The coming "open monopoly" in software

It's not hard to understand why open-source software, such as the Linux operating system and the Apache HTTP server, is growing in popularity among corporate IT departments. When source code is open, any developer is free to read, redistribute and modify it. This leads to faster bug fixes, improved software and lower development costs.

What's perhaps less understandable is why many traditional IT vendors are also jumping on the open-source bandwagon. For example, last December, IBM announced that it was investing $1 billion in Linux in 2001. Aren't these vendors concerned that open-source software will undermine the traditional proprietary software model on which their businesses are based? Why are these IT giants joining open-source efforts? Can any company really profit from open-source software? And if not, why would anyone want to develop it?

To answer these questions, it's useful to first examine the position of the one major IT vendor who has come out strongly against open-source software: Microsoft.

An economic analysis of open source
In the world of PC-based software, Microsoft enjoys what economists call a "natural monopoly." This natural monopoly has occurred as a result of several factors, including barriers to market entry (such as the cost and inconvenience for existing customers to switch operating systems) and barriers to competition (such as patents and proprietary source-code control).

Microsoft's natural monopoly has also been sustained by a basic law of software economics: as a vendor's business grows, the average cost of reproducing its software decreases. With downloadable software, vendors can produce virtually unlimited copies of their software, and each download reduces the unit cost for producing that software. At the same time, each unit downloaded increases the barrier to competition.

This situation creates strong momentum for the monopoly holder--but only as long as it is competing against other companies that follow the same business model. In the open-source community, today's software vendors are facing a competitor that has no stock, no owner, no board of directors--a competitor they cannot buy, and one they can't attack in a price war because the competitor's products already sell for nothing. It is predictable that in such a market there will be one winner.

The current monopoly holder, Microsoft, has chosen to address the competitive threat of open-source software by urging government regulatory intervention. Jim Allchin, the company's Windows operating-system chief, was quoted by Bloomberg News earlier this year as saying: "Open source is an intellectual-property destroyer. I can't imagine something that could be worse than this for the software business and the intellectual-property business." He added, "I'm an American, I believe in the American Way. I worry if the government encourages open source, and I don't think we've done enough education of policy-makers to understand the threat."

But what about the other big companies? Why would they join the open-source movement? Aren't they equally threatened? No, because they are not the monopoly holder.

These companies spend a lot of money on market analysis, and they understand that, in the end, there will be a monopoly again. The one-winner principle still applies. To them, the world will not change greatly whether open-source or proprietary software is running the world's computers. The end result will still be decreasing average costs, and the same barriers to entering the market will still apply.

What is different, however, is that in an open-source monopoly the barriers to participation and influence will disappear. This will be a different kind of monopoly--an "open monopoly"--from which no vendor can be excluded from participating, including the big companies now joining the open-source movement. They have much more to gain by breaking the existing monopoly and replacing it with the new open monopoly.

Now let's examine one of our other questions: Why would anyone want to develop open-source software?

All participation in open source can be traced to self-interest, and participation in open-source software development can be seen as a kind of barter trade. Participants donate the code they've developed in exchange for value: the opportunity to be part of something bigger than their own work, to influence the direction of a project to suit their needs and to achieve some measure of social status among their peers. Result? Both the participant and the open-source project get what they need.

One such benefit that all participants and users get from open-source software is robust, modular and stable architectures. The reason for this is that all of the participants need to have their needs met. Modularity both reduces the learning curve required for participation and allows individual participants to concentrate on the functionality that directly serves their needs. And stability is in the interest of everyone.

Profiting from open source
Which brings us to the profit question: How can a company increase its profits by working in open source? To answer that question, we have to go back again to basic economics. Profit is the difference between cost and revenue. A company can increase its profits by either increasing revenue or decreasing costs. And open-source software enables a company to reduce its costs. How?

Think of it this way. What happens when a software project is more maintainable, more self-managing? When geography is less important? When companies need fewer buildings, less energy and have more choice in the labor market? What would happen if all software projects were built on more robust, maintainable architectures? Those sound a lot like things that lead to cost savings.

Now consider this. Given that the people most likely to participate in an open-source project are also users of the application being worked on, what would happen if the customers for a software product actually participated in its design and creation? It would be impossible to create a product that is not what the market wants! In the open monopoly, IT vendors will still be able to sell support, configuration, consulting and extension software commercially, and their businesses will be that much more robust and profitable.

We've shown that there are a number of motivations for both traditional IT vendors and developers to get involved in open source. But ultimately, market forces will determine the outcome. In this case, time is on the side of open source.

Historically, market economies favor monopolies when infrastructure is needed. Consider the history of AT&T, utilities or railroads in America. But the infrastructure building period ends at some point--and we are rapidly approaching that point in the software industry.

Today, most of the Internet runs on open-source software. BIND, the software that allows computers and Web sites to have names instead of numbers, is open source. So is the aforementioned Apache, the Web server that runs 67 percent of the Web sites in the world. So, if you've bet your business on the Internet in any way, you've already bet your business on open-source software.