An Economics Perspective to the Open Source Movement

[Prescience]

As an economics geek, I'm fascinated by the open source movement and I now consider myself part of it. From an economic perspective, one could say that it's an entire movement that is dedicated toward fighting government failure (opposite of market failure) in a single sector of the economy. It's government failure because economic output would be greater without many of the government interventions in the sector. These interventions include software patents, overly strict copyright laws, looking the other way on monopolistic behavior, etc. It's basically the effect of powerful lobbyists, rent seekers and a handful of unfortunate court rulings. The first two are part of something economists refer to as crony capitalism. Government failure is often far worse in other parts of the economy that have been around longer. If only there were as many of people in other sectors of the economy with as much passion taking on government failure and it's effects.

I have a hypothesis as to why open source is successful. First, you have to take the personal utility that people get through developing open source software as opposed to proprietary and figure it into the deriving functions of both the supply and demand functions (don't worry, i won't do any fancy math) instead of just one of them. You have to factor in economies of scale a lot more with open source software. Also, open source software is probably the closest thing to a true contestable market out there. In a perfectly contestable market, participants act like they are in a perfectly competitive market and no one makes abnormal profits because there are barriers to entry or exit, leading to a potential for short term market entry to make all of the profits. Of course, there are flaws to the assumption that open source is a contestable market, but anyone following it has watched countless forks happen, a great example. This means that in open source, the biggest winner is the consumer and new and/or relatively week market participants. This improves overall competition, both within open source and outside by forcing firms to offer lower prices than they otherwise would, raise quality, differentiate and/or invest more in improvements. I'm sure there's other things that I'm forgetting to mention.

Anyone have any ideas or comments?

[suplero]

Re: An Economics Perspective to the Open Source Movement

Your post is interesting, but I do have some questions about it.

First, what is your definition of "successful" from an economics standpoint?

I'll leave the first paragraph alone, because I don't have much to add to it.

The second paragraph seems to be from a developer standpoint. I don't know if I would agree that a single viewpoint is enough. I would also add in the user to any hypothesis. Users, whether businesses or individuals, benefit from the reduced cost by being able to redirect the software costs into other areas. It also indirectly reduces costs for license tracking and associated headaches.

Either way, the economies of scale idea has merit, but I think the biggest benefit in open source is in starting with a huge supply of working code already. No need to reinvent an entire OS if the entire source is available. Thus, "cost" for materials is very low. However, the "cost" for the product is also higher than with proprietary software, in that any value added via new code is also given to everyone else. This creates a system with low cost for entry, but also reduced expectation for profits. From an economic perspective, I don't know if that is considered a success. From a freedom perspective, no doubt it is a great success.

Which is why I think there are few companies developing open source that make a profit on the software. I assume Red Hat actually makes much of their income from services. Even Canonical appears to be struggling in selling software. I am not very informed on the number or condition of open source companies, but since I read several tech and financial publications, the fact that none come to mind must mean it hasn't been newsworthy, either to just me [glossed over it] or the publication.

IBM is a growing into big name for open source, but most of their expectations - and the reason they pay for development of open source projects - is to make money on their services and hardware. I don't think they expect to make a profit on the software.

What I see as the real success for open source is the control it gives back to the users themselves. The community of open source is far greater than any company that distributes code - as evidenced by this forum. The fact that users are able to interact with developers, and share ideas, needs, and code and patches or whatever, provides for much greater benefit - especially in terms of "time is money" - than proprietary software ever could match. How long would it take to implement a new "how about this" idea into proprietary code vs rolling your own, or talking with the developer to get it done as a patch? When Windows vulnerabilities go unpatched for 17 years, I think the answer is pretty clear.

The lowering of prices hasn't necessarily been too obvious to me either. That is probably because much software is acquired from the pc-builders, as opposed to retail purchases, and those prices seem to be quite a bit lower than retail to begin with.

[bobcollard]

Re: An Economics Perspective to the Open Source Movement

To think of Open Source as "Free" is absurd. I takes time and money to create this amount of software and systems. As for the successful idea, it is not meant as a competition with any single entity, let alone Microsoft. It may seem that way, but, that is not the ideals behind it. For other industries to take up the flag it would take a major adjustment in the way the general public thinks about Free Enterprise. It is sort of the back bone of this country. I say sort of, because, if you really look behind it you find a few individuals running the whole mess and they don't want Free enterprise, really. They give that impression and yet they control prices and run people's lives. FWIW, My opinion of Economics is "It's like the weather, everyone is talking about it, but, no one is doing anything about it." (Will Rogers Junior) That is, except a few people in Open Source.

