Subject: Re: Successful FSBs
From: "Tim O'Reilly" <tim@oreilly.com>
Date: Wed, 30 Oct 2002 19:24:07 -0800

On 10/30/02 8:43 AM, "Jim Menard" <jimm@io.com> wrote:

> Tim O'Reilly writes:
> 
>> For that matter, OSS dynamics put competitors in a very strong position as
>> well, and competition keeps prices down. (That's another way of saying it
>> puts consumers in a strong position.)  You can build a huge business with
>> commodity software (viz. Uunet or Earthlink in the ISP market), but it's not
>> going to be anywhere near as profitable as a similarly sized proprietary
>> software business.
> 
> Aren't you comparing apples and oranges? Building a business using
> commodity software is not the same as being a software business. Companies
> that happen to use OSS to provide a service grow independently of what
> software they use. Companies that produce and sell software---proprietary
> or OSS---grow based on the software they provide.

This is a good distinction, up to a point.  But my point is that with
commodity software (or hardware), there are typically many providers of
reasonably similar products, which keeps prices (and profits) down.  Just
look at PC hardware margins vs. the margins of old style proprietary
hardware companies for a historical analogy.  Why should software be any
different?

> 
> [snip]
> 
>> Back to an example from FSB.  In the case of ISPs (a business mainly built
>> using commodity TCP/IP stacks), Uunet came closest.  Their strategy was to
>> dominate the backbone -- to be the best connected site, with lock-in on on
>> key interchanges -- and it worked pretty well for them.  So they didn't lock
>> in on software but on network topology.  Meanwhile, AOL and Earthlink
>> followed the strategy of customer acquisition at all costs, pumping huge
>> sums of money into folks who would pay off in the future.  But even with all
>> these strategies, no one became dominant in the way that Intel, or
>> Microsoft, or Cisco became dominant with their respective, proprietary IP
>> strategies.
> 
> Again, I see a difference between selling a proprietary thing vs. selling
> an open/free thing. Earthlink uses OSS to provide a service; customers buy
> the service.

And your point is?  You just restated my argument.  When you're selling an
open/free thing, you may look elsewhere for advantage than to proprietary
software.  (For example, note how cell phone providers fight number
portability tooth and nail, since that's how they get lock in.  "Software"
is not a differentiator, so they try to keep switching costs high.)

-- 
Tim O'Reilly @ O'Reilly & Associates, Inc.
1005 Gravenstein Highway North, Sebastopol, CA 95472
1-707-829-0515 http://www.oreilly.com, http://tim.oreilly.com