Open Source Economics and Why IBM Is Winning

driehle writes "In an article published in IEEE Computer magazine I recently looked at the economics of open source. I argue that large system integrators will do best and that open source startups will keep struggling. For developers, open source creates independence and new career paths as committers, while non-committers will fall on hard times. The race is on!"

Saw this earlier this month in Computer magazine

I came across Dirk Riehle's excellent article: "The Economic Motivation of Open Source Software: Stakeholder Perspectives" while reading the April issue of Computer on the train this morning. Thankfully, he's also put it online.

While there's certainly some truth in the example of how loyalties are shifting - and individuals might stay loyal to a project (or set of projects) across employers, just as IT professionals have always carried skillsets, language preferences, etc. across employers - I don't think this necessarily means more movement in this direction, for a few reasons:

1. Developers get involved in multiple projects. Core open source folks might start as contributors and become committers on a single project, but that is more a reflection of their interest in being involved than it is of their interest in that specific project - if the employment environment (quick Optaros plug here?) is explicitly supportive of that engagement across projects developers might discover new loyalty.

2. If the employer can uncover enough opportunities for developers to get paid to use their favorite project - for example, keep a developer busy working on Drupal based applications - they might accept the variety of new projects as compensation for the single employer. The joys of systems integration and consulting work is that if you change client projects frequently enough that it can be like changing jobs without all the paperwork.

3. How much of the whole "employees becoming 'free agents'" thing is really voluntary to begin with, at least on the IT side? Maybe a better way to look at this is to say that Open Source increases the level of portability of the knowledge an IT worker gains over time with any single employer, or decreases the barriers to leveraging that existing knowledge in a new firm.

Regardless it's a very good read for business stakeholders who struggle to understand why anyone wants to open source an in-house project or contribute to an existing open source project.

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Look at his name...

How is this different from any other business?

I argue that large system integrators will do best and that open source startups will keep struggling

Substitute restaurants, or retailers, and the situation is the same ... most smaller ones fold within 5 years, some extyablish a niche, some grow, and some get bought out.

This is so pre-dot-com and so obvious that its not even funny. What next: 2+2=4?

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It takes commitment, and that's one of the points of the article, I believe. Smaller businesses can succeed, but it takes an entrepreneur who's totally committed to the business. And by 'committed' I mean so committed that they should be committed. And

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And large companies don't always do well. Kmart was once one of the top 5 largest retailers in the country -- until Wal*Mart and Target came in and ate their lunch.

The examples don't support your statement in any way. Wal*Mart and Target ARE big companies.

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The examples don't support your statement in any way. Wal*Mart and Target ARE big companies. Toyota IS a big company. So they succeed at the expense of another big company, so what? They are just doing the big company thing better.

Okay. Microsoft, the 800

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But they weren't big companies when they started. They *became* big companies as part of beating K-Mart.

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We couldn't decide the other day

I was saying 2+2=11
My friend insists 2+2=10

Now you come and tell us 2+2=4, thanks for worsening the discussion.

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I think he's stating it because open source is not some kind of magic sauce that will make a small startup a resounding succcess overnight, that's a fair thing to state, considering the dot-bomb era.

Old news

Whoever commits to OS projects is likely more involved in the whole process than an outsider who simply tries to skim off some of the profit. As a customer I'd rather spend my money on a company that is involved in committing to what I pay for. After all developers tend to know best what they have done so far.

Re:Old news

That's true... today. However, if corporations start using open source contributions as a yardstick to measure potential candidates en masse, the landscape will change dramatically. Consider college - used to be, you didn't go to college unless there was really a point in learning for the sake of learning. Them employers started demanding degrees. All of a sudden, degree mills start popping up, grade inflation makes 4.0 GPA's meaningless, colleges are pushed to teach "practical" "skills"...

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However, if corporations start using open source contributions as a yardstick to measure potential candidates en masse, the landscape will change dramatically. Consider college - used to be, you didn't go to college unless there was really a point in learning for the sake of learning. Them employers started demanding degrees. All of a sudden, degree mills start popping up, grade inflation makes 4.0 GPA's meaningless, colleges are pushed to teach "practical" "skills"...

What I find interesting is that corporations using open source as a yardstick has the potential to reverse that trend at colleges, at least as far as computer science goes. If open source projects in general become widely recognised and highly regarded th

Economics of Open Source - Bruce Perens

For a really useful and insightfult article on Open Source Economics, I thought Bruce Perens' article was the best.... no catchy graphs, tables and colours, but still very thoughtful and well-researched.

http://www.riehle.org/computer-science/research/20 07 [riehle.org]

Re:Economics of Open Source - Bruce Perens

Oops.. sorry, wrong link. Corrected here:

http://perens.com/Articles/Economic.html [perens.com]

Economic insanity

Millions of people and businesses all buying the same software is economic insanity. It's not at all the same thing as millions of people all buying the same kind of car. A car has intrinsic value related to the cost of the components, software doesn't. Software sunk costs are incurred during development. Once complete the only ongoing costs, outside maintenance, are for distribution and the media. You don't have any intrinsic value of metal and parts in software.

