Section 7.4. Open Distribution, Not Source

7.4. Open Distribution, Not Source

This has huge implications for the software industry. Disruptive vendors can opt to completely open source their code, relying on reputation property to net them revenues, and further relying on their freely available alternative to competitive products to force competitors to meet them on their home turf. This is not to say that all vendors must adopt an open source strategy, but rather, that they must compete with open source's lower cost structures and superior distribution mechanisms. All must increasingly compete on open source's terms. More detail is needed on why this is so.

7.4.1. The Open Source Weapon

Open source enables a vendor to maximize its market penetration at minimal cost, which is the goal of every IT vendor, but particularly of emerging-growth vendors seeking to displace incumbent vendors. One of the biggest roadblocks to any company's growth is the Bureaucracy Bottleneckthe larger the buyer (and, hence, the larger the opportunity), the more layers of bureaucracy an IT buyer must fight through to try-before-they-buy. Not so with open source, which surreptitiously makes its way into enterprises via free download.

Such distribution fattens a vendor's bottom line without fattening the customer's price tag. MySQL had 10 million downloads in 2003, and by mid-2004 had more than 5 million installations. Of these would-be customers, 5,000 have returned to buy a support contract/license from MySQL, bumping the company's revenues by 100% to $10 million in 2003. The revenue growth is important, but even more so is that it achieved this growth by spending less than 10% of total revenues on sales and marketing activities. By contrast, most public software companies spend 45-50% of total revenues on sales and marketing, and companies of MySQL's size generally spend 21.8% on these activities, according to a study done by Softletter.com. In short, open source creates a small universe of prequalified buyers who seek out the vendor, instead of the other way around, with the vendor's primary marketing costs relating to setting up an FTP server and mostly word-of-mouth-type evangelism to developers.

The savings do not stop there. Whether the open source vendor "borrows" much of its code (e.g., Novell, Specifix, Gluecode) or creates it almost entirely in-house and then open sources it (MySQL, SugarCRM, JBoss), open source delivers development-related cost savings. For the "borrowers," the cost savings are obvious: they leverage a well-developed body of code, most of it written by individuals not on their payroll. For the JBosses and MySQLs of the world, which do 85100% of their own development work, there is still a significant QA savings from the global pool of testers who submit bug fixes and code contributions (which may or may not be used by the vendor)cheaper to build, cheaper to sell, cheaper to buy.

7.4.2. Proliferating Open Source Beyond the Enterprise

Today, open source largely confines itself to infrastructure software, in part because this is where the widest computing community resides. Community-based open source projects require a sufficient body of developers with aptitude and interest in a given development problem. But as the IT industry begins to recognize the promise of emerging open source business models, community becomes less critical to the success of a project. As this happens, no area of the software stack will be exempt from open source's influence and intrusion.

Significantly, open source business models will pave the way for open source to conquer the Great Middle Class of IT: the small to medium-size enterprise (SME) market. Open source, as a disruptive methodology in the Clayton Christensen sense, will do more than simply allow startup vendors to compete against established vendors in established markets: it will help to create new markets by competing against under-consumption and nonconsumption. The Internet, and open source's unparalleled use of it, is at this trend's core.

In "Does IT Matter?" Nick Carr offers one example of how this worked in another industry: chocolate. Milton Hershey, founder of the Hershey Company, noticed a gap in the chocolate landscape, a gap the railroad could resolve. Until his observation, transportation deficiencies had forced production to stick close to consumptionthere was no quick and refrigerated way to ship chocolate over long distances, creating scores of micromarkets for chocolate. With the advent of the railroad, however, Hershey conceived the idea of a national chocolate market, built it, and owned it.

Today, the Internet parallels the railroad infrastructure of Hershey's era. It offers independent software vendors (ISVs) a similar opportunity to that which Hershey had, yet the majority of ISVs are not capitalizing on it. Yes, some traditional ISVs can and do offer their products for download, but this is a makeshift attempt to leverage the Internet. Open source is an Internet phenomenonit depends upon the Internet and extends the Internet's utility. Open source should disproportionately benefit from the Internet's distribution mechanism, provided companies understand this fact and act accordingly. As I will show shortly, tomorrow's most successful software vendors will triumph to the extent that they develop models that leverage the Internet as a distribution mechanism, and use open source licensing as the rules-based system to govern that distribution.

