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The increasing marginal return on open source

Want to build a great business? Start with users, not revenue.

In perusing Nick Carr's blog today, I read his analysis of Google's voracious appetite for data and, in so doing, bumped into this exceptional blog post from Brad Burnham in which he dissects the importance of data to Google.

In the course of his argument, Burnham says something that hit me like a thunderbolt:

Data has this really weird quality. In economic terms data has an increasing marginal utility. Anyone who took Econ 101 knows that most physical objects have a decreasing marginal utility. When it is raining my first umbrella keeps me dry, a second may be handy if the first blows out, but a third is unlikely to be used. This is true of shirts, steaks, houses, of almost anything you can think of except data.

Data has the opposite characteristic. Each incremental point of data adds value to the ones you all ready have. It is easy to see this in the context of an advertising network. If the ad network knows that a user is female it can show more relevant ads. But, If the ad network knows that female's age, it can do even better, and data about location, household income, and recent web sites visited all add value to the existing data points, making it possible to show more and more relevant ads. Google's services all benefit from additional data albeit in different ways.

This struck me forcibly because it meshes so well with my own ideas on what I term "abundance theory." Nearly two years ago I bumped into this idea while working through Nash's equilibrium theory. It's a very simple idea, but plays into Burnham's idea below: data becomes more valuable the more of it that you have.

Open source, for its part, becomes more valuable by sharing. The more people using one's code, the better the opportunities to develop complements to that code for which users will happily pay. Far too many open-source companies/entrepreneurs (including myself, much of the time) overlook this fact and fixate on monetizing their code, when the truly disruptive move is to monetize complements to that code.

Red Hat? It sells a binary version of its freely available code (Red Hat Enterprise Linux), Red Hat Network, training, etc. All complements to Linux. MySQL? An enterprise-class binary of its code, MySQL Advisory Network, Workbench (which I would classify as a service rather than as a core product), etc. All complements.

Stephe Walli has been talking about this for years. It's not new. But looking around at what open-source companies are selling, you'd be hard-pressed to find much pick-up of the ideas.

Create abundance and then sell a complement to that abundance. Don't try to sell the abundance because doing so is an excellent way to cut down on demand and, hence, the abundance. The first step is to acquire lots of users. Lots of money can readily follow, but without users there is no money.