Subject: Re: CNET: The coming open monopoly in software
From: "Karsten M. Self" <kmself@ix.netcom.com>
Date: Mon, 29 Oct 2001 01:10:56 -0800
Mon, 29 Oct 2001 01:10:56 -0800
on Thu, Oct 25, 2001 at 12:26:48AM -0700, Karsten M. Self (kmself@ix.netcom.com) wrote:
> CNET is running a very good article on the coming "open monopoly" in
> software.  

Responding to some on- and off-list comments.  There are some faults to
this essay, particularly in specifics, but the core concepts are very
useful.

> http://news.cnet.com/news/0-1275-210-7632187-1.html?tag=bt bh
> 
>     The coming "open monopoly" in software
>     By [20]Petr Hrebejk and Tim Boudreau
>     October 24, 2001
> 
>     According to a recent report by Forrester Research, 56 percent of
>     Global 2500 IT executives surveyed said their companies were using
>     open-source software--that is, software in which the source code
>     is not controlled by a single vendor. Had that survey been
>     conducted as recently as three years ago, the percentage would
>     most likely have been zero.

...as several here have observed, there are some problems with this
statement.  If true, it's more attributable to underreporting and CYA
attitudes toward free software than any basis on reality.  At the least,
Sendmail, BIND, Perl, and the GNU toolset were widely distributed, and
GNU/Linux was making stealth appearances in many departments.  Chalk
this one up to hyperbole.

>     It's not hard to understand why open-source software, such as the
>     Linux operating system and the Apache HTTP server, is growing in
>     popularity among corporate IT departments. When source code is
>     open, any developer is free to read, redistribute and modify it.
>     This leads to faster bug fixes, improved software and lower
>     development costs.

A nice basic summary of benefits.

>     What's perhaps less understandable is why many traditional IT
>     vendors are also jumping on the open-source bandwagon. 

This is indeed a key question.  You can divide the target audience into
three classes:

  - Those who are fully on board.
  - Those who have no clue.
  - Those who are aware of support from IBM, HP, and other companies,
    but are confused as to why.

The second and third categories are the ones that concern us.  The third
in particular are wondering what is up, and more than a few are
suspicious of intentions.

>     For example, last December, IBM announced that it was investing $1
>     billion in Linux in 2001.  Aren't these vendors concerned that
>     open-source software will undermine the traditional proprietary
>     software model on which their businesses are based? Why are these
>     IT giants joining open-source efforts? Can any company really
>     profit from open-source software? And if not, why would anyone
>     want to develop it?
> 
>     To answer these questions, it's useful to first examine the
>     position of the one major IT vendor who has come out strongly
>     against open-source software: Microsoft.
> 
>     An economic analysis of open source In the world of PC-based
>     software, Microsoft enjoys what economists call a "natural
>     monopoly." 

Strictly:  in a competive market, equilibrium is reached where marginal
cost (MC) equals average cost (AC).  A natural monopoly faces declining
average cost over the entire demand curve, and instead sells where
marginal revenue (MR) equals MC.

Whether or not a software company faces a natural monopoly may vary,
more significantly, a market leader generally can enjoy and sustain a
monopoly position due to several factors (network effects, pricing
advantages, bundling and tying, marketing pressures, favorable
contractual terms, deal sweeteners).  This might be considered a
"natural software monopoly" of a sort also frequently recognized, though
not the same as the traditional economists "natural monopoly".  The
point is largely irrelevant, however.

What's important is this:  the software market is very prone to
monopolization, due to a confluence of effects, most enumerated above.
This is a key point of the essay.

>     This natural monopoly has occurred as a result of several factors,
>     including barriers to market entry (such as the cost and
>     inconvenience for existing customers to switch operating systems)
>     and barriers to competition (such as patents and proprietary
>     source-code control).
> 
>     Microsoft's natural monopoly has also been sustained by a basic
>     law of software economics: as a vendor's business grows, the
>     average cost of reproducing its software decreases. With
>     downloadable software, vendors can produce virtually unlimited
>     copies of their software, and each download reduces the unit cost
>     for producing that software. At the same time, each unit
>     downloaded increases the barrier to competition.

