Section 9.7. Open Source Economics


9.7. Open Source Economics

It was my reputation, or "brand name" if you wish, that got me involved in the Open Source Initiative (OSI). I had been running the Free Software Business (FSB) mailing list since 1993, and had some success and reputation. When I heard about the Open Source name, I immediately adopted it in describing my software. It's so much easier to explain to customers why they should pay for software when it isn't "Free Software." Sometime after that, I heard that Eric Raymond was seeking to create an organization to promote OSI. I had been corresponding with Eric about open source, and we had discussed it on the FSB mailing list, so I volunteered to be on the board of OSI.

I started the FSB mailing list so I could be more aware: I wanted to know what other people were doing to make money from open source. It seems that adding value to things others created is a revolutionary way to make money; even Shakespeare might agree, as he routinely "recycled" plots and storylines written by other people.

Certainly in the software business, an FSB is a new thing. With proprietary software, about the only way to add value is to sell the software for a higher price, or bundle products and sell them together for a lower price in toto.

Running an FSB interested me in economics. When you give up a payroll check and start paying yourself, you also have to pay the business's share of Social Security taxes and start paying estimated income taxes quarterly. The government imposes this dead load on businesses. Why do they do this? Who benefits? Who loses? Economics helps you answer these questions.

Think carefully about how you price your services. There is an economic concept called "price differentiation." It means that you charge different parties different prices for slightly different services. If you charge a single price to everyone, and that price is too high, you miss out on helping some people who cannot afford your services. If you charge a single price that is too low, you create value for some people beyond the amount they paid. It's not exactly fair that they should gain a lot more than you. To maximize your gain, sell things to people based on the value they receive rather than the cost to you. For example, everyone has seen software sold for less in a third-world country or to a school.

Of course, pricing is also related to costs. Think about both transaction costs and so-called "sunk costs." Every transaction consumes a small amount of value in the transaction itself. The buyer needs to evaluate whether the cost spent is worth the value received. The seller needs to take the money and provide the value. This cost is not received as value by either the buyer or the seller; it is simply wasted. One way you can sell support to a customer is on a self-renewing yearly support subscription. One month before the subscription expires, you send the customer an invoice. The subscription portion avoids having to bill the customer for each support request, and the self-renewing portion avoids having to ask the customer to renew the support contract.

A sunk cost is one you cannot recover by selling the thing you boughtfor example a railroad or a run of fiber optics cable. You can pull up the rails and sell them, but you won't get back anywhere near the cost of building the railroad. Likewise, spending money to create or improve open source software is a sunk cost. Once you've spent that money, you have no way to sell the software (except by exiting the open source system by using a dual license). Just as a railroad needs to recover its sunk cost by selling transportation services, you need to recover your investment in the software by selling related services.

One of the ways to manage costs is by making use of "public goods." A public good is nonrivalrous (meaning that my use doesn't affect your use) and nonexcludable (I can't stop you from using it). Absent copyright or patent protection, information is a public good. Open source is typically copyrighted software, but is licensed under terms that make it effectively a public good. There is currently great debate over how much excludability is necessary to produce the optimal amount of software.

Previously, economics students were taught that public goods were always underproduced, with lighthouses as the canonical example.

Someone dug up the history of lighthouses, only to find that the early ones were built by voluntary organizations. In a similar manner, the Free Software Foundation (FSF) wrote the GNU tool set as a public good. Economists can no longer assume that public goods are underproduced.

People don't particularly care about products. People only buy things and own things for the services those things render to them. People don't want to own a washing machine; they just want clean clothes. Any desire to own a washing machine is secondary to having the clean clothes. The same thing goes for computers, only computers can provide many different services. The same services that someone can get from a software product can also come from open source software and a support contract.

Economists have discovered many principles helpful to the proprietor of an open source business. Nevermind the joke about 10 economists having 11 opinions. This chapter can but touch on the principles. (See the "For Further Reading" section at the end of this chapter for more information.)



Open Sources 2.0
Open Sources 2.0: The Continuing Evolution
ISBN: 0596008023
EAN: 2147483647
Year: 2004
Pages: 217

flylib.com © 2008-2017.
If you may any questions please contact us: flylib@qtcs.net