The Lack Of A Billion Dollar Pureplay Open Source Software Company Shows The Market Is Working Properly

from the economics-of-monopolies dept

A few weeks back, Glyn Moody wrote a column discussing why there were no "billion dollar open source software companies," in response to a discussion he had with Redhat's CEO (Redhat is in the $750 million range):

He said that he did think that Red Hat could get to $5 billion in due course, but that this entailed "replacing $50 billion of revenue" currently enjoyed by other computer companies. What he meant was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion. Selling $50 billion-worth of software -- even if it only costs $5 billion -- is somewhat hard, which is why it will take a while to achieve.

I immediately knew I wanted to write up something about it, as it reminded me of a point I've been wanting to discuss for a while. But I got busy with some other things, and in the meantime, a bunch of other folks picked up the ball and ran with it -- and each time they did, they added something different to the conversation, which gave me more to think about before writing up this post. Matthew Aslett pointed out that this is leading many companies to adopt hybrid models while Stephen O'grady pointed out that the question was really irrelevant. Katherine Noyes, over at LinuxInsider highlighted many other points that people brought up as a part of the discussion. It's all a very interesting read, though none really hit on the two key points that Glyn's original column got me thinking about:

1. There absolutely are billion dollar open-source companies, but they're not pure play open source companies. But that's okay, because a "pure play" open source company is like a record label trying to focus on just selling music. You're in the wrong business -- trying to sell infinite goods -- so of course the direct profits should be limited.
2. The lack of billion dollar pure play open source software companies is a sign of a working efficient economy. In fact, billion dollar pure play open source companies would be a sign of a market failure.

On that first point, I would argue that tons of companies are, actually, billion dollar open source companies: Google, IBM, Facebook and many others, for example, all rely heavily on open source software and are valued at well over a billion dollars. It's unlikely that any of the three would be anywhere near what they are today without open source software. It's just that all of these companies were smart enough not to be in the bad business of selling an infinite good. Instead, they all looked for ways to use an infinite good -- for free -- to make something scarce massively more valuable. With Google it was user's attention and all of the information out on the web. With IBM it was services to support enterprise technology. Even Redhat, the company that kicked off this discussion, really makes its money from services and expertise.

Arguing about the profits directly attributable to pure play software sales of open source software is like only counting CD/digital download sales and claiming that's the "music business." It's not. It's the recording industry.

But the more interesting and more important point is about the lack of billion dollar pure play open source software companies is the fact that this is a sign of a strong, healthy and efficient marketplace. Even if you go all the way back to your Adam Smith, you would know that when you have a company making outsized profits, competitors will enter that market. That's the nature of a free market, and it tends to lead to efficiency, innovation and (most importantly) consumer surplus.

I'm reminded of various studies on modern societies without intellectual property protections (or with very weak intellectual property protections) that often saw thriving and highly competitive industries in those areas. One area that has been particularly interesting to me lately is looking at various countries that did not have patent coverage for pharmaceuticals, but then were forced into it. If you look at the pharma industry in those countries, you see the same story almost every time. Without patents, the industry is thriving with many, many different firms (sometimes hundreds). Yes, a percentage of these firms are certainly pure "copycat" firms, but the ones at the top are not. However, after patent protection is introduced (often with the claim that it will help investment, help competition and help innovation), the exact opposite occurs. Instead, many, many firms either go out of business or are gobbled up by large multinational conglomerates. The overall profits increase to those conglomerates, but the innovation and social welfare declines.

This is, of course, exactly what Adam Smith saw nearly two and a half centuries ago. If you give companies monopolies, they will take monopoly profits, but those monopoly profits come at the expense of innovation and consumer benefits.

So, giant billion dollar companies in markets -- especially markets of infinite goods -- suggests a market inefficiency of some sort. The lack of such pure play billion dollar companies is a good thing. It means the market is acting as it should, and being more efficient and creating greater economic benefit to the wider market. And this goes back to a point that Glyn makes in his original column:

I think this is the first time I've heard someone as senior as Whitehurst admit something rather profound: that open source solutions save money for customers by doing away with the fat margins for existing computer companies -- and thus shrink the overall market. Opponents of open source like to paint this as "value destruction" that takes money "out of the economy" -- as if free software went around burning down offices and warehouses.

