Open source constraints entrepreneurship
I used to be rather positive about open source software (or free software, let’s assume in this very post there’s no difference) overall, for at least 4 reasons listed in this post. But after thinking about it, I now believe open source software constraints entrepreneurship in a very unfruitful way. I came upon these conclusions, as with a bunch of classmates whom with I’ve been building an open source project, whilst trying to empathize asking myself “if I were a competing software vendor, would I fear those guys?” The answer is obviously “yes”.
Actually, software new entrants main competitors probably aren’t well-identified independent software vendors but unsuspected and most often free-of-charge open source software as well.
Say for instance you want to start a company to compete with Adobe on creating and saving .pdf files, how do you think you’ll manage to compete against software (like the one I use, CutePDF, an excellent piece of software although slower than Acrobat) that are free of charge?? If you decide to go after market leader Adobe, then you probably have a sort of more agile development team than Adobe, no pain-in-the-ass installed base to take care of (so far), a business model is just clever and you’ve been generous enough on stock options to attract the best country sales managers on Earth. So it’s likely that Adobe (very clever guys over there) will take you seriously.
But chances are high as well that you’re not going to start up your company at all, even though you believe you do better than Adobe in a number of areas. But since it’s obvious the new venture will never align prices amounting to zero, how can one compete with (often good) products that are free of charge?
Hence my call: open source software constraint entrepreneurship in the software industry and threaten the very idea of free-market competition. Indeed, with no new entrant jumping on the ring, established software companies (Microsoft, Oracle, SAP, Google, Adobe, IBM, etc.) will tend over time to be sort of challenged less, or by open source or free software projects only. This mechanism doesn’t help free-market competition (less market players), doesn’t drive commercial innovation and hence affects the end-user experience and consequently the computer industry as a whole.
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I completely disagree! First of all, I think everything happens for a reason, including open source, which in my opinion is a response to badly designed closed-format commercial solutions, and a consequence of the open standard that is the internet.
Second, the vibrant open source movement stimulates innovation in many ways. Think of the extensions for firefox, of which some are commercial, and also IBM, who bases a large part of it’s consulting branch on open source developments.
Thirdly, should we always be thinking in traditional business-models? Just because Microsoft, Adobe, and thousands of others made it in this industry, does that mean that we all have to emulate it? Clearly there is an alternative, and reasonably well-working model out there, that seems to work, in the sense of providing useful solutions to people. And the role of future entrepreneurs is not to fight it, but to work with it and exploit it.
Good post, btw. Nice and controversial. I’m hoping it will stimulate some discussion.
In a way it made me think of the theory of the market for lemmons: good products are, in the end, unsold, just as you say that potentially good start-up projects don’t start. Interesting idea! Entrepreneurship may indeed suffer from this -if you don’t count as entrepreneurs the countless leaders of open-source projects, or you don’t count as “firms” firms such as Redhat, Mozilla etc.
However, I too (entirely) disagree with the fact that this situation doesn’t drive innovation. I have recently followed the evolution of several open-source projects (Mathmap for Gimp, PanoTools, Hugin, etc), and it is obvious that innovation is at the heart of those projects. Moreover, you say very accurately that big corporations feel threatened by the open-source world: well great, now that forces big corporations to innovate -and they have much more resources to do so than tiny start-up companies.
Vince,
You’re right to mention the Internet browser industry here. And you point perfectly illustrates my call. When I meant software, I meant commercial software obviously. And in the case of Internet browsers, I believe Microsoft sadly killed the commercial browser market and hence innovation for a while (IE6) by reducing the price of Internet Explorer to zero, just to wipe Netscape off the map. Fortunately, Firefox and Opera came to wake this segment up, and now a new round of innovation has emerged (FFox, Safari, Opera, IE7, etc. are all excellent Internet browsers whilst IE6 wasn’t matching market needs and expectations in my opinion).
In this very case, Microsoft played (by distributing a software for free) the role of open source software today: how the hell can you compete with a player that gives software for free? As the Firefox example you point out shows, the only way to counter a free software initiative is to launch another free software initiative.
