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Open source as a business model

English version of the original interview "Open Source als Geschäftsmodell" :

Mr. Engelhardt, Open Source Software plays a substantial role in today's ICT world. Small projects like Mozilla Firefox have grown into big software industry players. And companies like Microsoft, Apple and Google are increasingly building on open source projects. Is this kind of commercialization consistent with the original open source idea?
Why not? The idea behind open source is that an "open" form of development leads to better software. This does not -- and never has – implied that open source must be non-commercial.

In fact, the term "open source software" (OSS) was deliberately invented to emphasize this commercial aspect. Originally this kind of software was called "free software." But this terminology forced people to explain that “free” meant “openness” or “liberty” instead of “free of charge” or “not-for-profit.” Or as the Free Software Foundation puts it: “think of 'free' as in 'free speech', not as in free beer.” ( The term "open source software" was invented to sound less ambiguous and more business-friendly. But even the "Free Software Definition" was always clear that “'Free software' does not mean 'noncommercial'. A free program must be available for commercial use, commercial development, and commercial distribution (...) free commercial software is very important."
So the basic idea behind open source software (or free software) never had anything to do with whether a product was commercial or non-commercial. Instead, the focus is on the idea that the principle of openness leads to better software than the closed-source/ proprietary approach. Just as Eric Raymond who claimed in his famous essay "The Cathedral and the Bazaar," that open source is just a more efficient way of developing software.

So why do companies choose open source instead of closed source to develop new products? Is it just a matter of creating a better image? Or are their development costs lower?
In some cases image matters. Other issues can also play a role. For example, customers may want open source code because it is more transparent. Or existing open source programs may be better suited to the task. For example almost all stock exchanges use trading systems based on the Linux open source operating system. These include the New York Stock Exchange, the London Stock Exchange, the Deutsche Börse and the Tokyo Stock Exchange. The reason for this almost certainly involves the quality of Linux rather than any kind of image reason. These kinds of cases depend very much on a case-by-case judgment that a particular piece of software – which could be OSS or CSS – is the best available tool
There is also a broader reason for companies to use open source. It gives them access to the resources of the open source community. Companies get knowledge, creativity and manpower from the OSS community without having to hire and pay programmers. If the software that I need already exists as OSS, then others have already produced it “for me”. All I have to do is customize it to my needs. And I don’t even have to pay license fees. And because OSS is developed on a community basis, many of the people who are involved in the further development of the project won’t be employed by my company. In addition to this there is a culture of mutual support among developers in open source projects. This means that if I have a technical problem, I can post it in a related forum and discuss it with other programmers. (Theoretically this is also possible with CSS, but only for problems which don’t require access to the source code). And finally I benefit from the open system of bug searching and fixing, for example with bugzilla-systems. To sum up: Open Source provides access to external resources so that firms can spend less of their own capital and labour.

So do smaller companies tend to use OSS more than large ones?
Yes, or more precisely: OSS makes it possible for companies to be smaller. This can be seen in the (very few) existing empirical studies that compare ICT companies that build on OSS with those that use CSS code: Companies with OSS-based business models are usually smaller. This is even true for start-ups. Professor Fritsch (Friedrich Schiller University Jena) and I did a study which shows that start-ups that use more OSS-based business models have fewer employees and less initial capital than companies that rely more on OSS-based business models. This means that the OSS companies encounter fewer problems with insufficient start-up capital. Hence, open source strategies seem to catalyze new company formation.

Don’t companies have to protect their intellectual property, at least to a certain extent, in order to protect themselves from imitations?
First of all: OSS is not software without any intellectual property rights. The different kinds of OSS licenses define in a legally binding way, what may and may not be done with the published code. Especially, whether the open source code can be used as direct input for CSS. These terms are enforced with property rights. And since the success of open source products depends on these terms, OSS also profits from a strict enforcement of intellectual property law. Once the licensing rules are accepted, open source takes hold. We even have empirical evidence for this. Professor Freytag (Friedrich Schiller University Jena) and I have looked at how cultural and legal factors affect worldwide OSS-activity. We found out that the ability to enforce intellectual property rights has a positive influence on the OSS activities of a particular country.
For this reason, the question should really be: “Are CSS-based strategies more successful than OSS-based business models in the long term?” Well, unfortunately we have no empirical evidence for this yet. And there are no good theoretical arguments one way or the other. Of course OSS based strategies cannot be used in every case. But in those areas where they work, they seem to be at least as successful as CSS-based business models.