What they fail to grasp is that the 90% savings do not just vanish like the smoke from those supposed conflagrations. That money is still in the economy, it's just spent on other items: free software allows people to use their hard-won money for things other than operating systems, office suites and applications. In developing countries, for example, it might mean more funds available for education or health.

And that's exactly the point. When a market is made more efficient, that actually spreads throughout other areas and helps consumer surplus, economic growth and the rest of the world benefit. Automobiles and airplanes "shrunk" the railroad market, but opened up massive new markets. The end result was a much bigger economy and greater economic opportunity and consumer surplus. Automated telephone dialing "shrunk" the telephone operator business, but opened up massive new efficiencies, leading to advancements like the internet itself. And that created massive economic efficiencies and growth and consumer surplus.

So, just as we shouldn't worry about the lack of "billion dollar" pure play open source software firms, we should also not fall sway to the complaints of companies who are being disrupted by these models, about how all that money they make is somehow "disappearing" if the government doesn't come in and protect their business model. What's actually happening is all that money is being put to more efficient use. Unfortunately, it's rare to see politicians or business leaders who actually understand this simple, but important fact, and it leads them to propping up legacy businesses, which actually slows down innovation, economic growth and consumer surplus.

Filed Under: economics, open source, proprietary, software
Companies: red hat

Effort Underway For Defensive Patent Pool For Open Source Developers

from the figthing-evil-with-evil dept

Slashdot alerts us to a new effort to create a "Defensive Patent License" (DPL) as a defensive mechanism for open source developers. The idea is a bit more advanced than your every day patent pools (even the defensive ones). The basic framework is as follows:

• Members of the DPL would make a business decision that they are obtaining patents strictly for defensive purposes and not because they want to sell licenses or go on the offensive with lawsuits.
• Members of the DPL contribute all of their patents in their patent portfolio – they don’t pick and choose (and this is what differentiates it from other defensive patent pools).
• Members of the DPL allow all other members to use its patents without royalty and without fear of patent infringement lawsuits from other members as long as a member does not file offensive lawsuits or remove their patents from the DPL.
• Members may choose to leave the DPL but cannot revoke the royalty-free license from members who used it during the time the company was a member.
• Members that join after a company leaves would not have royalty-free access to a former member’s patent portfolio.
• The royalty-free cross licensing applies only to members of the DPL. Members are free to pursue royalties or lawsuits with companies outside the DPL.

It still seems like a pain that those who don't even believe in software patents have to go through this sort of trouble, but it's the nature of the system. Also, it does worry me that this creates more incentives for patents to be filed, when those patents could, potentially, end up in others' hands down the road. Apparently the folks putting this together are looking into whether or not the "membership could legally be applied to a patent that changed ownership from a bankruptcy." Of course, even so, the new owner could opt-out of the DPL, and while it couldn't revoke the license for other members, those patents could still be used pretty offensively. Either way, given the nature of the market today, adding a bit more protection for open source developers seems like it could be a good thing -- even though we haven't seen too many successful patent lawsuits against open source providers.

Filed Under: defensive, dpl, open source, patents

IBM Breaks Promise; Threatens Open Source Company Over Patents

from the so-much-for-'reform' dept

For a while now, IBM has been positioning itself as being in favor of really fixing our broken patent system (even as it's remained at the top of the food chain in terms of companies filing for patents). However, we've always been a bit skeptical of IBM's claims about this -- as they quite often seemed to be more of a PR positioning move, rather than any real commitment to fixing the patent system. Almost exactly five years ago, the company made a big stink about freeing up approximately 500 patents for use in open source offerings. At the time, even that seemed like more of a PR stunt than anything else, but still, you'd at least think they'd live up to their word.

Not so apparently.

Slashdot points us to the news that IBM has threatened an open source project with some patents -- including two that were in that list of 500 (along with over 100 others). In the past, when IBM's nastier patent activities have gained attention in the tech-blog world, it's been known to back down, so it wouldn't surprise me to see that happen again here. But the fact that it made this threat in the first place, yet again, calls into question IBM's real commitment towards moving away from supporting patents as a bullying tool.