I think it all constraints entrepreneurship: I bet nobody today thinks of starting up an Internet browser software start up. And to me, that’s sad.
PS: did you know most software IBM sells is actually proprietary? IBM is the second-to-Microsoft software vendor worldwide, and by far dominates the middleware market.
Emmanuel,
Mozilla indeed is a foundation; but RedHat is a commercial company. I invite you to read this article entitled “RedHat, the next Microsoft?”: http://blogs.tedneward.com/2007/03/22/RedHat+Inc+The+Next+Microsoft.aspx
It’s funny because I actually thought of Market for Lemons as a theory to help me make my point, but thought eventually it would add complexity in my arguments
Thanks for bringing Market for Lemons on the table!
When you mention Gimp as initiatives that are driven by innovation, I can just applause as I 100% agree with you. But say you want to start a Photoshop rival company today. Doesn’t Gimp sort of prevents you from doing so?
About big corporations: I don’t think having no new commercial entrant drives them towards spending more resources to improve their current products, and that makes me feel concerned about the outlook of whole computer industry. That argument isn’t true though when it comes to ’strategic software’ (of which Internet browsers belong to to say the least).
There’s another way to look at the browser situation. But, first off all, I’m not an old enough internet-user that I ever had to pay for a browser, nor was I aware of the fact that Netscape was a for-pay product.
That said, by having a free platform, like a browser, and, hopefully someday, a viable operating system, you encourage innovation on that platform. For browsers, I’m not sure if the web was reserved for paying users that it would’ve taken off as it did.
Another reason, why I think most software should be free is because we are living in a dynamically changing world, and for companies to constantly adapt to their environment is a costly business.
Instead, let the community take care of it for free, and sell services and specialised functions on the developed platform. I’m pretty sure that this is the direction the world is going already, and could paint a 100 scenarios, from games to wi-fi, where this could work.
I did know that IBM sells proprietary software. But my point was that it also uses open source in its business-model(s).
Vince, I must have done something wrong because you’ve been elaborating on open source software and not entrepreneurship (entrepreneurship being the keyword of this post).
If you vision happen to come true at some point (all software for free), then it means there won’t be software start ups anymore.
So, your comment actually backs my point: free software constraints entrepreneurship.
PS: just a question; if all software should be free, then why all cars, books, computers and clothes be not free as well? Can’t people sell services instead of sound products?
, I’m currently reading, makes a good point on that. Software has no variable costs. It costs virtually nothing to reproduce copies of software once it is created. As such, I don’t think software should be compared to industrial products, nor should the same rules apply.
In many cases, software is a service, as once a product is developed the only thing people are paying for is support. So how is it different if we pay for just the support and get the software for free?
I don’t differentiate between innovation—the exploitation of an invention—and entrepreneurship so much. So that’s maybe were our lines of communication are crossed.
Hope that clears my point of view up for you.
sorry, the first few lines should be book, I’m currently reading…
One way to think about “open-source software vs proprietary software” could be to consider open-source software to have an infinite installed base (ie consider everyone has it, since everyone can get it for free in no time).
What is so different than competing against a monopoly? Let’s take the example you suggest: image manipulation programs. If Gimp didn’t exist, a start-up company would have to beat the quasi-monopoly, Adobe Photoshop, since everyone has it (and therefore, theorically, “acquires” it at no cost, if you see what I mean). Gimp being there doesn’t change a thing: the start up company has to beat 2 monopolies. The switching cost from Gimp or from Photoshop is the same (the price you have paid in the past to get Photoshop is a sunk cost).
Vince> Why would software be a service and not a product? What if my car is no product but a service (transportation)? Dematerialization shouldn’t be an excuse to avoid considering a value to things.
Emmanuel> I didn’t have Photoshop because I found it ways too expensive for me. So I’m happy to have Gimp now. But say I want to start a start up to compete with Photoshop and Gimp, I will probably not succeed because Gimp does such a good job, at such a terrific price (zero), that my entrepreneurial drive is very likely to be constrained.