But how can money be made with OSS?
Strictly speaking, one can’t earn money from OSS, except possibly for custom programming services. This is because people can use the software without charge. But software is rarely bought “on its own.” Usually customers buy packages which contain, for example both software and some additional service or customization. Or just think of the all the different kinds of hardware that need control software to function. This software can also be OSS. The most prominent examples of such business models are probably eBook readers, smartphones and cellphones. In these cases many of the customers don’t even know that they are using open source software, or else don’t care. So we can say that it is possible to have OSS business models whenever customers buy a “package” that also contains software. In these cases, the final product will contain a mix of “public” OSS and “private” goods like services, hardware or even CSS.

Do you see any further areas for using open source methods beyond software development?
There are surely further uses in the digital world, and in a broad sense this also includes community projects like Wikipedia. But if we want to focus on open source as a strategy for digital business – just as in the case of OSS with the interactions between commercial and non-commercial players and different OSS business models – then we must take a very close look at what preconditions are required.

So how do I know which preconditions are required?
Based on our experience with software, we can derive and define these conditions in a very powerful general way. I don’t want to go into all the details; instead I will focus on two conditions: First, the value of the digital good is greater when the code is open. And second, the participants can earn commercial profits by joining the project.
The first point is important because it leads to cumulative improvements and feedback effects. The more users use the digital good becomes, the better it gets. This is because the users also contribute improvements. And of course this can only happen where all users have full access to the code. This means that open source can utilize resources that aren’t available to closed source. For example, no CSS company would ever sign a contract with someone who had a one percent chance of finding and correcting at least one mistake within the next month. But this sort of thing works well for OSS collaborations – and the many small contributions add up.
The second point is that a successful OSS project must be able to reward participants who actively collaborate and follow the project management’s leadership. This can happen in various ways. For example, programmers can use their participation to build a reputation that they can use on the job market. Similarly, companies often participate because they hope to build products based on the open source code. Furthermore, companies must stay active if they want to influence the project. It goes without saying that this kind of strategy only works where the code can be linked to complementary products.

And where do you see areas complying with these preconditions?
People often say that certain areas of biology and pharmaceuticals would be good fields for open source, since these products are based on studying DNA, which is itself a code. In addition to this, some types of drug discovery depend entirely on computer simulations. Finally, open source is often mentioned as a way to develop drugs and vaccines for combating so-called “neglected diseases” in developing countries. There are already practical initiatives in this direction, for example the Tropical Diseases Initiative and the Indian Open Source Drug Discovery Foundation.
Drug development is much more complex than software. Still, one can argue that open source mechanisms ought to work nicely for many tasks. For example reputational mechanisms can be used to attract contributions from talented students. Still, one should not expect any miracles from open source. We know from software that there is no single best method – OSS and CSS each have strengths and weaknesses. Ideally, each method should compliment the other.

So the conclusion is to combine the closed and the open source approach with each another?
Indeed. We can even say that there is a general political message: Government shouldn’t provide one-sided support to either of these approaches. Also if closed and open source methods coexist they will also compete. At the end of the day this will improve both institutions. This is already very clear for software.

Dr. Sebastian v. Engelhardt is an economist from the Friedrich-Schiller-University in Jena, Germany. Hi research focus in on the digital economy, intellectual property rights and regulations of high-tech markets. He wrote his PhD thesis on the co-existence of open and closed source software in the ICT industry.

1 Kommentare:

mall silvia hat gesagt…

Attempt of sharing the thoughts through this virtual way is truly appreciative! I think it's a good guideline for the new entrepreneurs. Thanks for the support.
industry software

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