Filed Under: open source, patents
Companies: ibm

IIPA's Section 301 Filing Shows It's Really Not At All Interested In Reducing Copyright Infringement

from the incredible dept

We've covered some of the better comments to the USTR over the Special 301 report, such as the submission from the CCIA. But, of course, there were some ridiculous submissions as well -- and at the top of the list has to be the submission from the IIPA -- the International Intellectual Property Alliance, a trade association/lobbying group of trade associations/lobbying groups (including the RIAA, MPAA, BSA, ESA and NMPA) that proudly highlights how it has filed comments for the Special 301 report since such things began in 1988. But what's stunning is what the report effectively admits. Even though it claims to want to focus on ways to cut down on copyright infringement, the details show it wants the exact opposite. That's because in reports on a variety of countries, the IIPA seems to suggest that policies encouraging or mandating the use of open source software is somehow a bad thing.

But if your goal is to actually reduce infringement, then wouldn't you want to encourage the use of legal software? And by encouraging the use of open source software, you are making it that much less likely that infringement will be a problem, since the software will be cheaper. Basically, the IIPA is flat out admitting that it's not actually interested in reduced copyright infringement. It's abusing the USTR's Special 301 process to set up protectionist policies for the companies and organizations it represents -- and trying to use that process to deny efforts to actually reduce infringement.

This is really incredible when you think about it. Even though the USTR 301 report is supposed to be about figuring out ways to reduce infringement in countries around the world, the IIPA is trying to shoehorn open source software into the mix, claiming that it's somehow worse than infringing. While many of the IIPA's complaints have to do with mandates for open source software, it even goes after Indonesia, which is just recommending gov't agencies consider open source software -- and here, the IIPA basically exposes its agenda even further:

It encourages a mindset that does not give due consideration to the value to intellectual creations. As such, it fails to build respect for intellectual property rights...

Yes, you read that right. The IIPA is claiming that telling people to consider open source technologies -- which are not at all "anti-intellectual property rights" -- "fails to build respect for intellectual property rights" and doesn't properly value intellectual creations. In other words, in the eyes of the IIPA, properly licensed software that happens to be under an open source license is worse than infringing because of its price.

Filed Under: copyright, open source, special 301, ustr
Companies: iipa

As Cars Get More Complicated, Maybe Open Source Is The Way

from the progress-is-good dept

Back in 1999, a well-circulated false press release made the rounds, supposedly written in response to Bill Gates' jab at the auto industry at COMDEX that year. The memo joked:

If GM had developed technology like Microsoft, we would all be driving cars with the following characteristics:

    1. For no reason at all, your car would crash twice a day.

Of course, fast forward 10 years, and this is no longer really a joke anymore. Cars are now more complicated than ever, and now computers play a crucial part in the safe and efficient operation of modern automobiles. Today's premium vehicles probably contain close to 100 million lines of software code. That fact, coupled with the recent massive Toyota recall, seems to have spurred Slate's Farhad Manjoo to ask "Should we be worried that our cars are controlled by software?"

Perhaps if you're really into worrying for the sake of worrying, sure, I suppose the increasing complexity of the software in cars seems like a good reason to don a tinfoil hat. Certainly, compared to cars a quarter century ago, there's a huge amount of new technology between you and the road. But, cars are also safer and more efficient than ever before. While it's true that the software in cars may have bugs, that's really nothing new to be that concerned about -- car manufacturers issue recalls and maintenance updates all of the time to deal with not just software bugs, but mechanical problems as well. In the future, regular software updates may replace oil changes as regular maintenance for cars. But, the biggest Toyota recalls this year were still mechanical in nature: the floor mats and gas pedals, neither of which are remotely affected by any software in the car. Finally, as Manjoo points out, driver error is still the most common cause of accidents, so until we remove the human element from the driving equation (along with all of the driving distractions), recalled cars are really nothing to get worked up about.

That said, Michael A. Spiegel over at the Software Freedom Law Center makes an interesting point about this situation:

If Toyota truly wanted to repair its public image and reputation for quality, it would make its source code available to anyone interested, not just a single government regulator. The public is far more likely to discover bugs and suggest improvements than a relatively small number of overworked and potentially inexperienced government employees.

This is a intriguing proposition for a number of reasons. By releasing its software to the open source community, they could become key participants in the growing open source car ecosystem. By doing so, they could potentially benefit from the collective intelligence of that community looking at their code. Sure, Toyota may scoff at sharing what they consider to be proprietary IP with potential competitors, but in this case, Toyota could stand to gain more than it would potentially be giving away. After all, while software definitely is playing a critical part in automotive systems, by itself, it is not the selling point of a car. Even the e-voting industry is coming around to open source, after balking at the idea for years. For a variety of reasons, the automobile industry seems ripe for the exploration of new models right now. Programs like CityCarShare and ZipCar could be seen as "Automobiles As A Service" -- so maybe we'll start to see a Red Hat-like automobile company emerge in the near future.