Guys, lets look at this controversy from a macroeconomic point of view:
Companies launch free products even though they incurr the costs of developping them. Therefore, they do so in order to create a HABIT, the habit of using this or that software.
But, do customers loose anything in this very situation? No. I strongly believe that the case here is the same as for pirate applications.
Good examples are numerous, and you have given many of them. Adobe, Msoft (IE6), but also 3D Studio Max for piracy.
Lets look at piracy. The reasoning is obvious:
1. People use the soft bc it is a great soft.
2. Young guys become good at it and it becomes a standard on the web for non professionals, freelance graphists.
3. Recruiters in production studios need talented young guys, but most of them master 3d Max and not the alternative softs. Therefore, they adopt it in production and pay for it.
4. The company which developed 3D Max makes a lot of money.
I believe it is the same for freeware. Here are my arguments:
1. Why do people use freeware? Answer : bc it is free.
2. Why do people use freeware A and not freeware B? Obviously, either bc freeware A is beeter than freeware B or bc freeware A is easier to access (lets say it is pre-installed like IE6)
3. Entrepreneurship is constrained but not through wrongdoing. Why? Because what is the aim/purpose of entrepreneurs ? Well, it is to offer people services/products which make their life better, easier ans so on… In otherwords, if X is the additional wellbeing created by Soft A for people, then if we suppse that Y is the money (ie loss of wellbeing) paid for Soft A, Soft A exists only if Y
Following text:
3. Entrepreneurship is constrained but not through wrongdoing. Why? Because what is the aim/purpose of entrepreneurs ? Well, it is to offer people services/products which make their life better, easier ans so on… In otherwords, if X is the additional wellbeing created by Soft A for people, then if we suppse that Y is the money (ie loss of wellbeing) paid for Soft A, Soft A exists only if Y
I believe it is the same for freeware. Here are my arguments:
1. Why do people use freeware? Answer : bc it is free.
2. Why do people use freeware A and not freeware B? Obviously, either bc freeware A is beeter than freeware B or bc freeware A is easier to access (lets say it is pre-installed like IE6)
3. Entrepreneurship is constrained but not through wrongdoing. Why? Because what is the aim/purpose of entrepreneurs ? Well, it is to offer people services/products which make their life better, easier ans so on… In otherwords, if X is the additional wellbeing created by Soft A for people, then if we suppse that Y is the money (ie loss of wellbeing) paid for Soft A, Soft A exists only if Y
i am unable to post the rest of my text…
Jeremy> I apologize, maybe my comment wasn’t clear enough (actually the example with adobe is more confusing:p): I say competing against a free software is the same as competing against a software that everyone already has, free or not. The entrepreneurial drive will be constrained in exactly the same way as it would be if the already dominant software was free or not: the only constraint being if your product is good enough to induce consumers to pay a switching cost.
The conclusion for this might even be the opposite of the Market for Lemmons: only the excellent and innovative start-ups with breakthrough technologies will get past the open-source “monopoly”. Entrepreneurship sure is dampened, but the entrepreneurs that remain are the good ones. And in my opinion, this fiercer competition can only be healthy, and benefits the general welfare: before open-source, you had to pay to get something good; now you get something good for free, and you pay to get something excellent.
Vince, Alex> Vince, you mix “innovation” (exploit an invention) and entrepreneurship; you actually hide a major aspect of value creation: making money! I agree with Alex though with the aim of entrepreneurs at offering people services or products that will make their life better, but subsequently, if I decide to start a venture full-time, then I probably need to make money out of it to feed my family…
Emmanuel> it often occurs that a bad commercial product (for instance a web browser) becomes excellent thanks to time and customer feedbacks. Having competitors ’selling’ their products for free can only decrease, if not annihilate, the number of companies potentially providing excellent software over time.
So, as you point out, entrepreneurship for sure is dampened: few software start ups will be able to bootstrap (ie forget about raising VC money; + valuations are likely to go down as VCs will measure the risk of confronting with free software) AND build a software that quickly competes in quality against the open source projects developed by armies of developers.
