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Open Source Economics and Why IBM Is Winning 146

Posted by kdawson
from the committed dept.
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!"
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Open Source Economics and Why IBM Is Winning

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  • by 5, Troll (919133) on Friday April 13, 2007 @08:21AM (#18716733) Journal
    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.
  • 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?

    • Re: (Score:3, Informative)

      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 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. Ford Motor Co., just a few years ago, was the #2 automaker in the world. They've been suppla
      • 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. 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.
        • 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 lb. Gorilla, has failed to capture the personal finance market in any significant way with Microsoft Money, despite the fact that when the fight began, Intuit was a tiny little company by comparison.

          Better?

        • by profplump (309017)
          But they weren't big companies when they started. They *became* big companies as part of beating K-Mart.
    • Re: (Score:3, Funny)

      by Vexorian (959249)
      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.

    • 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.
      • by tomhudson (43916)

        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.

        ... umm ... the dot.bomb era was almost a decade ago ... how is this "news"?

    • It's news because some idiots [microsoft.com] will tell you there's not business model that will work at all. To them, and many others, the fact that small and large businesses are not only possible but exist and are thriving is the kind of news that contradicts previous lies.

  • Old news (Score:5, Insightful)

    by BibelBiber (557179) on Friday April 13, 2007 @08:24AM (#18716755)
    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 (Score:4, Insightful)

      by computational super (740265) on Friday April 13, 2007 @08:47AM (#18716945)

      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"...

      • Re: (Score:3, Insightful)

        by Coryoth (254751)

        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 then hands on experience on open source projects related to the hiring field is going to look much more valuable than a CS degree with no promise of actual experience. That could easily lead to a trend where getting a degree is much less important than manag

  • 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/computer-2007-article.html [riehle.org]

    IBM has nothing to do with the origins of 'Open Source' or Free software for that matter.. they just tagged along.
    • by jkrise (535370) on Friday April 13, 2007 @08:27AM (#18716789) Journal
      Oops.. sorry, wrong link. Corrected here:

      http://perens.com/Articles/Economic.html [perens.com]
      • Re: (Score:1, Interesting)

        by Anonymous Coward

        I refuse to accept articles with bullshit arguments.

        If Open Source Works, Why Don't We All Build Our Own Cars?

        The author poses this questions, tries to discuss economics, but never mentions the fact that the reason you don't make your own car is because you are able to make youself better off if you specialize in one thing and don't make the car (unless you are the best car maker). its called Comparative Advantage. Tell the author to look it up.

        Also, where does he get his numbers from? "Failure Rate of Consortium and Non-Open-Source Collaboration" is "Perhap

  • In other news : alea jacta est
  • Economic insanity (Score:5, Interesting)

    by HangingChad (677530) on Friday April 13, 2007 @09:10AM (#18717189) Homepage

    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.

    • Re: (Score:2, Insightful)

      by maxume (22995)
      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 its very nature the lowest margin business(because higher margin businesses are more sensitive to things like quality), and to some extent, the least capital intense(because there is generally less political risk in developed countries -- Germany is as unl
    • "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
      • 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. If you're a 20,000 employee corporation and you need some software that everyone else also needs, the open source model will almost always provide it at a tiny fraction of the cost of buying a commercial license to it.

        The collaborative model also carries added costs. There's the cost involved in managing the multiple-company development (e.g. Who's in charge?).

        This is in no way inherent in the op

        • "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."

          It might not be inherent in the open source model, but it was I was responding to. 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.

          "Linux
          • Re: (Score:3, Interesting)

            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 understand. My company uses a lot of open source software (as well as closed source). If we need that software to do something it does not already do, we either have a developer code that, or pay someone else to do so, then that code gets contributed to th

      • by zotz (3951)
        "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 than the members pay in licensing currently? Couldn't the associations oversee the work so the individual members did not have to deal with the day to day issues if they chose not to? Wouldn't this shift things back the other way?

        all the best,

        drew

        http://w [youtube.com]
        • Re: (Score:3, Insightful)

          by dan the person (93490)
          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 Japan couldn't fund a better wordprocessor then MS Word, Wordperfect, or openoffice etc. Free market competition and economies of scale.