Filed Under: cars, open source, software
Companies: toyota

Author Sherman Alexie's Rants On Colbert Against Ebooks, Piracy And 'Open Source Culture'

from the you-said-what-now? dept

On last night's Colbert Report, author Sherman Alexie spent most of the interview ranting against digital books and how "piracy" was destroying the book business. The whole thing was odd not just because of how uninformed it was, but also because he seemed to contradict himself multiple times. I haven't read any of Alexie's books, but if his logic is so twisted, it's difficult to think that his books are worth reading: He starts out by insisting that he won't put his book on the Kindle or any digital book format because he's afraid of piracy -- but that makes no sense at all. By not giving readers what they want, he's actually encouraging more piracy. There are probably plenty of people actively willing to buy ebook versions of his book, and his response is that because of piracy, he won't offer it to them. How does this help? Those people now have more incentive to actually go and download an unauthorized copy of the book (and Alexie is fooling himself if he thinks they don't exist). How can not giving people what they're asking for and are willing to pay for be a smart business model?

He compares the book business to the music business, saying:

"When the music industry went digital, somewhere between 75 and 95% of music is pirated. Nobody makes money off their music any more. Everything is about live shows now."

First of all, it wasn't the industry that went digital. Music went online way before the industry even realized it, and one of the main reasons that the piracy rates are as high as they are (and his numbers are industry figures that aren't reliable at all) was because the industry held back for so long in giving people what they wanted: which is exactly what Alexie is now doing!

As for his claim that no one makes money off their music any more, that's obviously silly. He admits that they now make their money from live shows (which is making money off their music). And then later in the interview, he points out that one of the parts he enjoyed most about being a published author was doing live performances and readings of his works. In other words, he already does what he claims happened to the music industry. So why is he so worried about piracy? That's not clear at all.

He also seems rather uninformed about how file sharing has helped some authors.

I'd be really worried if I were Stephen King or James Patterson or a really big best seller that when their books become completely digitized, how easy it's going to be to pirate them.

Where to start....? First, Alexie doesn't seem to understand how book file sharing happens. It's not because the industry digitizes the books, but because others digitize those books, and, yes, they're most likely already available on file sharing networks, whether those authors released them in ebook form or not. It's not the official ebook they're sharing in most cases anyway.

Second, as for the claim that it will harm the biggest name authors most of all, Alexie might want to talk to Paulo Coelho. Coelho is the guy who quietly set up operations to "pirate" his own book and saw the sales of his physical books increase massively. Oh, and the book he chose to offer up via BitTorrent, The Alchemist is one of the best selling books of all time. Stephen King and James Patterson, by the way, do not have any books on that list -- though, to be fair, if you combine all of their books, King has sold more than Coelho, and Patterson seems to be in a similar ballpark, probably selling slightly more than Coelho, but both have published many more books.

Then, really strangely, he attacks "open source culture":

With the "open source culture" on the internet, the idea of ownership -- of artistic ownership -- goes away.

Now, beyond this just being flat out wrong about what "open source" means or what "open source culture" is, what's the most bizarre thing about this statement is who it's coming from. Alexie is most well-known for his writing about modern Native American life -- and Native Americans aren't exactly known for their strong believe in artistic ownership. In fact, much of the understanding of so-called "gift economies," which are sometimes (though not always accurately) used to describe the open source world are actually based on Native American gift giving culture of tribes in the Pacific Northwest, which is where Alexie is from.

Colbert actually does a good job pushing back on this, in his usual self-mocking manner, pointing out that sharing helps get the word out there, and the only reason he's so famous is because of how easily his content is shared via TV. Without that, he notes, he'd have to just go door to door shouting at people. To which Alexie responds: "I'm a fan of door to door shouting at people." Good luck with that.

Filed Under: ebooks, open source, piracy, sherman alexie, stephen colbert

If You're Looking For The Open Source Business Model, You're Looking For The Wrong Thing

from the that's-backwards dept

Every so often we see a similar article to the one penned recently by Ashlee Vance in the NY Times, bemoaning the lack of "open source business model" success stories. Now, Vance is a top notch reporter and does great work for the NY Times (as he did for The Register before), but these kinds of articles seem to miss the point. They go looking for "open source" company success stories, and find that most open source software companies don't end up doing very well, and the few that do okay end up selling out to other companies (MySQL, XenSource, SpringSource) and conclude that, outside of perhaps RedHat, "open source" isn't a very good business. But that misses the point. Open source software, by itself, shouldn't be much of a business. Just as music isn't much of a business by itself, but it can be a huge component of a larger business, open source software is part of what helps many other businesses.