[GreyGeek]

Re: An Economics Perspective to the Open Source Movement

I disagree, Bob.

Open Source is free from the POV of the user. While I contribute regularly to the various distros I try and/or use, I do so voluntarily. Likewise, while it costs the FOSS developers their time, the use of their equipment, and they donate skills they could be paid to use, and frequently are, these contributions are also freely given. The corporate coders paid to contribute to FOSS are doing so under the GPL, so it represents a donation no more or less than mine or the volunteer FOSS coder. To say a FOSS project cost "X" dollars is to value it using proprietary standards, and there is no law dictating that proprietary costing methods must be employed to evaluate the worth of FOSS. FOSS has worth according to its use, not what is invested in it. The more it is used the more worth it has, regardless of how much was "invested" in it. Some of the most useful utilities were coded by a single individual over a single weekend, but they have been used by MILLIONS, millions of times. From that POV they are priceless. Irreplaceable.

IBM and other for-profit businesses EXPECT to get a return on their investment in FOSS project worth more, in the long run, than what they donate/spend on those projects. However, FOSS developers are under no obligation to see that profit driven business in fact receive more in return than they invested. But, as more and more proprietary/profit driven corporations see profits in FOSS, they also attempt to force their "business models" onto FOSS by trying to create artificial scarcity and, through the use of the LGPL, set up toll booths where ever they can. Their first efforts were the creation of "FOSS" licenses "similar" to the GPL, but NONE of them guaranteed the FOUR FREEDOMS, which is what they desperately seek to avoid. Currently, the OSI has some 60+ "free" licensees claiming the same benefits that the GPL gives, but none do. Their real purpose is to bury the GPL tree in a forest of other trees, so as to hide the GPL as much as possible. Some corporations even go so far as to violate the GPL license and steal GPL code, patent it, and then turn around and sue the original developers for patent violations. The recent model train software debacle comes to mind. While the crook hoped, like Microsoft frequently and successfully does, outspend the victim in court filings and thus default on the case, the crook in the model train code heist ran out of money first, resulting in a victory for the GPL license and that FOSS model train software.

I think the OP has hit the nail right on the head. It IS the failure of the various government agencies charged with protecting the public to uphold their PUBLIC trust that has led to this situation, with the help of congressmen who have taken "campaign contributions", formerly known as bribes because the congressmen can divert his/her "campaign war chest" to personal use if they decide not to run. Thus, the patent office is the property of the corporations with the deepest pockets. Presenting prior art to block a software patent on techniques which any software "yoman" can create off the top of their head (1-click? Sorting? software updating?... the list is endless) serves no purpose when the USTPO ignores prior art and takes the filing fees. In like manner, the FDA and the big Pharms have a revolving door policy that allows the Pharms to market drugs which are more dangerous than the medical problems the claim to treat -- 15 seconds of claimed benefits followed by 45 seconds of warnings, including the possibility of DEATH. And the FDA has a constant war against supplements and herbal treatments? They are merely trying to protect the profit centers of the pharms. The Pharms talk about "recovering research costs" but most of the research is by universities funded by government grants. When the research shows promise the scientists take the newest secrets with them into the corporate world, buy up the license rights for pennies on the dollar, and start charging the American people ransom amounts to use what they already paid the development costs on.

The FCC, likewise, is in bed with the cable and telcoms to the extent that they can bet $200+ BILLION from congress to complete the laying of fiber optics that local government started doing because the cable and telcoms sat on their copper wire profits and did nothing after a multitude of requests to make their communities ready for Internet in the 21st century. They pocketed that $200+ BILLION and did nothing (because Congress put no teeth for non-performance in that bill which authorized the funding AND forbid the local governments from "competing" against the cable and telcos.

In other words, in EVERY SECTOR of our government businesses big and small have bribed Congress to subvert the intended purposes of government agencies away from being servants of the people into being lapdogs for the super wealthy, hiding behind corporations. "Corpus" -- body. A faux "body" which now has more rights than a REAL, flesh and blood body.