          Do you think the Association fo Computing Machinery could fund the best software development environment for their needs?
          • by zotz (3951)
            "No. In the same way the writers institute of Japan couldn't fund a better wordprocessor then MS Word, Wordperfect, or openoffice etc."

            Fund it, not write it.

            all the best,

            drew
            • Fund it, not write it.

              So you think a bunch of novelists are best qualified to implement a word processor, or a bunch of architects are best qualified to implement a CAD program?

              Pray, let me not fly on a plane designed by the passengers.
              • by zotz (3951)
                Not implement, pay for it. Fund means pay for.

                all the best,

                drew
                • OK you got me confused now. I was talkign about funding it in the first place.

                  No. In the same way the writers institute of Japan couldn't fund a better wordprocessor then MS Word, Wordperfect, or openoffice etc. Free market competition and economies of scale.

                  Do you think the Association fo Computing Machinery could fund the best software development environment for their needs? Who needs gcc, eclipse, or Visual Studio? Better to centralise our efforts surely?
                  • by zotz (3951)
                    "Do you think the Association fo Computing Machinery could fund the best software development environment for their needs?"

                    Sure. Why not then?

                    "Better to centralise our efforts surely?"

                    I don't think I ever mentioned centralising efforts. (You have to read carefully perhaps to get that. Not sure.)

                    all the best,

                    drew
        • "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 to do that is going to come from? Membership in AIA is about $210 a year already.
          • by zotz (3951)
            "And where exactly do you think the money going to do that is going to come from?"

            Perhaps I wasn't too clear.

            Are the members paying yearly licensing fees (or average yearly purchase costs) for their CAD programs now? If you could wink and ignore the chicken and egg problem, couldn't they fund the Free Software replacement with a portion of those fees? perhaps they would need to pool with their other continent/country counterparts?

            all the best,

            drew
            • "If you could wink and ignore the chicken and egg problem, couldn't they fund the Free Software replacement with a portion of those fees?"

              If part of the problem is ignored, just about any solution will suffice. There's all kinds of possible cooperative efforts between companies that might save them money in the long run. Why doesn't this happen more? Because companies usually are focused on their core business and becoming involved in other activities that are not related to the core can be a major distract
            • by clodney (778910)
              If they have a problem with AutoCAD, and they can bring that kind of numbers to bear on the problem, don't you think that AutoDesk (or whomever makes AutoCAD) is going to be fairly solicitous of their needs?

              The people that sell AutoCAD want to increase sales, so will tend to implement whatever large groups of people are asking for. If the group is large enough that their defection would be a significant hit to the market leader, the dollars to be made satisfying that market are also significant.
              • by zotz (3951)
                "If they have a problem with AutoCAD, and they can bring that kind of numbers to bear on the problem, don't you think that AutoDesk (or whomever makes AutoCAD) is going to be fairly solicitous of their needs?"

                Lip service perhaps. These days, there seems to be more of an effort to achieve customer lock in that to meet customer needs.

                all the best,

                drew
      • 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 that's more appropriate) to save and load AutoCAD-compatible files. Yes Blender is a pain if you want to do AutoCAD-type work, but at least it allows you to get the job done.
        2) Add the most important (missing) AutoCad features to Blender.
        3) Add component
        • "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 already a number of $20-$50 packages that will do the trick, no additional development is required.
    • by mpapet (761907)
      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. Economically, we are in a situation in the technology market where a monopoly has become a price maker. (look "price maker" up on wikipedia) There are severe limitations in the market for computer software and hardware as a result of this monopoly.

      Instead of paying
    • That also cuts for commecial proprietary software, since distributing the costs on lots of consumer is what they do. In fact, your argument works only against in-house developped software.

