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Open source: Big value, not big money

Open source may not provide much in terms of direct revenue to its vendors, but it creates a hugely valuable ecosystem, much like soccer.

Open-source software may have a lot in common with the global soccer (football) business: while it generates a tremendous amount of value for users, very little of that value can be converted into cash. At least, not directly.

That's the thought that struck me while reading the exceptional "Soccernomics: Why England Loses, Why Germany and Brazil Win, and Why the U.S., Japan, Australia, Turkey--and Even Iraq--Are Destined to Become the Kings of the World's Most Popular Sport." Among other things, the book tackles the economics of soccer, and yields some counterintuitive insights:

...[I]f Deloitte ranked [soccer] clubs by their profits, the results would be embarrassing. Not only do most clubs make losses and fail to pay any dividends to their shareholders, but many of the "bigger" clubs [like Real Madrid and Manchester United] would rank near the bottom of the list....[Note: my Arsenal is one of the few profitable football clubs on the planet.]

Whichever way you measure it, no soccer club is big business....This feels like a contradiction. We all know that soccer is huge. Some of the most famous people on earth are soccer players, and the most watched television program in history is generally the most recent World Cup final.

Nonetheless, soccer clubs are puny businesses. This is partly a problem of what economists call appropriability: soccer clubs can't make money out of (can't appropriate) more than a tiny share of our love of soccer....[T]he world earns more from soccer than the soccer industry itself does.

It's the world's biggest game...with some of the world's worst financial returns. We buy the replica shirts. (Um, I buy many.) We pay to attend games. (Er, I pay to watch many.) We try to give the game our money. But it generates very little top-line revenue, and almost never any bottom-line profits for soccer clubs.

Like football, there's no question that open source is exceedingly popular these days. Virtually every company--indeed, every person--on the planet uses it in some way, whether it's the free Firefox browser with which someone reads this blog post or the Linux operating system serving up a wireless carrier's phone system, open source is everywhere and highly useful.

It's just not big business.

Yes, Red Hat is nearing $1 billion in annual sales, but it's the exception. And that's OK.

Open source, like soccer, doesn't have to directly generate mountains of cash to be immensely valuable to the companies in its ecosystem. For every Real Madrid squeezing annual revenues of $475 million out of soccer there are scores of broadcasters, sports apparel companies, etc. making billions on the back of the sport.

In similar manner, Google, IBM, and others like them make billions with the help of open-source software, but they make very little directly from open-source software.

Like the soccer economy, the open-source software economy is best measured by the total value it creates, which will have very little to do with the direct sales the Red Hats of the world report. Open source saves enterprises billions of dollars in license fees, and arguably has the potential to collectively add trillions of dollars in productivity gains.

That's big value, even if it's not big money. Not in the pockets of software entrepreneurs like myself, anyway.