4. Look at Carrefour, a retailer from the Old Economy. I has both financial stregth and a quasi monopoly due to its network of shopping centres. Therefore, it can force prices lower than the cost it incurs for them for enough time to sink its competitors. But, it is illegal. There must be a reason. Yes, it is to allow competition regulators say. From this point of view, Jeremy, you are right.
5. But, look at Msoft, the EVIL, BIG company which sells more and more FREE softs inside its beautiful Windows/Vista. Well, it simply means that the price of the OS falls and that they use the monopoly to take hold of distribution channels for other products/software which is distributed on the market and works under their OS. It is the same thing as for Carrefour to sell clothes alongside with food.
Nothing extraordinary.
Jeremy, do you want prices to be regulated ? Do you propose to forbid companies from selling their software cheaper than X, as it is the case for books in France, a law which forbids rebates higher than 5% officially to protect Culture?
i made it!! i posed the rest (or nearly so) of my post! I am a Geek!
Lool
or is it Gick? ahah
Wow, I didn’t know the comments were restricted by word count. I guess I never wrote that much (which is surprising, because I write a lot). Anyway, nice job, Mr. Lucas!
Personally I don’t see the internet- and software-market being very big for VCs, no. They learned their lessons in 2001, and I doubt they will ever make that mistake twice. And many of them moved on to more “innovative” technologies, such as biotech and probably space-tech in the near future.
In that sense, I suppose that software-entrepreneurship has been killed. IF you evaluate the profession by amount being invested.
Instead, I think software/internet is very attractive for entrepreneurial individuals (not investors), because it requires very little initial investments and can have high margins IF profitable.
Ok, that said, I also think that the software market is highly saturated? Why, because software is either very simplistic (i.e. the typical webapp)—which invites competitors—or it is very complex, promoting either monopolistic companies or open-sourceware—which could also be called monopolistic.
I still think there are niches, but let’s face it, the problem is not open source. The problem is that we are sitting on the same hardware-technology for the last 20 years and there are only so many solutions customers need on that platform: word-processor, graphics-package, browser, filesystem, and some more specialised stuff. And it’s worse on the internet, because people are constantly re-inventing mousetraps, which are already catching plenty of mice.
There is no radical innovation happening in the software sense, it is mostly process-based, meaning that they are improving stuff that already exists, incrementally. And that sadly means that returns will be lower and the people who want to really strike it rich, should perhaps look elsewhere or re-evaluate their software-inventions.
To hopefully conclude my view on this, (potential) entrepreneurs should not be worried about open source, because it represents freedom, i.e. opportunities. They should be worried about monopolies, which confine opportunities. But with all this freedom and confinement, there is very little space left and most ventures, unless they represent actual “blue oceans” (see Jeremy’s post and my comments on that a few months ago), aka “innovation,” will not make much money.
I didn’t know the comments were restricted by word count either, but perhaps I never posted such long comments. Thank you for your drive and will to debate guys!
Vince> you’re not getting what software is about: software is a capital intensive industry! Look here:
http://jeremyfain.wordpress.com/2006/11/23/why-do-software-venture-capitalists-also-invest-in-biotechnologies/
It is also an industry with very high margins (the highest actually).
This put aside, I agree with your different points.
Alex> of course you know I don’t want prices to be regulated whatsoever.
I believe open-source software constrains entrepreneurship in a very fruitful way. You can’t sell inferior products anymore.
Jeremy, in your model, open source just happens. You forget that at some point, the people behind the project have made the decision to make their product open source instead of trying to sell it. The reasons behind can be anything, more often than not it seems to be just to make “a free alternative” to the market leader. Open source and free software make sure there is development and progress in the market.
Apple gave up and based parts of their operating system in open source code. They put their effort into what makes them different from their competitors. You don’t have to reinvent the wheel. Many successful software start-ups leverage open-source.
Netscape was selling a browser, Microsoft bundled one for free, yet Opera managed to sell its browser… by making it better and focusing on different markets. Who else is making browsers for mobile phones or for Wii? Are there free alternatives? No.