7.4.3. So, Why Not Freeware?

Let us assume that all of this is true. Open source is great because it enables upstart competitors to undercut established vendors on price while providing their customers Porsche technology at Pinto pricing. But if open source is so important because it allows me to freely distribute my product over the Internet, why is freeware not equally disruptive?^[1] Stated another way, if the source code does not matter, and only distribution matters, why not just give the software away as freeware and charge users who require support? Why offer something (access to source code) that simply does not matter?

^[1] Larry Augustin originally needled me with this question, for which I thank him.

The easy way out of this apparent quandary is to allow that while open distribution matters most, open source code access is also important. But this does not get us very far. I will therefore detail the reasons that freeware cannot match open source as a distribution strategy. Most importantly, I will explain how the two matter most when they intersect, making distribution without access as hollow as access without distribution.

7.4.3.1. Don't view. Don't modify. What do you do?

As mentioned earlier, it is an indisputable fact that the vast majority of IT buyers will never view or modify source code, even if offered the ability. There are numerous reasons for this, but the most compelling one is that customers expect to pay for a solution to their problems, and not merely a tool to help them solve their problems. (More on this shortly.) No company can afford the time and human resources necessary to resolve all IT problems; therefore, they take "shortcuts" by buying software that purports to fix certain problems for them. This applies equally well to closed source software and open source software. Most IT buyers just want their software to work, they don't want to have to fiddle with it.

By opting not to view or modify source code, does an IT buyer thereby opt out of any and all of the benefits of access to the source code? Absolutely not. Just because customers do not choose to exercise their rights to view and modify source code does not mean they do not benefit from the right, even when not exercised. On one level, the option to view the source code serves as a surrogate for the actual exercise of this ability. As an example, because I can review the database code that Sleepycat delivers to me, it forces Sleepycat to provide a higher-quality product than closed source vendors would have to offer.

R0ml Lefkowitz of AT&T Wireless gives a tangible example of how this works. In June 2003, R0ml related that he had asked his wife to solicit multiple contractors' bids for a home improvement project. Instead of gathering several bids, however, R0ml's wife procured only one bid. When he asked her why, she responded that she figured the contractor would assume she had collected a number of bids, and so would give her his best bid from the start. The option to exercise choice, then, served her as a useful surrogate for actual choice.

In this way, access to source code motivates the code's vendor to provide a superior product, knowing that it will be open for all to see. It also functions as a security blanket for customers. Hopefully, they will never have to look at the source code. But if Vendor X fails to deliver on its promises, or if it goes out of business, that customer will have the option (unpleasant though it might be) to have some other services firm support the stranded code. Source code access lets buyers rely on their vendors...but not too much. Importantly, the more independent the buyer is from the vendor, the lower the vendor's prices must be. More on this shortly.

As IT buyers have grown comfortable with open source projects, another benefit has emerged. Initially, it is true that buyers will tend to want to avoid tampering with the software they buy. Over time, however, as they grow familiar with a product (closed or open), the buyer's developers will want to make tweaks here or there. They begin to support themselves, in other words, because calling out for support takes unnecessary time (and patience). In a closed source world, however, their ability to tweak the "solutions" they buy is limited. In an open source world, the Amazons of the world have free reign over their IT. Source code access gives customers the ability to experiment with and tailor software to their liking, if they choose, and on their own time table.

Other reasons have been suggested. Developers like to be creative. Like anyone else, they prefer not to have self-expression manacled, and they choose to express themselves in the code they write and modify. On a mailing list in June 2003, Frank Hecker argued that access to source code is critical for developers at the heart of a company's IT infrastructure. Such people want to be able to modify code, and so must have access to source, because they will need to be able to fix any problems they may download into the company. Outside the corporate firewall, Ben Tilly (on the same email list) stipulated that while the majority of developers are not involved in open source, access to source code is critical to that core of developers who do participate. They are the lifeblood of open source communities and are the ones who will openly extend assistance to newbies who just want the code to work without getting their hands dirty.