I began my political life voting for Goldwater in 1964. At that time I felt that the Democrats were evil incarnate and would spell the doom of this country if they got into power. I was wrong. Struggling to use Linux and help it reach a level playing field while Microsoft ignored ethics and laws in its quest to suppress ALL other competitors, has opened my eyes to the miserable state of our government and economy. The fault lies with both parties and our political process. It allows those with deep pockets the ability to pay corrupt congressmen, which most are, to ignore the votes of the people and serve the wishes of the moneyed few. So, NAFTA, supposedly to make American corporations more profitable, actually makes the upper management and major stock holders more wealthy by shipping manufacturing and most professional jobs overseas, importing technical workers under H1B (along with videos showing how to hire them while avoiding citizen applicants), has succeeded in turning America into a 2nd world country, unable to afford to maintain its own infrastructure, let alone build new infrastructure. Repair roads? Many local governments can barely afford to fill potholes, and some can't.

The current economic crisis, while started by ACORN, institutionalized by C.A.R., and fueled by corruption at FANNY MAE and FREDDIE MAC, was exploited by a nearly TRILLION dollar theft of the US treasury by corporate bankers, brokers and other "investors". Bernie Madoff was an armature by comparison. Their "bail out" money now is funding their hundreds of millions in "bonuses" to EACH (for what? theft?) while they sit on that cash to protect their luxury lifestyles and refuse to use the money for what it was intended, to jump start the economy be helping home owners and other tax payers.

What amazes me is that the Left can't see George Soros for what he is, and the Right can't see the TEA Party for what it is. Both are plagues.

[dibl]

Re: An Economics Perspective to the Open Source Movement

Heh -- GG, it's the BEST government money can buy!

[bobcollard]

Re: An Economics Perspective to the Open Source Movement

Dibl, you said a mouthful.
GreyGeek, you seem to contradict yourself. We all contribute in one way or another, just click on one of the advertisements and the contributions pour in. Forgive me, but, that is not the ethics they propose, nor how Linus Torvalds thought when he started this. Oil, Agriculture, Medicine including Doctors and Pharmaceudicals, Technology and Manufacturing run this country, not the people. Doctors want to keep us sick, there is no money in wellness. Oil companies don't want us to get 50 or 75 MPG of gas, they pay good money to keep that off the market. Farming is Big business. Look at the mess in South America where they leveled the rainforest for more land. The biggest advances in Technology comes from War. Manufacturing is a matter of dollars and cents. Design it here and sent the plans to poor countries like Mexico or China where there are no government regulations and who cares if some people die because they use Ethyline Glycol (Anti Freeze) as a sweetener? The huge recall in automobiles in Japan will end with one or two people committing suicide, all nice and clean. People are starving in Africa because their Governments found it was the easiest way to reduce the populations, not because there is no food to feed them. Most charities are a big scam, the donated money is absorbed in Administration costs. Sure, they may help some people for their fifteen seconds of fame then they are forgotten. The money used to bolster our economy from this financial ruin has lined many peoples pockets when they chose to retire with a great pension. Some got caught, smacked on the back of the hand and let go. Where is that money now? It is not making jobs for the millions on the streets. I love to vent. My apologies if this is too long.

[GreyGeek]

Re: An Economics Perspective to the Open Source Movement

Heh -- GG, it's the BEST government money can buy!

That's my most oft repeated response to questions about our Congress -- it the best money can buy because ALL of them are bought and paid for.

The average congressman comes to his/her first term with a net work of around $250,000. By the end of their second term their net work is around $4.5 Million. It raises the question of WHO they are working for, the people who elected them, or themselves. The answer is obvious.

[GreyGeek]

Re: An Economics Perspective to the Open Source Movement

Dibl, you said a mouthful.
GreyGeek, you seem to contradict yourself. ....
Farming is Big business.
....

How? I agree with everything you write. I quote the "Farming" line because of a simple fact FEW people understand and even fewer know. Dr Alfred Bartlett first wrote it:

Farming is nothing more than a way to convert oil into food.

In a past life I was an analytical chemist in the oil industry. IF more people realized how little oil remains that quotation would scare the *** out of them, and perhaps we'd get more serious and vocal about alternative energy sources.