If I remember correctly, there were two ways to survive in the market. You either go for the volume and be the price leader or you differentiate. In general purpose Acrobat writers/viewers, you’re screwed if you try to sell your software for a price. That’s why CutePDF gives the basic version for free. If you want more advanced features (like ICC profiles and some other stuff), which very, very few (none?) free or open-source PDF writers have, you have to pay – but you have to pay less than what Adobe charges for similar features.
Thanks to open source, the barrier to entry for general purpose software is higher and this is good for the consumer. We get better software. Thanks for the strange phenomenon that Vince pointed out, that copying software is essentially without cost, this is more extreme than in other markets.
How could Apple sell more expensive mp3 player with less features? Different market. How could Nintendo sell last generation console? Different market. How could Red Hat sell a free product like Linux? Different market. How can Six Apart sell a blogging platform? Different market. How on earth can Macromates and others sell a fucking text editor in the 21st century? Different market.
Back to your original post, Jeremy, if there was a competitor to your OS project, I bet they can deliver many things you can’t. Support. Solutions. You only give a product for free. The competitor sees that they cannot make profit from the software alone, but need to differentiate by providing things that are important to the customer. Differentiate, that’s what I think is the keyword here.
I don’t think the wonderful Market of Lemons applies here, as it’s more about asymmetric information in markets, which clearly not the case here.
Thanks for your insightful comments, Kari. I completely agree that open source raises the standard and entry-barriers for non-innovative entrepreneurs.
In regards to software being a capital-intensive business, sure I understand that. But I’m not entirely sure whether it should be however. One of the reasons for the high margins is after all that software requires very little initial capital.
Anyway, every word I write on this blog is one word less I write for my other work. So, I’ll check in again in a few days to see what you guys said.
And thanks for the link to the biotech-discussion, Jeremy. I have added some thoughts there.
Jeremy,
I disagree with you.
a) market leadership is not eternal; a challenger can always take over the leader’s position. Look at the Automotive industry for instance : GM has been kicked out by Toyota, as Ford has been by GM, etc. Never say never, it’s the rule #1 even in the Software industry… The day will come when somebody somewhere will kick the Oracle, IBM, or… Microsoft (sorry
out of the business.
b) You can always make money selling services around a free product. A smart business model, it’s all you need. Look at the Printing business : you buy an HP printer (almost) for free, because you * just * pay for the ink cartridges. Look at the Video Content Delivery business : you get your website set up (almost) for free, because your provider will charge you on the bandwidth consumption. Etc, etc, etc…
Now, to better understand the true meaning of Innovation, read Geoffrey Moore : http://geoffmoore.blogs.com/my_weblog/2006/02/what_do_we_mean.html
HTH,
_Marc
This blog-post, I stumbled across, seems somehow related.
And this one does too: Where are all the open-source billionaires?
[...] A while ago, Jeremy wrote several posts criticising open-source, one in particular stating that open source constrains entrepreneurship. I think he’s right. If a standard becomes open that means that the barriers to competing [...]
I read this with, well, an understanding that this is your opinion, and you don’t really back up your opinion with any facts. An interesting hypothesis, but ultimately flawed. I’m probably just repeating what other commenters are – but, essentially, you compete with another product by a combination of making a better one and/or having better marketing. Even if your product stinks, if you have better marketing you can still compete and win. You did support your hypothesis with one example, but, if I remember correctly, Mozzilla was initially free. IE had better marketing, and Netscape screwed up and created a monster. Even with IE being free, if Netscape had created a product on time that wasn’t a behemoth, it might possibly still be in the lead.
Also consider the opposite. Is Microsoft worried about Linux? Some. I think Linux is a perfect example of an open source product leading the way to innovation, both in its own right, and forcing Microsoft to keep up.
So, basically, it is my opinion that open source software is currently driving innovation everywhere today, and it has the ability to do so at a much faster pace than a closed up commercial venture, largely due to the internet and the ability to tap into resources worldwide, while a commercial venture often has only the input of a few people.