[ox-en] biz talk... "Prospering in the Open Source Software Era"
- From: "geert lovink" <geert xs4all.nl>
- Date: Tue, 14 Oct 2003 09:40:12 +1000
http://www.neuralscape.com/cgi-bin/businessissues.cgi?disruptive_Linux.txt
Prospering in the Open Source Software Era
by Karen Shaeffer
While it is a fact open source software has ascended to become a genuine
disruptive technology, there remains considerable confusion concerning the
notion of a general open source software business model. The consequences of
open source software are not reversible and create real opportunity for
entrepreneurs and creative folks in general. To appreciate the scope and
extent of these opportunities, it is helpful to consider the nature of the
consequences of open source software on the profitability of proprietary
software firms. Open source software has the disruptive effect of
commoditizing what used to be proprietary property of software vendors. The
closed, proprietary source code formed the foundation of the highly
profitable software industry of the last quarter century. Giving away the
source code removes all barriers to entry for that particular market sector.
We can see this in operating systems today. In the very near future,
virtually all sundry applications will follow.
It happened for good reason. In the past, when a company or an individual
purchased proprietary software under restrictive licensing, the usefulness
of that software was limited by its feature set. In effect, the end user
could not do anything that the proprietor vendor hadn't already envisioned
customers endeavoring to accomplish with the software in question.
Additionally, the software was overpriced, almost always buggy, and by
design locked the end user into a technological box crafted by the
proprietary vendor for the purpose of maintaining a revenue stream for
future upgrades. In this sense, the proprietary software vendors would
preclude innovation, if it was perceived as a threat to the future profits
of the vendor. These business model features are all in the interest of the
proprietary vendor at the expense of the general end user -- corporate or
consumer.
With respect to entrepreneurs and creative folks in general, the essence of
the redeeming nature of the open source software phenomenon can be
appreciated when one considers the empowering effect open source software
can have in the creative process. We, as a society, have become fully
dependent on our computers and the software that runs on them. Most
innovation occurring these days is supported and enabled by these computer
technologies. The legacy software business model of the proprietary software
vendor era constrained and taxed the creative process. The constraints were
in fact prohibiting innovation to the extent the proprietary software
constrained the creative endeavors of corporations and individuals to be
bounded by the capability of that proprietary software's feature set. Open
source software is just the opposite. Use of open source software invites
innovation and novel extension of the capability and functionality of the
software. In of itself, this is laudable and of great utility, but the real
story here is for groups tasked to develop new ideas and technology within
R&D groups. Within these organizations, open source software is a substrate
for innovation, effectively removing the artificial constraints that have
been the status quo for the past quarter century.
As the business community has begun to adopt the open source software
development model, there has been much wrangling over how to earn a profit
within this new paradigm. To be clear, this new paradigm is a direct
competitor to the legacy, proprietary software business model and is wholly
incompatible to it. The legacy, proprietary software business model will
survive, but with significantly diminished power, profitability, and
influence within the business community. But out of the ashes of this
disruption, a much more vibrant, efficient, and larger economic growth will
result. As with all disruptive technologies, the emergence will be an epic
struggle between those with an interest in the existing proprietary software
business model and those who are building the foundation of this new
paradigm.
The legacy, proprietary software business model employed software developers
within groups at the proprietary software vendor firms. These developers
created value that resided in the closed source, proprietary code base. The
business folks leveraged this into very high profit margins. The model
scaled well: As the code base and subsequent functionality increased in size
and complexity, the value of the firm rose proportionally. The key to note
is the value resided in the closed source code base. Individual developers
became a commodity to the managers of these firms. This legacy, proprietary
software business model resulted in all the power being held by the
management of these firms. Based on this business model, this industry
produced consistent, high rates of return to investors. The rate of return
was in fact quite high by any metric normalized over time and industry
sectors. And the software developers -- the folks, who actually created all
this value, received compensation disproportionate to their vital role in
the process.