[Telengard]

Re: An Economics Perspective to the Open Source Movement

Blah, I don't care about the economics. Open source code and Free software just plain makes sense because it is the best way to develop good software.

[bobcollard]

Re: An Economics Perspective to the Open Source Movement

GreyGeek, have you by any chance read Alvin Toffler's Future Shock? LOL

[suplero]

Re: An Economics Perspective to the Open Source Movement

Blah, I don't care about the economics. Open source code and Free software just plain makes sense because it is the best way to develop good software.

But this is exactly why economics is important - to me at least.

there is no way to convince people without proof, and I think economics is a way to quantify the two things in your sentence: "best way" and "good software".

I always find the Microsoft TCO studies funny, but there is a reason why a company with 90+% market share spends money to make up numbers. When looking at a situation, the side with hard "facts" will be taken more seriously than the guy who just says "this is better" even when speaking the truth.

If a theory can be worked out why people believe the way they do, there is tremendous marketing leverage potential. Marketing is actually the one thing that hasn't been given much attention by open source, and probably for all good reasons. I would rather get work done than waste time with meetings and such, but unless people are made aware of me, I don't get work. Although at this point most of my work comes from referrals - which I won't complain about. However, if I wanted to expand, I couldn't count on these same people for bigger projects, or long term. And I probably couldn't count on them telling people fast enough to keep me paying the bills.

An economic approach is one way to convince people, hopefully by backing up statements such as "it's the best way" with numbers.

[GreyGeek]

Re: An Economics Perspective to the Open Source Movement

a company with 90+% market share

Microsoft does NOT have a 90+% market share. On Feb 12, 2009, Ballmer gave a talk in which he presented a graph showing that Apple had about 10% desktop market share and Linux had about a 12% desktop market share. That means that Microsoft's desktop market share can not be more than 78%. With the failure of VISTA both the Apple and Linux desktop market share has increased. Win7 has brought back "some" of Microsoft's lost desktop market share, but I doubt, currently, if it is much over 70% .... and that is in the USA. In other some other countries the Linux desktop market share has been above 16%. In China there are 300 million Internet users, while in the US the number is only about 90-100 million. There could be as many people in China using Linux as there are people in the USA using computers.

When one considers the server market the Linux market share is greater. The ONLY reason why the myth of the Microsoft 90+% market share persists is because they pay to have that fable repeated as often as possible in as many outlets as possible. They get support from 3rd party vendors whose SOLE source of income is selling applications that run ONLY on Windows. It is in their advantage, as well, to push the myth.

The ONLY data one has about sales is the retail market channel. Even then that channel does not take into account the fact that the convicted monopolist still has a strangle hold (thanks to the blind eyes of the Feds) on the PC OEMs. The result is that most Linux offerings are so meager and limited that folks who buy computers to run Linux buy one with Windows preinstalled because, "strangely", it is just as cheap to get hardware with Windows preinstalled as it is to get a box with Linux preinstalled, but the Windows boxes come with more features and options that those sold with Linux preinstalled. So, the deck is loaded in Microsoft's favor and it is remarkable that despite that slanted playing field Microsoft's desktop market share has suffered as much as it has. Microsoft is really ticking people off, both in their ethical and moral behavior, and because they cannot create an OS that has even a semblance of security.

[suplero]

Re: An Economics Perspective to the Open Source Movement

.....
I couldn't find anything with your numbers on it, but I did find a presentation slide with a donut chart that didn't come with numbers but showed relative market share. At the bottom of the slide was a "splat" that said "microsoft internal analysis" - whatever that means.

I don't dispute your numbers either, but with a cursory search couldn't find anything that stuck out with those numbers from any independent sources. Who knows why Ballmer would use any type of number comparison - without context all it did to me was to question morale.
....

You found the graph I referenced. In his talk Ballmer mentioned that Apple (at the time) had a 10% market share. While he didn't mention the Linux market share it is interesting that his PR department drew the Linux pie slice slightly larger than Apple's. Since these graphs are usually generated automatically from spreadsheets I suspect that the value representing the Linux market share WAS larger than that representing the Apple share. Since then Microsoft has tried to portray Apple and Linux fighting over a trivial piece of the market share pie, with Apple making up lost ground at the expense of Linux, while Microsoft's market share "remains" at 90% or higher. The truth is that since the VISTA debacle BOTH the Apple and Linux desktop market shares have GROWN, and only since the release of Win7, which is just XP with window dressing, has Microsoft's share rebounded a few points. But, it is not, and probably never will be again, even near, let alone above, 90%.