Instead of paying money to buy software, a company can instead choose to pay less money to modify an open source project to meet their needs and leverage the contributions other companies have made modifying the same project to their needs. It's game theory in action. Five companies all pay a little to modify an open source project instead of all five paying a lot for some big box software solution. Collaborate with competitors in the same field for the common product they all need, then compete in pursuit of their market. Game theory.

What was needed for the theory to become disruptive to reality was a base of open source software to start with. We've had that for a while. All the pieces are there. And, as the author pointed out, it presents an opportunity for integrators.

Software really does fit the utility economic model better than a manufacturing model. Which is one of the things that really scares me about the US shipping manufacturing capability overseas and relying on a brain share economy.

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The US still exports the second most real goods in the world. The leader? Germany.

http://www.bbc.co.uk/blogs/thereporters/evandavis/ 2007/04/the_state_of_trade.html [bbc.co.uk]

And it is better than that. The manufacturing moving overseas because of labor prices is by

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"Instead of paying money to buy software, a company can instead choose to pay less money to modify an open source project to meet their needs and leverage the contributions other companies have made modifying the same project to their needs. It's game theo

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It's not at all clear that modifying an OS project is going to cost less than buying one.

Of course not, but conceptually, the larger a project is and the more used it is, the cheaper it should be by comparison. If you're a ten person company and need a special calculator, it may make a lot more financial sense to buy a commercial offering. I

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"This is in no way inherent in the open source model. Open source does not even mean developed in house."

I was responding to this:

"Collaborate with competitors in the same field for the common product they all need, then compete in pursuit of their market.

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I was responding to this: "Collaborate with competitors in the same field for the common product they all need, then compete in pursuit of their market." It might not be inherent in the open source model, but it was I was responding to.

I don't see why you're interpreting "collaborate" to imply that the collaboration has to take the form of hiring an internal developer, instead of hiring a contractor, or simply providing funding to a project along with recommendations.

In any case, I don't think that many open source projects are going to change priorities in response to outside companies' needs unless the contribution is very high.

I'm not sure I

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"I think you've rather "cooked the books" a bit here."

OK, but haven't you done the same thing?

Don't you think that The American Institute of Architects (for instance) could fund the development of a Free CAD application to suit their members needs for less

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Don't you think that The American Institute of Architects (for instance) could fund the development of a Free CAD application to suit their members needs for less than the members pay in licensing currently?

No. In the same way the writers institute of Jap

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"Don't you think that The American Institute of Architects (for instance) could fund the development of a Free CAD application to suit their members needs for less than the members pay in licensing currently?"

And where exactly do you think the money going

Re: AutoCad "cooked the books"

You're forgetting one thing. Most people don't need 100% of the features in an application like AutoCad and it's often possible to bootstrap other applications.

Here's one approach you could duplicate AutoCad:
1) Modify Blender (or some such 3D modelling app

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"Most people don't need 100% of the features in an application like AutoCad and it's often possible to bootstrap other applications."

Yes I'm sure there's a lot of non-architects who don't need the power of an application like AutoCad. For them there's alre

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Millions of people and businesses all buying the same software is economic insanity.

No, it's not. The people that spend the money on software more than once get at least as much value out of it as they gave to the entity selling the software. Economicall

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Why would I, as a business owner, give my good, custom, closed software away to competitors that don't have anything like it, just in the hopes that my software will be marginally improved? In the meantime, assuming that my competition CAN improve my softw

Simple answer: core competencies

> Why would any company willingly give up any competitive advantage? That's business suicide.

Not really. The key phrase you're forgetting is "core competencies". Companies collaborate outside their core competencies all the time. It's a great way of low

Dont understand it

Though I like what he says, I am not sure I understand it well. His figure three has comparison of prices quoted to customers for the open and closed sources. He shows constant price quoted, irrespective of the number of items sold for the closed source model. But we all know that it is not true. MSFT charges much much lower price/per unit sold to large customers. Infact "unlimited use licenses" sold to Dells and HPs mean that they pay a flat fee irrespective of the number of units sold.

MSFT also has very "innovative" pricing schemes. In one instance, paying a flat fee per every computer owned by the univ, whether or not it has Office installed, was cheaper than paying per copy of Office. Effect of such pricing is that, there is no incremental cost to a dept to run Office. To use any other software, the dept head has to budget for it and justify the cost to the bean counters.

All I know is this, MSFT is far more sophisticated in playing Corporate pricing games, budget games and such things than any simple model used for research purposes by Open Source advocates.

My most common grouse is that the key is Open Standards, not Open Source. If MSOffice and OS products conform to a open standard and anyone can develop applications that cleanly interoperate with them, the playing field will be level. There will be many vendors, some playing at the Open Sources and some in Free Software, some closed and for-profit players. Without leveling the playing field one can not see how Open Source is going to win. But what do I know.

If I am so smart why am I coding for a living instead of smooching with the bean counters in the country clubs?

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All I know is this, MSFT is far more sophisticated in playing Corporate pricing games, budget games and such things than any simple model used for research purposes by Open Source advocates.

