Subject: Re: a model of competition between free and proprietary software
From: "Mark Rauterkus" <Mark@Rauterkus.com>
Date: Sun, 20 May 2001 22:26:45 -0500


Hi All,
 
> However, the number of developer-hours spent on improving P is *not*
> proportional to P's quality, but to its revenue.

P's value might not reside in its worth as a development tool on the
marketplace, but rather from its functions as a advantage that gives value
to some other business (income streams) that leverages P.

Example: Ford Motor Company might invest in a new paint for a car finish.
Call it "No Dirt Paint." That paint's R&D and investement was made so FORD
could sell more cars, not paint. But, in turn, the paint is sold on the
marketplace. But, the paint is priced with costs so high so that other car
makers (competitors to FORD) can't afford it.

Perhaps that is not a good example.

Point being, P can't always be expected to flourish on its own. The web of
life can be tangled in many ways around various entities. Success and
failure can't always be measured on the merits of one's own capacity.

>  Furthermore, not all
> of that revenue can be spent on developers' salaries.  Some of it must
> be spent on salespeople, lawyers, and the other
> accoutrements of a functioning corporation.  Most importantly, the
> investors who supplied the original capital must be rewarded, and they
> must be rewarded at an attractive rate of interest, so P's sponsor has
> one *cost* that grows exponentially.

And, P's cost to P's sponsor might be a pimple in the grand picture.

> At a certain point, F's level of quality is so close to P's that if a
> customer needs one feature from F that P does not have, it will be
> cheaper for the customer to hire someone to extend F than to buy P,
> and there are enough volunteers extending F that they can quickly
> match any improvements to P.

This is an assumption that F & P come close to one another. That is a big
"IF."

> Once F passes this point, the return on
> investment for P's sponsors is no more than the ROI for a company
> specializing in F-related services; that is, they may be able to stay
> in business by providing support, maintenance, and consulting
> services, but the copyright on P itself has no market value.

P's value as a part of a suite of assets can't be so easily discounted.
Marketshare, customer history, and competitive edge (even false hopes) are
not zero.

> This is certainly oversimplifying things.
Okay.

> argument could be developed with more mathematical and economic rigor,
> it might provide some insights into what situations favor free
> software and what situations favor proprietary software.  (If the Fed
> lowers interest rates, is that good or bad for free software?)  Also,
> if a more formal analysis supports my theory that free will always
> beat proprietary software in the long run, that analysis might appeal
> to the CEOs and CFOs who wonder if "open source" is just another fad.

Humm... Good Qs. I'm not a pro either.


Ta.

Mark Rauterkus
mark@Rauterkus.com
http://Rauterkus.com