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Saturday, April 14, 2007

The economics of open source

Dirk Riehle has written an interesting paper for IEEE on the economic motivations of stakeholders in open source software. Riehle leads the open source research group at SAP Research, a research organization within SAP that identifies emerging IT trends and conducts R&D activities for new technologies. As such, Riehle's insights are interesting in that they may reflect the view toward open source within SAP.

There are a wide range of business models within open source. Reihle points out that there are actually two main forms of open source: community open source (products that are owned and developed by a community of developers) and commercial open source (products that are owned by a single commercial organization). The Apache web server is an example of community open source, while MySQL is an example of commercial open source.

Three stakeholders
He then goes on to analyze the economic incentives of open source from the perspective of three groups of stakeholders: system integrators, software vendors (closed source and open source), and individual developers/employees.

Of the three groups, system integrators stand the most to gain from open source. Open source takes out a large part of the system integrator's cost structure, the part that goes toward software. This frees up money for the client to spend on additional services, or allows the system integrator to lower its price-point, making its services more affordable and increasing volume. System integrators prefer community open source, because its cost is lower than commercial open source, and there is no "vendor lock-in" to the owner of the software.

There's a lot more in Reihle's paper, including an analysis of the impact of open source on the software developer profession. In short, open source "makes life more complicated for employees." On the one hand, a developer supporting an open source product can be more easily replaced by an outsider that has similar experience with the same product. On the other hand, a good open source developer can build expertise that has value to other employers, increasing his or her marketability. He writes,

A developer who chooses the right project can gain and maintain a position that will increase salary-negotiation power and job prospects. The developer will enjoy those benefits as long as the project is of significance to potential employers.

Open source reinforces the trend toward employees becoming "free agents."
Winners and losers
Reihle's article does a good job in explaining the economic incentives by open source. To me, it makes it easy to understand why IBM--which is today largely a services firm--is one of the strongest proponent of open source, especially community open source.

It also suggests why many traditional vendors of closed source products seem to have such a hard time with profitability these days, leading to the huge amount of acquisition/consolidation activity we've witnessed in the past five years. Unless you are an 800 pound gorilla (like Reihle's employer, SAP), the cost-structure of closed source development is just not a good way to make money. In many markets, it might just be better to embrace some sort of open source development and make money higher up the value stack, in maintenance, support, integration, and customization.

I think we are still early in the development of business models around open source. Ten years from now, things will be clearer.

There's a good discussion on Slashdot, on Reihle's article.

For another good piece on the economics of open source, see Bruce Perens's article, The Emerging Economic Paradigm of Open Source.

Related posts
The disruptive power of open source
Why organizations choose open source software
Key advantage of open source is NOT cost savings
Open source: turning software sales and marketing upside down
Compiere's open source ERP business model and growth plans

by Frank Scavo, 4/14/2007 10:40:00 AM | permalink | e-mail this!

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