Most of what you cite are simply strategic pricing by MS. Discounts for large customers help motivate buyers to remain loyal if they want to remain large customers instead of be undercut by the competition. This is differential pricing, classic monopoly

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My most common grouse is that the key is Open Standards, not Open Source. If MSOffice and OS products conform to a open standard and anyone can develop applications that cleanly interoperate with them, the playing field will be level. There will be many ve

myopic logic

"While this explains some of the volunteer work, it doesn't explain why companies today employ people who contribute to open source projects on company time."

Maybe it is because the company sees the open source project as a strategic component to its product or service offerings and its in their best interest that the project succeeds and they can influence its direction?

"Il-Horn Hann and colleagues found that the salaries of Apache Software Foundation project contributors correlated positively with the contributor's rank in the Apache organization [6]. They therefore concluded that employers use a developer's rank within the foundation as a measure of productive capabilities."

For me, that is not right conclusion, or at least not the only one. It is often the case that people contributing to open source on company time only started contributing because they were told to by their employers. A developer salary at his company and their rank within the open source project are both determined by his technical skills and teamwork abilities.

ibm?

Neither the article nor the summary mentions IBM.

good article

I especially liked: "Every dollar a system integrator saves on license costs paid to a software firm is a dollar gained that the customer might spend on services."

My vision for the future (from an independent consultant's viewpoint) is the development of such a rich open source ecosystem that the cost of building unique applications is drastically reduced. As development projects become less expensive, companies and organizations will fund more projects because the cost to benefit ratio gets lower - and "fringe" projects start to get funded.

Re:I can't wait for RMS to die

No, actually, I think Stallman is a good counter-balance to the 'earn money at all costs' types out there. His extremism balances out the other extreme and let's us normal people see both sides of the equation more clearly.

I may not like the man, and I may not like his zealotry, but when looked at as a piece of the whole, he needs to be there.

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I'm not too keen on Stallmans ongoing political agenda, but I cannot imagine an open source world without his keystone contributions.

His implementation of Lint (Splint) has reduced me to nervous wreck on more than one occasion, but it did improve my C codi

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You replied to your own post like that!?

Here, have an ego cookie...

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how will your third post et modded down?

I vote for "redundant"

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well, you were right. I'd have gone for redundant as well, but only because there's no tag 'dorkish'

what can I say, it's been a year and I've never deviated from excellent karma. Time for a change.

It's really hard work though, I've been at it all day, and

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Dude. If you have nothing better to do than fuck with your karma on Slashdot, move out of your mom's basement and find a real job.

Re:OSS only shifts the problem, dont solve anythin

IBM is winning because IBM sell hardware

Hate to burst your bubble, but IBM only makes a bit more on hardware than it does on software. IBM is winning because they sell services. Have a look at their 10-Q [edgar-online.com]

In millions:
Hardware: 5,583
Software: 4,406
Services: 12,017

Joel Spolsky said it first

Commoditize the complement to what you are selling.

If you are primarily selling services, software that you need to provide those services is a cost. If you commoditize software, you create more opportunity to make money from services. Those fancy four

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Agree completely. Their services branch will recommend and implement Windows as your corporate desktop, and whatever else proprietary as your business tools.

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In latin: alea iacta est.

oh

theres latin grammar police in slashdot too now eh ?

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theres latin grammar police in slashdot too now eh ?
No, it's the latin spelling police.

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My gods, man, didn't you see Indiana Jones and the Last Crusade? By jumping on the 'j' unused in Latin you would have Alfred Molina'd yourself into the abyss, denying yourself a front-row seat to the cool-ass dessication of the head jackass.

See

i dont discriminate

against seats. front row, middle row, rear row, i accept them as they are.

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The basic idea behind open source in not to write software to make money,
but because you need it. You open source it so other people that has the
same or simmilar requirements can chip in.

Then it doesent really mather that 98% of your users never contribute

Re:Open Source Strike?

Look, you should never do an Open Source project to get hired somewhere. You should do it because you enjoy doing it and it's your hobby. IBM earns multi millions each year. Red Hat earns less multi millions, but multi millions all the same. They don't need your charity. <your niche interest community goes here> however benefits greatly from any contribution you make. If you want to get a job somewhere special, then first get a job somewhere else slightly less special.

The cash flow is not broken. The cash goes to those who deliver what the customer wants, and who charge for it. Firstly, IBM, Red Hat and the like. Secondly, the makers of useful products that charge for them.

The makers of useful products who give them away, on the other hand, I thank from the bottom of my heart, since you saved me filling out a PO and numerous levels of approval.

it would be good if the people who've put effort on something can get a fair contribution back.

They can! Feel free to charge for your product! If it's any use, somebody will pay you for it. But you can't both give it away and charge for it.

Don't get me wrong, I am not dismissing Free Software (which has legitimate political aims) or Open Source (which has legitimate practical aims), but as an individual you should only contribute where you would anyway contribute. i.e. in projects that qualify as "your hobby" (or "your mission" if you have strong beliefs)