So, while Vance dismisses the fact that companies like Google and IBM rely tremendously on using open source software to be the foundation of their multi-billion dollar businesses, it's time to recognize that those are open source business models. Just as we talk about how the new music ecosystem involves using music to make other things much more valuable, the "open source business model" is using open source software to make other things much more valuable. The companies that haven't gotten very far trying to sell open source software are in that spot because they don't understand open source business models themselves, and seem to think that the focus should remain on selling software, rather than using the software to make other things more valuable. While Vance dismisses companies like Google and IBM using open source software as "pawns," it's time to recognize that that is the most reasonable way to build a business on open source work. And there's nothing wrong with that at all. It's helping build tremendous businesses that have a huge impact on the world economy.

Filed Under: business models, open source, services, software
Companies: google, ibm, mysql, red hat

Google Sued Over Patents On Open Source Code

from the bad-reporting dept

We've discussed in the past how reporters often contribute to misconceptions about the patent system and patent disputes. They commonly report that those sued for infringement are accused of "copying" or "taking" an invention from another company, when it's much more common for infringement lawsuits to involve independent invention. Now we've got another example. Red Bend Software is the latest in a long list of companies suing Google for patent infringement, claiming that Google violates its patent 6,546,552 on "difference extraction between two versions of data-tables containing intra-references."

Specifically, Red Bend claims that Google's Chrome browser violates this patent by including an algorithm, called Courgette, that lets Google push compressed software updates. Of course, plenty of companies have come up with various ways to push compressed software updates over the years, so I'm at a loss as to why it requires a patent... but that's a different issue. The problem here is the reporting on this lawsuit by Mass High Tech and reporter Galen Moore. First, he claims that this lawsuit suggests Google's "open-source Chrome browser isn't so open source after all." Huh? I've read that sentence over and over again and I can't figure out how a patent dispute would mean that Chrome isn't open source. This kind of reporting suggests that a patent simply wipes out the type of license covering a software.

The second questionable bit is in talking about how Red Bend (like plenty of patent holders putting forth lawsuits) is claiming willful infringement, which gives a company triple damages if found to be true. So what's the evidence of "willful infringement." A claim that "Google has known about the conflicting patent since September 7." September 7th? That's a month and a half ago. The patent was issued in 2003. And Courgette was first used in July. It's difficult to see how anyone could claim with a straight face willful infringement when you just informed them of your patent, and that happened after the software was already in use. You don't even need to know much about patents to at least point these facts out.

But, of course, you wouldn't know any of that from the article. Instead, your average reader would likely read this, thinking that Google somehow "took" this invention from Red Bend and that somehow negates Google's "open source" license on Chrome.

Filed Under: open source, patents, reporting
Companies: google, red blend

Surprise: Sequoia To Open Source E-voting Code

from the didn't-see-that-coming dept

Sequoia Voting Systems had been one of the "big three" e-voting providers, along with Diebold (Premiere) and ES&S. All three companies were notorious for massive amounts of secrecy and many, many, many reports of faulty machines with weak security. Sequoia's biggest problem -- which showed up in election after election after election after election -- was that it seemed to count the votes differently every time. That seems like a rather big flaw. The company also threatened computer security expert Ed Felten after the State of New Jersey asked him to look at Sequoia's code.

Just last week there were reports that Sequoia had accidentally revealed some of its source code -- but this week Sequoia has surprised a lot of people by announcing plans for a new e-voting system which will have open source e-voting software included. The code will be released to the public next month.

This is definitely a big (and surprising) step forward. The Wired link above tries to speculate why -- but I'd argue the most obvious reason (not mentioned in that article) is that Sequoia's two largest competitors, ES&S and Diebold/Premiere merged last month, suddenly making Sequoia a much smaller player in the space (I believe it was already the number three player...). Going open source isn't just a way to improve its code and improve trust in the machines, but also a way to stand out against a much larger competitor.

Filed Under: e-voting, open source, source code
Companies: sequoia