, also working for Sun Microsystems in the Czech Republic.

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