Open Source & Business

By Adrian Stanica

This article is meant to be the first in a series of articles dedicated to bringing a better understanding of what is called open source software.

This is an introduction, which is trying to offer you an image of the choices you have as a businessperson to choose your software. The article is divided into two parts, the first one discussing the tools and the second one dealing briefly with the importance of the brands in the software market.

Briefly, open source software is software that lets you access the code and lets you modify it according to your needs. For a detailed definition please go to this page: http://www.opensource.org .

The Tools

From a strategic point of view, companies can be divided into four categories:
    1.   Companies that produce software as a product;
    2.   Companies that offer software as a service;
    3.   Companies that produce and/or use software for mission critical systems;
    4.   Companies that use software in general.

1. Companies that produce software as a product
If you produce software as a product you might be better off with the normal tools, that is, non-open source. The main reason behind this is that your business depends on the code you are producing. Second, as we shall see further into the article, open-source is a very competitive business. If what you offer is based more on convenience and less on innovation or continued innovation, then open source is definitely not for you. This is because using open source may have different consequences, depending on the type of license you are using. For example, if you use a GPL license, then your code may be easily copied and before you can establish yourself in the market, somebody else may be already offering the same thing. If you are using a BSD type of license, trying to build a business on open-source without giving anything back will make you seem like the bad guy, which is not good for business.

There is one exception though. If you are able to come up with continuous improvements and make yourself recognized, then I would suggest you choose open source. This is especially true if you are required to roll out different product lines. Take for example RedHat, which I consider the most successful open-source company. It offers an OS, which comes bundled with a complete set of tools. The company is continuously improving its offering through better software, database offering (based on PostgreSQL), advanced server offering and RedHat Network. What do all these products from RedHat have in common? You have to start almost from zero to offer something similar and they are platforms that come bundled with the development tools. When you develop on Windows, you only add functionality, not improvement. For example Microsoft Office offers you very good functionality, but you need the Windows (Mac) platform and the tools to develop something like this. Everything you do depends on the platform's capabilities. Open source allows you flexibility, which means you can adjust the platform according to your needs. So if your business needs this kind of functionality, open source is the best option.

2. Companies that offer software as a service
Companies that offer software as a service have started to appear here and there. These companies can be divided into three categories: platform dependent, platform independent and web services. Platform dependent companies use their software to offer functionality on a certain platform, like Norton Antivirus, and may use the Internet for distribution purposes. For them the relevance of the code is strictly related to the level and importance of functionality they offer, like in the previous category.

Companies that are not dependent on the platform would be better off with the open source. Unlike the general belief out there, open source has nothing to do with money, but with research and innovation. In fact there are many open source licenses that don't require you to show your code, like the FreeBSD license (there will be an article on the licenses in a future newsletter). The reason why I put forth the open source is the cost. There is nothing wrong with paying for the software you use, but there is something wrong with being forced to pay. On the Windows platform, if you want to offer the best software for all Windows systems, you have to pay for different products to see the code (the part you can see), even though you may not use them. Open Source allows you this freedom through a series of standard interfaces, like HTML, XML and so on. Of course, you have the wonderful JAVA, which, although a little slow, I still consider as the only universal programming language because of the Java machine. But I don't think that software wants universality. I know it sounds strange, but universal is not good. Instead the software wants interoperability. This is what XML, SOAP and others are trying to do. This is where .Net as a strategy is something good. Because of the extension of the .Net framework it would be very dangerous to give one company (Microsoft) so much power, but this is where the Mono project comes in (www.go-mono.com). (There will be an article on .Net in a future newsletter).

Also, you may offer your services under the form of expertise or consulting. We must not forget that the current software programs can be very complex. Even if you give them for free, it doesn't mean somebody can use all the programs. I am currently using RedHat 7.3 and sometimes WindowsMe (due to laziness, instead of making everything work under Linux, I take advantage of dual boot),but despite knowing that RedHat can do everything I want it to, I don't know even half the software I have there. The main reason is because I don't need it. I used FreeBSD 4.5 for a while (excellent operating system) and I plan to change to it from November. Now, when you install this OS, you will first install only the basic part, and then the additional software (the same goes for NetBSD). But if you ever want to install everything about Python for example, unless you are a pro, you will not succeed because there are many modules that are required by specific software programs, like MySQL and so on. This is why, in fact offering your software for free, or under GPL or other licenses can be a good marketing strategy. And then you will realize that the brand and not necessarily your product is what matters.

3. Companies that produce and/or use software for mission critical systems
These types of companies use software for critical systems. Fortunately, like in the case of the banks, many of those systems are heavily customized. Still, I think that open source is the best answer for them, and the main reason is the profit. Open source is not profit driven. Programmers develop open source software because they believe it is good to do so. Unlike other software companies like Microsoft and most recently Hewlett Packard, people involved in the open source want to talk about flaws. Remember, that eventually everything is about research and innovation. They have no profit statement to make at the end of the year. For them, talking about flaws is the best way to improve. On the other hand, companies have to worry all the time about the impact of negative press coverage on their brand, so it wouldn't be illogical to withhold critical information until a problem is fixed (if it is ever discovered). At the same time, you can take advantage of the newsgroups and other discussion forums, through which you can get a lot of information. Of course, all of this requires that you have an IT staff which can act quickly on each occasion to minimize the impact of any problem. At the end of the day, there is no such thing as secure software.