Apple market share comes from verifiable retail sales channel information, but Linux also has a retail channel presence due to Ubuntu, RedHat, Novell, Mandriva and others selling copies of Linux through those channels, the size of which can be verified for a price. Neither Microsoft nor interested Linux parties have disputed the implications in the Ballmer graph.

As you know, a far larger number of copies of Linux are made available through the "free channel" of a download. AND, a single copy of a downloaded distro can be, and often is, installed on more than one computer, often replacing Windows installation. Therefore, I suspect that the ACTUAL market share for Linux is far larger than the 12% shown in the Ballmer graphic. Few FOSS projects have money they can spare for purchasing ads in major meida, and since most 3rd party application houses believe that they can't make money competing against FOSS software in their market niche they generally don't make Linux versions of their applications so they don't run ads promoting their applications for a Linux platform. For example, in video editing I have been using Kdenlive, but just yesterday I saw a FOSS project, OpenShot, which is in the Lucid repository, which appears to have raised the Linux video editing application standard to a whole new level! 8)

Regardless. Since Microsoft has no qualms about using one of their 3rd party sycophants, NetApplications, to publish bogus claims about supposedly minuscule Linux market share values, I have no qualms citing Ballmer himself as the source for a MUCH LARGER, and more accurate, Linux market share. And, I believe an analysis of the numbers from several sources back up the 12+% claim.

And, while we are on the topic of market shares, allow me to point out another bogus claim, namely that Microsoft's share of the Internet servers is increasing and the FOSS share is decreasing. If one believed Netcraft's surveys that would be the natural conclusion. However, around the spring of 2003 Netcraft began using unusual analysis techniques, such as: counting EACH PARKED GODADDY server running Windows, but counting 5,000 Linux Google servers as ONE; dividing the servers into "active" and "passive" categories that favor the WIndows OS, etc.... The February 2010 Netcraft survey shows FOSS at 54% and Microsoft at 25%.

However, Netcraft is NOT the only firm doing Internet server analysis. A Canadian firm called SecuritySpace has been doing so as well, and their treatment of the data is more even handed. Their sample size is more than sufficient to accurately classify Internet market shares, and the URL I've linked to shows that the FOSS Internet server market share is at 72%, while Microsoft's is at 17%. On that link is a drop down combo box which allows the comparison of market shares in various domains. In Germany FOSS is 93% and Microsoft is 4%. Generally, only the domains of repressive governments show higher percentages for Microsoft servers than FOSS servers. It is much easier to spy on the activities of those who use Windows.

[Prescience]

Re: An Economics Perspective to the Open Source Movement

This post is in response to the economics comments (not open source.)

