The Simple Economics of Open Source

Gordon McMillan gmcm at
Sat Apr 29 15:06:04 CEST 2000

Raffael Cavallaro wrote:

> Oh really? Then why has no competitor yet figured out a
> *reliable* way to read and edit MS Word format documents? Just
> because the IP involved is intentional obfuscation, doesn't mean
> that "there's very little of that in code."
which is taken from (online) msdn docs.

> .... From an economic
> standpoint, the closed source model is a big winner. It is the
> anemic open source model, which must rely on service revenues for
> any profit that looks sick when it comes to profitability.

Consumer behavior (particularly what they're willing to pay for 
a product that which will no longer be supported) indicates 
that the value is based on future support and upgrades. 

Consumers are used to paying X up front, then something like 
50% of X in few years for the upgrade. Corps are used to 
paying X up front and 15% of X annually and then renogotiate 
at upgrade time. The open source model is strange to both of 

Eventually, buyers and sellers will evolve to a common 
understanding of their common business. I don't know that the 
result will be the current open source model; but this model is 
a large advance in that understanding.

That doesn't mean there won't be rip-offs and gouging. In 
estabished markets, that's normally done by controlling the 
distribution chain. Software presents a unique challenge in 
this regard, but people are creative.

> If they produce software that:
> 1. cannot be easily reverse engineered
> 2. achievs sufficient market penetration that interoperability
> with others becomes a significant feature
> then yes, they are effective monopolies. This is *precisely* how
> MS got where they are.

If that were the model, we'd all be using Apples. MS got where 
they are by outmanuvering IBM and DR. If Gary Kildall had 
been willing to play hardball with a bunch of IBM suits, the 
world would be quite different.

Corp's standardize on office suites for support, licensing and 
interoperability. Some standardize on Lotus SmartSuite. Face 
it, MS Office is significantly better, and is more open to 
working with third party software.
> >> BTW, all software is *not* support. This is another open
> >> source community bias which comes from living in the server
> >> room. Lots of software is *client* software, which requires
> >> little or no support from the vendor.
> > 
> > And client software is often free.
> Only as a loss leader, or a monopolist's attempt to undercut
> potential competition (Netscape for the former, MSIE for the
> latter)

So can I conclude that even according to the "monopolists", 
client software is better considered a service? That's a start...

- Gordon

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