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Open source as an antitrust strategy

Open source provides a way for industries to collaborate without running afoul of antitrust law.

The day open source became big business is the day that open-source development exploded. Yes, open source predates the moneyed interests hankering to use it to competitive advantage, but it really wasn't until IBM dropped $1 billion on Linux that companies began paying employees to write free software that the movement saw broad adoption.

That's when open source became more than an efficient way to develop software, and also became a great way to build a business.

However, adding open source to one's business is not magical pixie dust that guarantees its viability. As IBM's Bob Sutor explains:

The basic principles around revenue, profit, loss, taxes, payroll, overhead, accounting, sales, incorporation, health care, and human resources all apply. You can be a starving open source software entrepreneur as easily as a starving proprietary software entrepreneur. No one will excuse basic business failures and screw-ups just because you use open source. Make sure that you will produce a product that people want and in some way will pay for, no matter how indirectly.

Sutor's counsel applies to any company or individual that wants to build a business around open-source software, but arguably some of the industry's best projects are not the product of any one company, but rather of several. Linux, Mozilla, Apache Software Foundation, Eclipse, and other collaborative communities represent an interesting way to use open source to competitive advantage.

In many ways, open source has become a critical component of the software industry because the market has largely moved from vertical businesses (i.e., companies controlling all aspects of production, distribution, etc.) to horizontal markets (i.e., companies focusing on their core competencies and depending on others for complementary functions).

Linux: Peace, love, & squeezing Microsoft

As Gartner's Brian Prentice astutely points out, however, horizontal markets have a flaw:

But this business control system has a inherent risk. Should an organization monopolize a specific segment of a value chain system they can extract a higher percentage of its total proceeds. If the product, or service, in question is price elastic than those additional proceeds will come from other participants in the value chain system.

Case in point? Windows. By owning the operating system, Microsoft threw a wrench into the collective cogs of horizontally oriented software firms like Intel, IBM, and others.

The industry's response--Linux--is a classic example of the open-source approach to mitigating individual choke holds within an industry, as Prentice goes on to write:

What then does a CEO do when facing a squeeze on their profits because a direct, or downstream, supplier is dominating a segment of the value chain system? Besides negotiating a better deal - if they can - they've been left with little choice but to get directly into that segment of the value chain system themselves. But by doing so their organization is distracted from focusing on its own core competency.

The risk of such an undertaking can be mitigated if there is a collective response by similarly affected members of the value chain system. After all, it is usually a shared problem. But collective responses have always had an inherent, and often fatal, flaw. Who owns the resulting assets? Either organizations enter into complex joint venture agreements to sort this out or run the risk of shifting the distortion in the value chain system to another organization.

Again, Linux offers the perfect example. IBM, Intel, Red Hat, and others aren't investing in Linux because they're all chums at the country club together, but rather because they're looking for ways to reduce Microsoft's hold on their own businesses through its control of personal computer and server operating systems.

As an added benefit, it's a great way for companies to collaborate without running afoul of antitrust laws. It's collusion without the collusion.

Intriguingly, even Microsoft is getting into this game. Microsoft's partnership with open-source ad serving company OpenX indicates that Microsoft, too, is figuring out how to use open-source complements to loosen strangleholds competitors like Google may be hoping to throw in its way.

This is why open source is growing so much faster than the rest of the industry, as IDC finds. It's not because we love each other more. Quite the opposite. It's because proprietary vendors have figured out that open-sourcing key complements to their core businesses can be strategically decisive in hurting competitors while helping themselves.