Nothing Comes Free: the Open Source Business Models

Better for Less: How to make Government IT deliver savings”  is a great read although the idea that six months of tight central control can lead to a transformation of government IT sounds a bit like the approach of revolutionaries through the ages: from Robespierre through Marx to Chairman Mao. I have, however, promised that I will do a serious review because the report makes many good points and valid criticisms that need to be answered, not dismissed. A core part of the recommended approach is the re-use of Open Source software. On 27th September I am due to chair a session on “Free” Open Source Software at a Westminster Media Forum event. Chairmen are supposed to keep quiet and I accepted because chairing experts is a great way to keep up to date and some-one else’s expense. I thought therefore that I would blog my thoughts (and by implication my own questions) in advance.   

When I was a trainee programmer in 1968 almost all software was Open Source, we had to compile packages before running them and commonly reverse engineered the result to improve efficiency and remove bugs. Much was also free. Later I was one of the founding Directors of Federation Against Software Theft, which “engineered” the extension of copyright to cover computer software. I still belive it was the right thing to do at the time (early 1980s and the start of the micro age) although it is no longer the right approach.


What follows is an article that I wrote for the journal of the Institute for the Management of Information Systems in February 2006 after being a guest at a major Open Source Conference in Berlin. I plan to try to make time to update it after the event on 27th September.  



Open Source Software: Nothing Comes Free 

– the changing business models and balance of commercial power 


Neither new nor Free


“Open Source” is neither new nor “free” but the vigour of current debate indicates growing change in the business models that underpin the development, testing, marketing and support of software. Some see the “Open Source” movement as a crusade against a global cartel of dominant software suppliers. Others see it as an agglomeration of unsupported raw code, produced by academics and amateurs, that only experts can afford to integrate and use. As in all profound debates, the protagonists are both right and wrong.


Open Source pre-dates Proprietary


Until the early 1970’s most suppliers made their money from selling expensive computers. They gave away programmes and encouraged their users, business as well as academic, to share what they had developed. When the British “National Computing Centre” was first planned in the early 1960s it was envisaged that one of its main roles would be to create library of Computer Programmes to save the users of computers having to duplicate effort and expense: an “open source library”. But a number of vendors were already beginning to see the provisions of packaged programmes as a separate business opportunity. The packages were commonly supplied as source code, to be compiled and customised as necessary. Until the 1980s campaign to extend copyright to cover computer software, it was unclear whether those who copied even operating systems without permission had committed any offence. Suppliers therefore tended to rent, rather than sell, software and to ensure payment by policing documentation and support, rather than code. 


A cancer at the heart of the software industry


The UK extension of copyright to cover computer software was unopposed because the main ICT suppliers of day agreed to provide academic and educational users with licenses on nominal terms (commonly one penny unless used for commercially funded research or training).


In the US the path was different. Many of the routines now at the heart of the Internet and of many commercial products had been developed in Universities with major Law Schools as well as technology transfer operations. The academics may not have been commercially motivated but their tenure often depended on their publication records and the acknowledgment of their contributions to open source software development was seen as a form of publication.


They also believed in the free exchange of research except where this had been fully funded by business or government. They therefore made their software contributions freely available for non-commercial use but demanded royalties when it was used commercially. Because they were not commercially minded they rarely policed these licenses, unless and until someone pointed out that their code was now at the heart of some major commercial software package, whose promoter often had no knowledge of the potential liability. At that point their University’s Law School became involved and the consequence might be millions (in one case hundreds of millions) of dollars of backdated royalties for software which had been made freely available only for “non-commercial” purposes. Hence the description of “Open Source” by the CEO of one of the world’s largest ICT suppliers as “a cancer at the heart of the American software industry”.



Add the problems of originality


The debate is further complicated by attempts to extend Patent Law to over software under certain circumstances. One of the European test cases, where it was held that a patent should not have withheld simply because the idea was implemented in software, concerns a technique where the patent should have been withheld because the idea was over 20 years old (albeit the original developer had given up on trying to make it work with the technology then available). The near impossibility of testing whether a software concept really is original, plus the fact that the investment is commonly in the testing, not the development (and certainly not the original idea), in one of the reasons for supporting software copyright rather than patent, despite side effects such as the grotesquely over-long protection period. 


