SOME SIMPLE ECONOMICS OF OPEN SOURCE

I. INTRODUCTION:
The interest in open source software development has increased because of:
1. Wide spread use of open source software
eg. Apache web server, Linux program – challenge to Microsoft Windows
2. Significant capital investments in open source projects by major corporations
Eg. HP, IBM, Sun
3. Collaborative nature of OS software development

II. NATURE OF OPEN SOURCE SOFTWARE

• Open source development process is reminiscent of ‘user-driver innovation’ seen in the machine tool
industry and the computer industry
• Sophisticated users play an important role in accelerating technological progress
• Development of software can be done by individuals with no capital investment
• Combining basic and applied research within for-profit organizations is not new
○ Eg. “open science”
• Open source movement has faced challenges:
1. Forking
2. Reduced emphasis on documentation and support, user interfaces, and backward compatibility
• Geared towards more sophisticated users
• Contributors to Open source software development:
○ Computer system administrators, database administrators, computer programmers, computer
scientists and engineers.
○ Self-employed or contracted
○ Open source process is elitist, as important contributors are few and ascent to the “core group status”
= ultimate recognition by peers

IV. WHAT DOES ECONOMIC THEORY TELL US ABOUT OPEN SOURCE?

 Why should thousands of programmers contribute freely to the public good? Are they more altruistic
than individuals in other industries?
What Motivates Programmers:
• Net benefit = immediate payoff (benefit – cost) + delayed payoff (benefit – cost)
• Current Costs:
○ Time:
- unable to work on a project that pays
- unable to focus on primary mission, ie. Research or obtaining a degree
• Current benefits:
○ may improve work skills through problem solving on an open source project
○ open source projects may be more ‘fun’ to work on than primary mission
• Delayed payoff = Signaling incentives
○ Career concern incentive = future job offers, shares in companies or access to venture capital
market
○ Ego gratification incentive = desire for peer recognition
• Open Source projects may have a strong signaling incentive because they attract a large number of other
programmers that in turn promotes quality work because of the large audience.
 Leadership: why turn over valuable code to the community and forfeit monetary gains?
○ May involve the resistance of the corporation, and licensing issues in taking the technology private
○ Open source has more resources and support to fight against dominant industry players
 Open Source
a) Short Term Incentives
• Alumni effect: Open source projects use code
that programmers may be familiar with from
previous learning environments
• Learn how to fix bugs and customize programs
b) delayed reward (signaling incentives)
• Better performance measurement as outsiders
are able to see individual contributions
• Full initiative; autonomy; authors get credit
• Greater fluidity of labour market
Users
• Sophisticated, advertises talents for job
opportunities
• Use open source work as a way to get access to
venture capital
Tasks
• Operating systems
• Programming languages
Closed Source
a) Short term Incentives
• Pays a salary as code generates income
• Source code is not directly visible
• Hierarchical; performance is grouped under a
supervisor
• Firm-specific: limits ability to change projects
or work environment
Users
• Aimed at helping less sophisticated end-user
Tasks
• Creation “commercial grade” software
• Features: Accessible program interfaces,
technical support, backwards compatibility

 Why are there open source projects?

Characteristics of Successful Open Source production
1. Modularity: divided into smaller, well defined tasks
2. Fun programming challenges: puts focus on the creativity of the programmer
3. Strong leadership: centralization of authority
• Leaders are those who developed the initial code for the project
• Bring vision
• Updating goals
• Trust of other programmers
○ Not driven by ego, commercial interests or politics
○ Reduce instances of ‘forking’ (splintering into parallel projects)

V. COMMERCIAL SOFTWARE COMPANIES’ REACTIONS TO THE OPEN SOURCE MOVEMENT

 Why don’t commercial vendors duplicate open source incentives?
• Would jeopardize intellectual property rights
• Want to limit visibility of key employees to prevent them from being hired away by the competition
• Each software group is autonomous, which limits sharing of code between groups
• Programs are not modular and features are not documented on purpose to maintain team cohesion.

 How do commercial companies capitalize on open source strategies?

• Commercially provide services and products that are not supplied efficiently by the open source
community. Eg. Red Hat: Linux
• Take a proactive role in the development of open source software by releasing propriety code under an
open source license.
○ Eg. Netscape’s Mozilla project (competing against Explorer)
VI. OPEN ECONOMIC QUESTIONS ABOUT OPEN SOURCE
• What will the future hold for open source projects in terms of synchronization of upgrades & backwards
compatibilities that are costly?
• What is the influence of a competitive environment?
• Open source projects work when members have similar objectives, one of which being a dominant
competitor.
• What will be the lifespan of open source projects?
• Longer? Contributions will be continuously made as source code is publically available
• Shorter? Contributions will decline as project loses popularity
• How will the open source community respond to free-riding or ‘hijacking’ of projects by commercial
vendors? What type of licensing would be optimal to protect the nature of open source projects?
• What will happen to the community if programmers working on open source stop contributing freely in
order to develop ideas with potential commercial payoffs?