4. Companies that use software in general.
These kinds of companies are platform dependent. These companies should, especially now when Web Services as a concept may change the way we use software, clearly determine their IT strategy and costs. If you use Windows, you may not have too much of a choice, especially as a business. If you use Linux/FreeBSD/NetBSD and so on, then you are the lucky one. Now you have a free office suite on Windows called OpenOffice, which is good, but still has a long way to go. I am using it at home under Windows, because I don't want to use Microsoft Office, but if I need some advanced spreadsheet functions, then I switch to Gnumeric under RedHat/FreeBSD. Still, I think that if you are into the web development business you should be extra careful. If you have time and like programming, open source is for you, but usually all available software like the products from Adobe and Macromedia are usually only for Windows and Mac users. Some versions may be available for UNIX too, but if you still want to use the Windows version under Linux/FreeBSD, there is a program called Wine (www.winehq.org), which lets you use Windows programs under Linux/FreeBSD, but it is not always guaranteed that all functions will work. But, you may want to take a look at Gimp, which could the best program out there for image editing. I have nothing against paid software, and, in fact, I believe that people using free software should not forget to donate something or to contribute something to it (writing articles, help notes, helping others). But I believe that it is the greed of some software companies that is pushing the prices too high. That's why before you buy some software make sure you have an analysis of your cost expectations.

As a company which is using software for daily functions, you should always be careful of switching costs, in the present and in the future. This is because many software companies are trying to lock you onto their platform. In fact they are trying to copy Microsoft with its Windows OS and Microsoft Office products. For this they may offer you the deal of your dreams, knowing though that once you have chosen them it would be very difficult to change your supplier. Switching costs are very important because they don't involve only software, but people who use the software and so on. In the case of big corporations this cost can be huge. And software companies know this. This may seem immoral, but it is one of the things you learn first during a management class. Of course, things have started changing because of the interfaces companies are trying to establish. But don't forget the case of Visual Java, which was made to work better on Windows; even if software giants don't intend to harm businesses, monopolistic behavior is a normal outcome of profit maximization. Current implementation can be the result of much needed interoperability, but also a smarter marketing strategy on behalf of the software giants, who may introduce functions tomorrow that work better only in certain environments. As a result, it is only up to you to know what your company needs and what your future needs are, or it will be up to a software company to decide that.

Software and brands

The other day, I was talking to a friend of mine at my university. He is doing his PhD, and his research is related to video streaming over networks. He didn't like open source because everybody can use the code. Well, this is true in part, depending on your license. But let's consider GPL. You write a piece of code that everybody can use. So what?

Does it mean you cannot make money out of it? The answer is no. I told him this. Take RedHat, modify it a little bit and go sell it. It is your right and nobody can stop you. The only question is how well you can sell it. Companies like
Mandrake
tried to do things like this and their business model failed. They still exist because they appealed to the mercy of the public, but they lack a strategy of their own. This is how the problem of brand comes about. Who are you? What is your name associated with? Today's software systems are too complicated to trust anybody. If you are not a brand, chances are that you will have to struggle in a very unprofitable market for a long time until you can come up with something that is recognized by the market. GPL never kept RedHat from developing software. Maybe the company is only 99% open source and they try to keep things for themselves as much as possible (like in the case of Advanced Server), but at the end of the day they do offer value. If anybody from RedHat reads this, I apologize for never paying for your software (I always download it). But if I had a company, I would definitely subscribe to their RedHat Network, because it is cost efficient from my point of view. For the money I pay I get upgrades not only for the OS, but for all the programs I am using. Not to say that I have the right to upgrades for one computer for free (which I am doing now with my RedHat 7.3). The reason why I not only like, but respect the company, is that it managed to come with better solutions and with new services that brought real value to me as a consumer. The same goes for FreeBSD, the only difference is that here the upgrades are not done automatically, but manually, although FreeBSD is not a company, but a project with a different type of license. Take a look at Microsoft Office XP. You pay almost $300 dollars to upgrade, as a normal user, and for what? While there are new things, thinking of the marginal cost, which $300 was the most valuable: when you first bought the software or when you upgrade it? And the same goes for Windows. Now, considering that you upgrade every 2-3 years, and that you are a developer business, using Windows (NT/2000/XP), Office and Visual Studio, your upgrades will run into thousands of dollars. Compare that to $60/year from RedHat. You never know, remember the locking policy, RedHat may become a bad guy tomorrow, but currently I have to choose between paying a lot of money for upgrades from Microsoft (some including upgrades to fix previous bugs which should be available for free), and not paying anything for my home computer and then paying $60 dollars a year for each additional computer upgrade from RedHat. Of course I would go with RedHat. In fact even if I had money, thinking of my benefits, I would go with RedHat, only because the upgrade is automatic. If you like to do it on your own, I Would suggest FreeBSD.

As a conclusion, please pay attention to the names used in the above paragraph. They are brands and they are known, and most important, this is how you sell your software.

Adrian is currently a graduate student at the University of Osaka, studing Management Strategy and doing research on Information Pricing. Lately he's been concentrating on Open Source and has started learning programming under Linux.
He believes that while everybody should be selfish and look only for his own interests, we all have the duty to give something back to the society or other people in any way we can.
Anybody can contact him at:
090-3971-8441 or
stanica_adrian@yahoo.co.jp (as it supports both Japanese and English) in either of the two languages.

© Algorithmica Japonica Copyright Notice: Copyright of material rests with the individual author. Articles may be reprinted by other user groups if the author and original publication are credited. Any other reproduction or use of material herein is prohibited without prior written permission from TPC. The mention of names of products without indication of Trademark or Registered Trademark status in no way implies that these products are not so protected by law.