Mabaloo - Economics of Software Development - Open Source vs Closed Source

Economics of Software Development - Open Source vs Closed Source

Written by Girish Singh

These days there seem to be so much hue and cry over the open source phenomenon that is occuring in the software industry. However , is open source the best solution ? That is the question we tackle.

Now the first issue that i had was with the economics of the software development.
Currently there are two kind of software models - the open source software and the commercial software. Now lets compare the two models.

The open source software model - The common assumption with people today is that open source is absolutely free. That as pointed out by many is not so. In the beginning open source began as a model for free software - free in all sense. As the revolution hit the markets the model was changed into something called 'commercial open source' . Searching on the topic i came across these papers

The Open Source Monopoly - http://www.galatea.com/opensource.html

The Economics of Commercial Open Source - http://www.galatea.com/economics.html

Openstructure: A Call for Open Source Reform - http://www.galatea.com/openstructure.html

Quoting from one of the papers we see

The Dual Licensing Strategy

Dual licensing is the technique whereby a COS company develops software that is called "open source" because the company makes its source code freely available. However, since the company owns the copyright to the software source code, it is able to distribute the software under two different licenses: one open source, one commercial. The open source license, typically the GNU General Public License or GPL, allows you to take the software code, modify it, redistribute it or incorporate it into another project - all usually subject to various restrictions. For example, under the GPL you cannot redistribute the GPL'd software in unmodified or modified form, nor any other project that uses all or part of the GPL'd software, unless you too use the GPL license. This means that you cannot take the GPL'd code, create your own brand of software with it, and then sell it for profit. Of course, if you want to do that, the company conveniently offers you its commercial license.

Dual licensing is used in various forms by such companies as Trolltech, Sleepycat, MySQL and Red Hat. It is precisely this trend that I see to be so dangerous to the spirit of open source. In my opinion, this dual licensing model amounts to a hijacking of the open source movement in which the "open source" nature of the company is used as bait to an increasingly receptive marketplace.

Let's look at an example. Red Hat Inc. distributes two versions of Linux: a commercial version, Red Hat Enterprise Linux (RHEL), and an open source version, Fedora. Originally a free download (and called simply "Red Hat"), the RHEL line was created in 2002 and currently costs anywhere from $349 to $2,499 per server. RHEL is positioned to attract companies who want to move to Linux and want the promise of enterprise-level performance and support. On the other hand, the open source licensed Fedora version is free for anyone to download but is not supported and changes more often. The hope was that the Fedora project could attract a development community which would enable innovations to feed into the RHEL version.

When it comes to a company like JBoss, it might appear that the dual licensing strategy is impossible, since individual contributors and not JBoss owns the copyright to the source code. Currently, the revenue model for JBoss is built around support of their products. However, it has already been pointed out that this model is not viable in the long run (especially for capitalizing on the $10M venture capital investment it received last year). The fact is that JBoss is going after the market share enjoyed by BEA, just like Red Hat is targeting Sun's market. You can't beat BEA by support contracts alone: you need a better revenue model. And JBoss execs don't rule it out. Marc Fleury, for example, admits about dual licensing that "on new layers it may make sense".

Whereas Red Hat Inc. offers one product under the commercial license and another under an open source license, other companies offer two different licenses for the same product. Such is the case with MySQL AB which has been in the dual licensing business for a while. It's flagship database product can be downloaded for free under the terms of the GPL or can be used commercially under the commercial license.

Another link which you might want to see the growth of profit for open source -

http://weblog.infoworld.com/openresource/archives/2007/01/the_decreasing.html

One common factor that you see among them is that they depend on providing services as there major source of income. Now services sector was always a major part of any industry. This just goes on to show a very good example of how the software market has evolved into something which is a self contained industry.

Ever wondered why Red Hat never released a desktop version of linux - Your answers lies above only. A desktop user does not need support so - how will the company earn? That is why they only dewel in a market where commercial organizations are there , market which need advanced technical support. This is where Ubuntu comes in. They are providing desktop versions of linux and even free cds. Now how do they do that ? A little search into the ubuntu and you will find ubuntu has a commercial sponsor Canonical Ltd which in turn is run by a South African enterepreneur Mark Shuttleworth. Search on this name you will find your answer.

You may say that certain groups like ASF (Apache Software Foundation) still exist which still run by the true open source idealogy. Then again check the thanks page (http://www.apache.org/foundation/thanks.html) of apache and you will find the two big names google and HP there. Thus this also is funded by the commercial names.

The above argument clearly proves that the Open Source movement does not run by itself . The funding which it acquires is by either providing services or through commercial tie-ups with other companies which are commercial software in nature.

This brings us to one important conclusion - Open software can never exist on its own. There will always be a balance between open software and commercial software. Providing services may be a way to support however it by no means can be the sole way of earning only. The services market is not that profiting in nature.

Not all software needs services . You do not need support for your photoshop or your microsoft word and as such these kinds of softwares will always exist in the commercial branch only. This is so true as we see no competition of photoshop today in the open source market. For microsoft office we see substitutes but none possess a threat to the market. Also as stated above all these open office etc. are financed by the commercial companies only.

Commercial Software model - This model is clear and straight. You pay for your software.

It is the most common model which exists today and the more successful of the two.

Concluding the article i would say that there will always be existence of the commercial software market without which the industry cannot survive. The recent rise in open source projects has been attributed to the the certain advantages which open source has over commercial software. However the open source model can never solely exist due to its economic considerations. However this does answer the question that open source is not totally non-profit in nature. It has evolved and is continually doing so. The economics will always result in profit motive in an industry without which the industry wil not survive.

The second issue which was raised was the fact that keeping profit motive aside is open source the best of the two models. This I will take up in the follow up article to this.