Wow. So much to say, but I don't even know where to begin. First of all, I'd like to correct a very common misconception about free trade. "Mutual" free trade is great. Unfortunately, there's this weird phenomenon in economics where if you make one change that normally improves the economy, other factors can be cause the change to make things worse. The reason for free trade related job loss in areas like manufacturing is not because of free trade. Free trade has merely accelerated the process. The job loss is a market correction caused by an artificially strong currency because a lot of foreign countries peg their currency to the American dollar and then devalue it. If that were not happening, the developing world would begin to develop a middle class, there would be a great deal more financial and economic stability in the world, and the vast majority of Americans would benefit. Americans would still get cheaper goods (though more expensive than now.) Americans of all income levels would generally make more money because of productivity gains do to increased global competition (this is assuming there are no unions. I don't know how unions might effect the equation or if they would effect things at all). The manufacturing sector would still be vibrant. More importantly, there would be no outrageous trade deficit. America's trade deficit is a side effect of foreign countries devaluing their currency with a currency peg to the U.S. dollar. While America benefits from the resulting low interest rates, it encourages people to lend more money for unproductive economic investments like consumption and residential real estate. It also lowers the return Americans make on financial investments, discouraging savings. These two things have caused a negative savings rate for a long time. This is very scary. America is vastly over-levered. This has weakened America's economic stability by turning it into a house of cards. The current financial crisis would have been a garden variety recession, but for this. If something isn't done about the savings rate, it will happen again. Also, America should be looking to begin paying off its public debt and private consumer debt and residential mortgages before trying to push foreign countries very hard to get rid of their currency peg. It's a huge mess and I'm deeply concerned it will not be dealt with. By the way, protectionism (like tariffs and quotas) only has a negligible impact on trade debt. In response to a previous post: Acorn didn't help, but I don't know how much harm if any they were actually responsible for. Fannie and Freddy were huge culprits. The government has written a blank check into law so that they have no choice but to bail out Fannie and Freddy, regardless of anything else. This has created tremendous moral hazard, where they take risks that the free market would not allow and shift the consequences to the taxpayer, but they still reap the returns during good times. Since they are so big, they essentially "forced" all or most of their competitors to also take on the risk. When the bubble burst, suddenly all of the risky business practices caused tremendous losses. Since it was so widespread throughout the financial sector (which has a tremendous importance in the economy: redirecting underutilized resources from individuals and firms to others where they would be employed more efficiently), the risks to the taxpayer became systemic risk, or risks to the entire economy. When it fell, it brought the whole economy down with it.

Whew! I'm sure you guys already knew some of this, but I tried to be thorough, in case some people didn't.

[Prescience]

Re: An Economics Perspective to the Open Source Movement

This post is in response to the open source posts:

Suplero, you're probably very right about the difficulty of making money with FOSS. I suggest looking at it another way though. Let's look at Open Office. What if all users of Windows and Mac paid the same price for their operating systems, but instead of paying it to Microsoft, it got donated it to development of things like the Linux Kernel, GNOME, or KDE? Linux's awesomeness would skyrocket to unbelievable heights. What if only a small fraction of the money was donated? It would still catapult Linux far ahead of Windows and Mac while saving everyone lots of money. Of course, this isn't done because of the "prisoner's dilemma." This is often a cause for people to demand government intervention, which would probably be a mistake because they don't have a good track record of handling similar things well in the past. Realistically though, there is a more moderate thing that happens. Firms donate code, money, capital, and help to FOSS because it improves their bottom line. I may be adept, but I'm not a technology expert so I don't know if this is true, but I've heard that firms like Microsoft essentially have been "bullying" their business partners because they have so much market power and forcing them to do things there way. This has hurt both consumers and their partners by rising costs and prices. Naturally, firms have a vested interest in Microsoft failing so they help out it's most "dangerous" competition, FOSS. Also, if a firm has needs a new feature in software for it's business or needs a bug fixed, they can put a bounty on it so private developers have an added incentive to write it, hire a private contractor to write it, or even submit a patch themselves. If FOSS can increase it's market share, the last thing will become increasingly common. Also, I wouldn't be surprised to see entire businesses pop up that revolve around it. Similarly, some FOSS software could be developed by a company for internal use, but make a profit on it by fulfilling bounties and contracts other firms put on it. Some of this, especially the last thing may require the government to loosen both patent and copyright laws before it would become prevalent.

Linux has more than 10% market share on desktops? I can't see that, at least not in America. Maybe internationally though. I'm the only person I know who uses Linux except for a friend of mine who I recently converted. Maybe I'm just don't live in a very "Linuxy" area.

I would like to disagree at what I might mistakenly have seen as a complete dismissal of the LGPL by GreyGeek. It's one step closer to the GPL, so in that sense I'm sure everyone here can agree it's an improvement (though there's something to be said about it pulling away individual developers away from projects with a GPL.) I personally believe that in a healthy economy businesses should generally make investments in open source with the hope or expectation of a long term return. This is part of what makes free markets work. This may not always be possible with the GPL. As long as there isn't any trolling, the LGPL is a natural middle ground that allows for open source to exist in business where it wouldn't otherwise be. On the other hand, I agree that there are a lot of times that firms misuse it or that the overall economy would be better off without a product using it altogether. More specifically, the economy would be better off with people simply using existing products that happen to be licensed under the GPL. Speaking of LGPL, does anyone know about Qt's trajectory (if there's any movement at all) for becoming closer to the GPL license than it is now?