For other factors contributing to Microsoft's continued hold on power,
see:

    http://www.usdoj.gov/atr/cases/f3800/msjudgex.htm

>     This situation creates strong momentum for the monopoly
>     holder--but only as long as it is competing against other
>     companies that follow the same business model.  In the open-source
>     community, today's software vendors are facing a competitor that
>     has no stock, no owner, no board of directors--a competitor they
>     cannot buy, and one they can't attack in a price war because the
>     competitor's products already sell for nothing. It is predictable
>     that in such a market there will be one winner.

Above is the crux of the "winning is inevitable" argument.  My own
feeling is that a viable free software community is inevitable so long
as a landscape in which it may operate freely.  The primary fears are
changes to the legal or Internet environments.

>     The current monopoly holder, Microsoft, has chosen to address the
>     competitive threat of open-source software by urging government
>     regulatory intervention.  Jim Allchin, the company's Windows
>     operating-system chief, was quoted by Bloomberg News earlier this
>     year as saying: "Open source is an intellectual-property
>     destroyer.  I can't imagine something that could be worse than
>     this for the software business and the intellectual-property
>     business." He added, "I'm an American, I believe in the American
>     Way. I worry if the government encourages open source, and I don't
>     think we've done enough education of policy-makers to understand
>     the threat."

Here's where you want to start reading closely.

>     But what about the other big companies? Why would they join the
>     open-source movement? Aren't they equally threatened? No, because
>     they are not the monopoly holder.
> 
>     These companies spend a lot of money on market analysis, and they
>     understand that, in the end, there will be a monopoly again. The
>     one-winner principle still applies. To them, the world will not
>     change greatly whether open-source or proprietary software is
>     running the world's computers.  The end result will still be
>     decreasing average costs, and the same barriers to entering the
>     market will still apply.

Moreover, most of these companies have been through one or more such
cycles already.  Of the major IT companies, the exceptions are Microsoft
and Sun.  Note that neither is particulary warm to GNU/Linux (Sun isn't
hostile, but hasn't figured out its strategy yet, and is beginning to
pay the price).  Notably, IBM, HP, and Apple have all seen several
cycles within the tech industry (or their segments of it), most have
enjoyed a period at the top, and lost it.  Each has a measure of
corporate history to measure the present against.

>     What is different, however, is that in an open-source monopoly the
>     barriers to participation and influence will disappear. This will
>     be a different kind of monopoly--an "open monopoly"--from which no
>     vendor can be excluded from participating, including the big
>     companies now joining the open-source movement.  They have much
>     more to gain by breaking the existing monopoly and replacing it
>     with the new open monopoly.

And that's the answer to the "why is IBM (or HP or foo) supporting
GNU/Linux?" question.

From here on out, things get a bit hazier.

>     Now let's examine one of our other questions: Why would anyone
>     want to develop open-source software?
> 
>     All participation in open source can be traced to self-interest,
>     and participation in open-source software development can be seen
>     as a kind of barter trade. Participants donate the code they've
>     developed in exchange for value: the opportunity to be part of
>     something bigger than their own work, to influence the direction
>     of a project to suit their needs and to achieve some measure of
>     social status among their peers.  Result? Both the participant and
>     the open-source project get what they need.

Sounds nice, but I'm far less happy with such arguments than those which
focus on more tangible benefits.  I appreciate the community that
develops around free software, but I appreciate it because I believe it
gives me and my professional life value.  It's a selfish route to
altrusim, if you will.  A similar argument would be that a strong,
equitable foreign policy might be in a nations interest because it keeps
the flight paths of jetliners and building envelopes of skyscrapers
distinctly seperated.  The theory is the same:  selfish goals can serve
altruistic principles, if sufficiently enlightened and long-term.

Etc.  Remainder of the essay hits some good points, but the meat's
above.

Peace.

-- 
Karsten M. Self <kmself@ix.netcom.com>       http://kmself.home.netcom.com/
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