The commercial drivers


Previously intellectual arguments are given current political importance by financial pressures on all sides. Suppliers need to generate revenue streams to fund the development of products and services which better meet user needs for security, reliability and throughput. Private sector users need to cut costs in order to compete with growing competition from the Pacific Rim and Indian Sub-continent. Public sector users need to improve value for money in the face of the falling tax revenues. Western universities need to sweat past intellectual property rights to fund future research and teaching as external funding dries up or moves East.


The core issues  


Almost all complex products and services now use IPR from multiple sources, licensed under a variety of conventions. Those most relevant to computer software include copyleft (requiring access to any product which subsequently uses the knowledge or software component covered by the licence) and those which permit free use for academic, educational or public service purposes but require royalties when used in a commercial product or service.


The political, as opposed to commercial, debate on Open Source Software has three main dimensions:

·         access to source code (for testing, security, maintenance or other purposes)

·         the sharing of rights between those who develop and test modules of code

·         uncharged access and/or fair dealing for those using software for academic purposes


The commercial choice commonly hinges on who supplies and pays for the integration, packaging and support necessary to turn modules of code into useable systems and what rights they expect in return. The answer to the question “which is better or cheaper?” therefore differs according to the situation. 


The Players


The most active lobbyist fall into four main groups: 

·         Those who view the production of computer software as an extension of academic creativity based on the free (both open and uncharged) exchange of knowledge

·         Those with limited budgets who are seeking uncharged or low cost access to software for “non-commercial” (e.g. public service, education on non-commercially funded research) purposes

·         ICT service providers (and sophisticated users) seeking high-reliability, industry-standard software (often “platform level”) onto which they can build layers of proprietary or customised products and services

·        ICT software suppliers seeking premium prices for value-added proprietary software.


Academic Freedom-fighters


The arguments of the first group (e.g.the Free Software Federation) reflect one side of a long-standing debate between the academic tradition that knowledge should be freely and openly available (but still attributed) and those who believe that the organisations funding research should share in the reward. There has always been a mix of controversy and compromise over the application of patents to University research and also over the copyright position of the contents of University Libraries. That debate was brought up to date in the Royal Society Paper Keeping science open: the effects of intellectual property policy on the conduct of science and lies behind current arguments over Digital and Scientific Commons.  




To get the private members’ bill to extend copyright to cover computer software in the UK through both Houses of Parliament, without opposition, the founding members of the Federation Against Software Theft (FAST) agreed to make their software available for educational use at 1p per licensed copy. Those arrangements then evolved into a variety of educational licenses and fair dealing conventions. In the USA many commercial suppliers made similar arrangements, encouraged by generous tax breaks when they package these into donations with  “market value”.


The impact of Y2K on those with fixed software budgets spurred interest in the public sector use of Open Source, especially those needing to make the best use of limited funds in Local Government, South America, the EU Accession states and the Pacific Rim. At the recent E-Government conference in Manchester, one of the main events of the UK Presidency of the European Union, one of the accession states not only described how they had used “Open Source” to leapfrog the rest of Europe in the provision of user-friendly on-line access to public services, but also offered to make all their software available at no charge to any other member state. This was not just an ego trip by a Minister wishing to boast of his national achievement. It was a calculated bid to help position that nations’ small but impressive software industry at the heart of the global open source integration, maintenance and support business. Their supply of a set of already working and packaged solutions would directly address one of the main commercial criticisms of open source but would not support a marketing budget.


Service Providers and Software Suppliers


The arguments of the ICT suppliers over Open Source depend whether they see their main revenues as coming from the sale of licenses to use their technologies and proprietary products or from the provision of services. Most occupy places along a spectrum, competing to occupy the supposedly more profitable middle ground of “value added services”. Many wish to be seen publicly to be competing on cost and quality of service over time, while privately acquiring intellectual property rights which will provide lock-ins if they win the business and royalty streams from the winners if they do not.


Those who boast of their contributions and commitments towards the development of “Open Source” platforms often have an equally strong commitment to software patents and other protections for those areas from which see their future revenues coming. Meanwhile the largest single contributor to the testing of open source modules has never publicised its involvement. Its objective is to slash software support and licensing overheads by transitioning customers who pay per-transaction from fragmented legacy systems to common, robust, high performance, lost-cost, global platforms. But it has no wish to be seen to be driving this process – because it wants its customers to pay at least the same for better service.   


