Subject: Re: economic efficiency of free software
From: Phil Hughes <fyl@a42.com>
Date: Thu, 5 Feb 2004 15:36:30 -0600

On Thu, Feb 05, 2004 at 04:12:04PM -0500, Russell Nelson wrote:
> Kragen Sitaker writes:
>  > Here's a naive economic argument that spending money on free software
>  > is more efficient than spending it on proprietary software.  Perhaps
>  > there are some good ideas in here, but I don't know enough about
>  > economics to be able to judge.
> 
> Acckkkpththththt, Kragen!  You're not supposed to admit naivete about
> economics!  When was the last time you heard anybody say "I Am Not An
> Economist" in the same way they say IANAL?  Anyway, thank you for
> having done so, it's very refreshing.
> 
>  > 90% profit margins induced by copyright-based monopoly ultimately mean
>  > that less than the ideal amount of effort goes into improving software,
>  > and less than the ideal number of users benefit from the software.  
> 
> You're neglecting two effects: first is that not all software is
> successful in the sense that it attracts sufficient users to fund
> future development.  Somebody has to pay for the initial development
> of that software.  In the open source world, it is the person who
> writes it in the first place.

I see some useful data from the book-publishing racket to toss in here.
Major publishers (that means the companies that just do books rather than 
companies that are in an industry and also publish books just in that
industry) have a success rate of about 1 in 10. That is, for every ten
books they publish, they expect one to be profitable.

What makes this interesting to a free software developer is that while
the publisher of the books has some costs (editing, printing and
distributing) the author is also taking a big chance with a lot less
control. The book publisher is happy with this 1 in 10 ratio and will
put a lot of effort into turning a profitable book into a very
profitable book rather than trying to help something that is marginal
become profitable.

Besides the downside for the book author, you have the same thing at the
retail level. Bookstores want to maximize their income per inch of shelf
space. What that means is that they would rather have copies of a book
that somehow got a lot of press on their shelf that copies of an
assortment of books covering the same topic in different ways.

> Secondly, price conveys more than money.  It also conveys information.
> Information about what software is needed, and what is not.  For
> example, the price of Microsoft BoB has in essence dropped to zero,
> because nobody wants it.  It may be that Open Office will force
> Microsoft to drop its price.  In time, Microsoft may decide that it
> should not invest farther in word.  Their level of profits tells them
> what software they should write.  The open source world doesn't have
> the price signal.

Doesn't have or doesn't currently have. One (failed) attempt to address
this was co-source which was essentially a dating service for people
with a software need and people who wanted to get paid to write
software. Threatenware (in any of a number of forms where you start
using the software but are then expected to pay if you decide you want
to continue to use it) is another approach with appears to have pretty
much failed as well.

I don't have a solution here but it does seem like there must be some
model that would "work". That is, demand would be established, initial
development would be funded and "profit" would be shared in such a way
that future projects could also get seed money.

>  > then the extra 90% is market friction.  The users would be much better
>  > off if they could give $50 million directly to the Word developers,
>  > perhaps through an administrative organization like the United Way that
>  > added on 30% for administrative costs.
> 
> United Way??  How about suggesting the Public Software Fund?  :-)

Yeah, that's closer but does it work? That is, do any big potential
buyers get excited about it? This whole problem is clearly not specific
to software. Funding art has similar problems. So, maybe I am just
looking for a way to save the world. :-)
-- 
Phil Hughes, fyl@a42.com  Phone/FAX: 506-483-1265 
Aptdo. 89-4060, Alajuela, Costa Rica