All of which is a verbose way of repeating the earlier point: source matters, even where it may not directly matter to the end user. Access to source extends benefits to users beyond those chosen few who actually exercise the right to touch source code. Source matters because choice matters. Choice matters for a number of reasons, not the least of which is that choice drives down prices. And choice is amplified by open source, not by freeware, which has its source code closed.

7.4.3.2. Open source. Open choice. Open wallet.

Many successful software vendors would have us believe otherwise. That is, they want to sell suites of services that take care of all needs, that reduce complexity, and that reduce choice. The primary perpetrator of this strategy is Microsoft, which, as Dana Gardner of Yankee Group notes, wants to "make the end user any offer they can't refuseto go Windows everywhere" (http://enterprise-windows-it.newsfactor.com/story.xhtml?story_id=22143). One major problem with buying into these monolithic visions is that once in, the switching costs to go with another vendor are prohibitive.

By buying into Microsoft or any other vendor that holds out greatly reduced choice as a way to accomplish moderately reduced complexity, a buyer surrenders his IT destiny to that vendor. He upgrades when the vendor wants him to. It gets new technology when the vendor chooses to innovate. (I would argue, and have on several occasions, that Microsoft's market dominance has caused it to stagnate in terms of innovation. When was the last time Microsoft's Office product significantly improved over the last version? And yet the buyer keeps buying, because he finds himself on the Microsoft treadmill.) And he pays whatever the vendor demands, because the he has no other options. He is a prisoner of the vendor's universe, however expansive the vendor pretends that universe to be.

Over time, buyers who condemn themselves to such vendor-controlled realities will pay more for their IT, both in hard costs and in opportunity costs. Open source offers the opposite vision: maximum freedom to shift among vendors (even while staying with the same or similar code base). Open source therefore costs less in the short term and, especially, in the long term.

If we step outside the IT world for a moment, this point will become even clearer. My wife and I recently redid our landscaping, including our cement work. Or, rather, we wisely chose to hire out the work. True, with a Dummy's Guide to Cement (my "source code," as it were), even I might have been able to figure it out and could have completed the project satisfactorily. Had I opted to do the work myself, the cost would have been X. Because I could have done the work myself for X, my cement contractor was only able to charge me 1.5X. Had he bid higher, I would have had strong incentive to perform the work myself. I had access to the source, so his pricing power was curtailed. (In the same way, access to a closed binary, as with freeware, does not accomplish this same effect of driving costs down.)

The cement contractor ended up performing shoddy work and walked off with a portion of our money, for which he had not completed the associated work. Measuring it out, it will cost us 5-10X to hire a lawyer to compel our cement contractor to satisfactorily complete his 1.5X worth of work. I happen to be a lawyer, but not one that has ever actually practiced law, so I am stuck paying the lawyer's fees: $500/hour to recover $1,500+ in payments owed to me by the contractor.

Perverse world, you say? Yes, I suppose so, but the point is that the delta between the cost of me doing my own cement work and the cost of me doing my own legal work is directly proportionate to the skill set involved and the artificial licenses set up by the legal profession to keep would-be attorneys in "would-be land." I am effectively barred from accessing the "source code" of the legal (and medical, among others) profession, which drives up the price that I must pay.

Again, access to source code, whether in software or cement, offers choice, and choice ensures lower prices. It does not matter that most people will never choose to do their own cement work, just as it does not matter that most IT buyers will never choose to view and modify source code. The important thing is that they could if they were so inclined. That "could" is instrumental in dropping prices through the floor.

Such lower prices, then, allow the CIO to spend more money on developers who can further customize software to meet that specific organization's requirements. Imagine that: IT that works for a customer, rather than against it. That is innovative.

Such innovation is what open source is all about, and is why it continues to make inroads in the enterprise, in embedded devices, and everywhere else. Open source brings choice, and choice saves money. Freeware does not engender such choice. Meaningful choice is not created by cost-free technology; rather, choice is created by the freedom to manipulate code to one's personal (or corporate) advantage, or to have it widely distributed in such a way that one can benefit from others' exercise of that freedom. Access matters little without distribution, and distribution matters little without access. Together, they spell the commencement of a new age of software innovation, innovation that benefits vendors' and buyers' bottom lines.