Open Source Business Strategies Had A Bubble Too

from the now-its-growing-again dept

Thu, Oct 25th 2007 12:26pm — Timothy Lee

Matt Asay points us to a fascinating paper (pdf) by Oliver Alexy of Technische Universitat Munchen (TUM) Business School, that looks at how the stock market reacts to companies that announce open-source software releases. The paper looks at how stock prices move the day the news is released in an effort to gauge how Wall Street evaluates open-source-oriented business strategies. The study found a couple of interesting things. First Wall Street reacted positively to open-source announcements in 1999 and 2000, negatively in 2002-2004, and then positively again in the last couple of years. This suggests an open source bubble that coincided with the broader tech bubble. That was followed by a period of open source pessimism while the technology industry was in the doldrums. More recently, as open-source-related business strategies have matured, investor attitudes have become positive once again, and source code releases are rapidly becoming standard in some parts of the software industry.

Second, Alexy finds that Wall Street reacts more positively to business models that use open source as a way to directly cut costs or enhance revenue (for example by selling support services) than they do to longer-term strategies aimed at using open source as a "competitive weapon." Asay suggests the paper shows that a business will do poorly "if a vendor is more worried about pulverizing its competitors than it is in serving its customers," but that's not exactly what the paper is focused on. Rather, "competitive weapon" is used in the paper as a kind of catch-all term for source code releases focused on long-term strategic concerns rather than short-term revenue generation. For example, releasing a product as open source might help a company's preferred file format or networking protocol become the industry standard rather than a competitor's format. Alexy suggests that it's harder for companies to explain such long-range strategies to investors, and harder for investors to evaluate their effect on a company's bottom line. As Wall Street has become more familiar with the long-term benefits of open source software releases (for example, IBM's 2001 support of Eclipse) investor attitudes toward decisions to release software for long-term strategic reasons have become more positive.

One weakness of the study (which Alexy acknowledges) is that it focuses on source code releases by large, publicly traded companies. There was no way around this given the methodology they used, but it might give a somewhat skewed perspective on the benefits of open source strategies. Open source strategies are likely to be of the greatest benefit to small, young firms that have few resources and are racing to establish themselves in the marketplace. Opening their source code can be an effective way to both lower development costs and get their product in the hands of a lot of potential customers very quickly. Open source can benefit large companies too, of course, but the benefits are likely to be smaller, as large companies are already well-known in their industries and have much more money to spend on R&D. It seems likely that if Alexy found a way to conduct a similar study on small firms, the effects would be even more positive.

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Filed Under: bubbles, open source, stock market, wall street

6 Comments

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chris (profile), 25 Oct 2007 @ 1:49pm

the four models
long ago the business of open source was broken down in to 4 categories.

they are:

service selling: giving away the software and selling support, services, and consulting. webhosts do this (use FLOSS to run their hosting services) and so do software companies like MySQL and canonical.

loss leadership: giving away part of your software/service as open source to create value for your proprietary offerings. groupware companies give away their server software as open source and sell proprietary plugins for outlook.

widget frosting: giving away the software that powers your device/appliance to the community and sell the device for profit. linksys and entangle do this with their router products.

accessorizing: selling accessories that make better use of open source software. websites that host articles or forums and sell ads, people who write books on open source, most projects that sell t-shirts to fans do this.
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JS Beckerist, 25 Oct 2007 @ 1:54pm

I wonder...
Now I know this isn't really "open source" but I wonder how much the "open" attitudes of places like Wikipedia and Facebook (application development) has affected this. Wondering too if Linux (and the recent influx of news from that camp) has anything to do with it...
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KT, 25 Oct 2007 @ 3:38pm

Open source adds value the market never even sees.
I use NUnit, NAnt, CC and Svn everyday as a means to improve and create software. It was looked down on at work early on but now it is much more accepted and even encouraged. These are open source projects that don’t turn into businesses but they are creating tools that are making business processes better. Guess that is the starve to death so you can write software category. I do wish that companies would allow their programmers to contribute to open source projects that they use a few hours a week though it only seems fair.
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atroon, 25 Oct 2007 @ 6:26pm

Re: the four models
An insightful breakdown. At the same time, I take issue with some of the naming. 'Loss leadership' is a valid strategy labeled negatively; it also bears no resemblance to traditional 'loss leadership' wherein retail stores accept a loss on one product to entice consumers to visit their locations and buy additional products. Using open source in this way is not 'loss leading', it's (as has been mentioned in Techdirt often) using the value of the infinite product (information in the form of source or binary files easily copied) to create or enhance the value of your other offerings. That's not losing anything, it's gaining a foothold where no one else has created value. The only value that's created in retail loss leading is to the customer, where here the company releases an open source product and therefore doesn't have to worry about 'piracy', about trying to market software and convince people to pay for it, about any number of headaches you get when you try to treat an infinite commodity as a finite one.
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nonuser, 25 Oct 2007 @ 8:49pm

Re: the four models
A fifth model would be dual licensing, allowing free use of one's software under the GPL. But if someone wants to use the product to develop a proprietary offering, they must purchase licenses to do so (Trolltech's Qt and MySQL are well-known examples). Indeed, one can argue that the GPL provides much
more leverage to the original developer than most other
open source licenses such as BSD, etc.
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Chris Maresca, 25 Oct 2007 @ 10:31pm

We've done a LOT of Open Source strategy...
... probably more than most other companies, including almost all of the big tech companies, and a large number of VC-backed startups. In fact, strategy around Open Source is why we founded Olliance six years ago.

I think that what Tim is missing and so is Mr. Alexy is both the long tail nature of OSS revenue models and the fact that open source is always part of a much larger strategy.

While Mr. Alexy's study is certainly interesting, I think that it's still much too early for markets to understand how open source impacts companies, both on the technology provider and technology consumer sides. Never mind that a lot of open source benefits are very, very hard for markets to quantify (for example, how do you value community) and that the number of data points is still very small (how do you separate out IBM Global Services revenue driven by open source vs not driven by open source).

Chris.
P.S. On the subject of successful business models around OSS, the 451 Group has a good review of the 10 most successful ones.
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