Supplier – User Tensions


Alongside the new spirit of co-operation between public sector users, wishing to freely exchange that for which they have paid, we can see the formation of groups of private sector users who wish to collectively specify and test new products and services that better meet their needs. Both wish more transparency in the subsequent licensing processes, paying for quality of service over time and sharing the intellectual property fights they have helped create. Some of the embryonic groups, such those which bring together the heads of ICT procurement for most of main UK-based financial services players or the heads of security of those under regular electronic attack by organised crime, contain sufficient technical expertise and purchasing power that even the largest of suppliers will wish to listen. But they are not the only users who need help in this area. Hence the importance of the Strategic Supplier Relations Group, bringing together those who also represent smaller users and also the suggestion that the National Computing Centre return to its routes, as a UK-based library and clearing house for Open Source software.


But nothing really useful comes free. We can also see suppliers seeking to return to the original roots of business computing: when a British catering company (Lyons Tea Houses) paid the cream of the operations researchers of World War 2 to work out how the new technologies could help them run their business better.


Instead of providing innovative thinking for free, expecting to make money by selling expensive software to run on cheap networked hardware, we can expect suppliers to charge full price to help users identify what they need, as it changes over time and provide the necessary support and service, integrating and testing whatever evolving mix of products and services is appropriate. At that point debate over Service Oriented Architectures may overtake that on Open Source versus Proprietary – but a core part of that debate will still be about the balance of power between users and suppliers, including who owns what rights, so that dissatisfied users are not locked in to unsatisfactory suppliers.            



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Philip, I agree with your points about the absurdity of patents in software, but after that I'm left a bit chilled by your analysis...

I'd be interested to know your personal biases as this article seems quite slanted - quite disparaging and berating, despite coming across as an attempted "objective" view of FOSS.

Over the years I've noticed an increasing number of software pundits using a similar approach: write an article evaluating FOSS in an level, even academic, tone, but fill it with subtle subjective judgements that create an overall negative tone...

My impression is that proprietary software interests who have realised that in FOSS they've met a competitor they can't beat... so they use a media whitewash to try to discredit Free and Open Source software rather than compete on their merits.

it's a shame for all of those readers who don't question these sorts of tactics. Remember, thanks to monopoly profits (probably *your money* gentle readers), the proprietary software vendors have a lot of spare cash to mount these sorts of "astroturf" campaigns to undermine something truly grass-roots: FOSS.

Comment from Philip Virgo: I have not worked for a vendor since 1977 when I joined a major user as a Corporate Planner. When I returned to the IT industry in 1982 it was initially to run the Technology Assessment activities of the National Computing Centre. My prejudice since then has been in favour of those who make their money by providing users with systems that meet their needs, including for ease of use, flexibility and resilience. That usually means they spend considerably more of their revenues on testing and support than on technology or code, whether proprietary (protected by patent or copyright) or open source (under a wide variety of licenses).

I would not recommend any user to bet their business on support from a supplier who does not have a sustainable business model - unless they are planning to rebuild an in-house team akin to those of the 1970s. The Internet and Web expanded outside the Academic and Defence environments because large commercial players decided to abandon their proprietary network "solutions" and pool their resources, via the Internet Engineering Task Force. They did so for business reasons, not idealism. Hence my analysis of those reasons.

Thanks for your response, Philip. I see that open source can be totally sustainable. My business has been providing commercial support services for FOSS systems as well as writing (testing and supporting) FOSS software enhancements specifically for customer business requirements, primarily for the FOSS Drupal web platform. We've been going for 12 years now, so I guess that's a measure of our sustainability. Our customers provide frequent anecdotal evidence for both their cost savings (compared, in some cases, to previous proprietary software solutions and vendor support) as well as superior functionality...

Of course, as with all business, viability comes down to the specific vendor you choose. I'd say, however, that going with a vendor supporting a FOSS solution eliminates risks that exist with a vendor supporting a proprietary solution (e.g. vendor failing and leaving an orphan unsupportable proprietary product, vendor changing licensing model, increasing costs, or being unwilling to offer suitable bug-fixes, customisations for a specific customer due to business-model and/or self-interest). With FOSS, the customer is in the driver's seat. With proprietary software, the customer has influence, but not if the vendor is a monopoly (which most proprietary vendors are, to one degree or another, due to the use of proprietary/patented protocols or file formats, etc.).