      FOSS have a clear advantage if you think about multi layered software, where a stack of libraries is used by another stack of libraries, and so on until you get to the user program. Proprietary software's cust grows exponentialy when the number of stacks grows, that happens because capital wants to be rewarded every time

    • by shmlco (594907)
      "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."

      I have a one-man consulting company. I can buy Photoshop CS2 for $600 and have it here tomorrow. Who can I give $500 to in order to get GIMP up to the same level, and can he have the work done by tomorrow?
  • by Anonymous Coward
    IBM is winning because IBM sell hardware, and since you can't copy hardware...well you are forced to buy at the price asked if you need something from them....
    Open Source is only a solution for IBM to maximize its margin by lowering the cost developpement by shifting cost to other companies or naives individuals.

    and of course, open source still offers NO guarantee of working.

    but well at least, you can have it for free.....

    • by mark0 (750639) on Friday April 13, 2007 @09:26AM (#18717393)
      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
      • 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-color graphs are simply restating something Joel On Software said a while back in words.

      • IBM appears to be winning because they did the appserver better than Weblogic. This graph is a little old but still relevant -

        http://www.realmeme.com/Main/miner/java/AppServers Dejanews.png [realmeme.com]

        I've been a Websphere bigot for the past seven years but cost issues moved me into the JBoss space this year and I've got to say...

        I can see serious issues with IBM's profit margins in the near future.
    • IBM is winning because IBM sell hardware, and since you can't copy hardware...well you are forced to buy at the price asked if you need something from them.... Open Source is only a solution for IBM to maximize its margin by lowering the cost developpement by shifting cost to other companies or naives individuals.

      But if you are a purchaser of hardware, an open source solution guarantees a few things that closed source doesn't:

      No conflict of interest features in the software-- such as software lock-in me

  • Open Source Strike? (Score:1, Interesting)

    by Anonymous Coward
    First of all, there is a lot of money spent on Open Source (distros, hardware vendors, service providers, people who would've otherwise paid for s/w, but now produce stuff with free tools, etc). We are talking about millions of $$ which would be enough to give $10k to every oss project out there.

    From all this money a tiny 1% actually reaches OSS developers and it is usually only for mainstream projects. The cash flow is broken. Sure, OSS people give away their work for free, but if money is made from it,
    • Re: (Score:2, Insightful)

      by KenRH (265139)
      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 as
      long as the projetcs commuity is large enough to drive the software forwards.

      That said, there is ways to make money from open source, mostly by services
      like consulting, customising og support.
    • by eraserewind (446891) on Friday April 13, 2007 @11:23AM (#18718879)
      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)
  • Dont understand it (Score:4, Insightful)

    by 140Mandak262Jamuna (970587) on Friday April 13, 2007 @09:18AM (#18717279) Journal
    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?

    • Re: (Score:3, Interesting)

      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 maintenance. Pricing schemes for education help remove the tendency of price sensitive, but highly capable university clients to move to cheaper, open source products. None of this really relates to the models presented which are a point case revenue model

    • by MartinB (51897)

      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.

      Well of course it is. Everyone should have the cho

  • myopic logic (Score:3, Interesting)

    by chaves (824310) on Friday April 13, 2007 @09:26AM (#18717401)

    "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.

  • by rumli (1066212)
    Neither the article nor the summary mentions IBM.
  • good article (Score:4, Insightful)

    by MarkWatson (189759) on Friday April 13, 2007 @10:12AM (#18717881) Homepage
    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.
    • the development of such a rich open source ecosystem that the cost of building unique applications is drastically reduced

      My experience is that a rich ecosystem is not always what you want to reduce the cost of building applications... because a rich ecosystem includes mosquitos and malaria and rabies and gangrene. It doesn't matter whether it's a proprietary or an open source "ecosystem", either: the ability to cherry-pick the good stuff and run from the bad like it was a swarm of radioactive bees is alread

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