From the perspective of the proprietary software vendor, the open source
software phenomenon effectively devalues the source code to the price of the
media that holds it. Thus, the primary consequence of the growth of open
source software code bases will be the legacy, proprietary software business
model will not be able to sustain the historical profit margins of the past
few decades. These firms need to diversify and reorganize into business
units that are compatible with this new paradigm. The open source paradigm
business model, as applied to pure play software vendors -- does not scale.
The value resides explicitly in the developers. Small teams of consultants
are ideally suited to this new paradigm. These groups will bring with them
the skills to rapidly evolve and extend existing open source code bases to
enable end user groups to capitalize on emerging business opportunities with
maximum efficiency and cost effectiveness. It is these efficiencies that
will support and sustain the open source computing paradigm. There is room
for leveraging the coordination of groups of these consulting teams. This
coordination will involve teams with skill sets that map both vertically and
horizontally in the service capabilities space. This leverage will be
exploited by management teams. But the bounds on profitability leverageable
by management in forming such coordinated teams of specialized consultants
is bounded by the functional utility that such coordination can project into
corporate organizations endeavoring to capitalize on emerging business
opportunities. Such bounds are in constant flux and under complete control
of the end user corporations -- rather than under the control of the
software vendor management teams. This is a manifestation of the enhanced
efficiency of this new era of open software computing.
It follows, that from the perspective of the end user, the software costs
much less while providing significantly increased value and utility. This is
true of all users, but it is clearly amplified with respect to the business
end user. It is this increased "efficiency" that will continue to attract
the corporate end users in larger and larger numbers as time goes on. It's
somewhat ironic, because this new paradigm has completely defuncted numerous
other presumed truisms of efficient end user business practices associated
with the legacy, closed source, proprietary software business model. End
user business executives need to rethink their strategies to take full
advantage of the opportunity that the open source software paradigm
represents. In many cases, direct employment of software developers with
specific skill sets will provide significant utility and leverageable
capacity to adapt infrastructures to meet rapidly shifting priorities. This
point is central to the new thinking that will be adopted by end user
corporations that will thrive in this new era of open source computing.
In contrast, the legacy, proprietary software business model provided
incentive for end user firms not to employ the software developers. The
proprietary software firms served the role of exclusive innovator, often
extracting the ideas from their captive customers, leading to new
functionality being incorporated into the closed source, proprietary code
base and, thereby providing a mechanism for sustaining future sales and
profits. In exchange for this perceived "efficiency", the end user firms
paid too much for the software: An artificially high rate of return was
built into the cost structure, representing a tax on innovation.
Furthermore, the legacy software business model effectively metered
innovation by constraining the rate of implementation of new features based
on the interest of the proprietary software vendor management's marketing
analysis. The end result is that the end user with the innovative ideas
would invaribly suffer time delays, ultimately limiting the end user's
ability to think out of the box -- limiting their capacity to take advantage
of unfolding business opportunities in the most time and cost efficient
manner.
The new paradigm of computing based on open source software, presents the
corporate end user and the consumer the unconstrained capacity to innovate
and capitalize on emerging business opportunities. The value of software no
longer resides in the code base -- it resides in the developers who can
quickly adapt and extend the existing open source code to enable businesses
to realize their objectives concerned with emerging opportunities. This
commoditization of source code represents a quantum step forward in business
process efficiency -- bringing the developers with the expertise into the
business groups who have the innovating ideas. The efficiency is realized by
removing the proprietary software firm management (and their investors) out
of the loop. The big winners are the end users and the software developers.
The subsequent emergence of Linux clustering software is a seminal event in
the history of computing. It is both a concrete example of the empowering
nature of open source software and a fundamental building block for the
future of computing. Linux cluster computing can be employed as the core
infrastructure for an entire class of emerging businesses. This core
infrastructure is at the heart of a computing revolution now unfolding.
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http://www.oekonux.org/