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Open
Source: On why not
By Steven Den Beste February 2000
I'm
beginning to get a bit tired of people asking everyone and their dog to release
the source for every product they can think of.
Somehow
people have gotten this idea that this is the wave of the future, and that each
and every commercial software vendor needs to get on the bandwagon.
But
they're looking at it from the wrong point of view. Open Source has significant
drawbacks, because at the lowest level it virtually guarantees easy piracy of
the product.
I'm
not saying that no-one should release anything Open Source. There's definitely
a place for open source. What I'm saying is that there is not and should not be
any obligation to do so.
I
think the problem is that most of the people making these suggestions have a
very concrete understanding of their own situation and of the benefits for them
in an Open Source release of something that they use or would like to use, but
only a very vague understanding of the actual situation and effects this would
have on the producer of the software.
The
Open Source advocate knows how expensive the product is, and that's real money
from his pocket flowing out.
But
it seems as if the conceptual model ends at the point where the money is
received at the corporation, as if it somehow vanishes into a black hole at
that point. Or perhaps they have this image of it flowing into the wallet of
some fat-cat corporate executive (or worse, fat-cat stock holders, who "of
course" are scum).
But
that's not the case. Those corporations have real expenses and that money is
used to pay them. Without that income, the corporation can't exist. (And
virtually all of these corporations pay no stock dividends.)
People
are talking about Red Hat, for instance, as a big Open Source success story.
They went public, their stock went through the roof, the founders are now
wealthy beyonds the dreams of avarice, and they now have a market cap above $13
billion dollars.
But
now that they're publicly traded, we can examine their books in the cold hard
light of their SEC filings. Here's the most recent one, as this is written:
http://www.sec.gov/Archives/edgar/data/1087423/0000912057-00-001361.txt
Someday,
somehow, someway, this corporation is actually going to have to make a profit.
A big one. Continuously. For a long time.
It
sure hasn't happened yet.
In
the 9 months ending 11/30/1999, they had gross revenue of $12.6 million and
expenses of $7.4 million (cost of sales) plus $15.8 million (operating expenses)
for a net loss of $10.6 million. (Rounding errors apply. See the EDGAR report
for the precise figures.)
Their
fundamental problem is that they're trying to make revenue by selling something
which they are obligated to *give* for free to anyone who asks for it. This
costs them money (to operate the FTP server and pay for the network connection
to it) without giving them any compensating revenue. In the mean time, while
they have been developing additional software which they include in their
distributions, they're obligated to give all of that away, too. And at least
one competitor is now selling, at cut-rate, what amounts to a clone of Red Hat
Linux including all their custom code. And there's nothing, nothing at all,
that Red Hat can do about it.
Their
solution to their revenue bind is to try to sell services along side, and to
make the bulk of their revenue from that. So far it isn't working. It remains
to be seen whether they can ever turn around.
Red
Hat's market capitalization is preposterously high: It's more than a thousand
times yearly gross revenue, which is absurd for a company which has never
turned a profit and shows no sign of doing so any time soon.
By
comparison, Intel's market cap is 32 times revenue. Qualcomm's market cap is 24
times revenue. Sun's market cap is about 20 times revenue. IBM's market cap is
about 3 times revenue. Apple's market cap is less than 2 times revenue. And
they're all profitable, though Apple's been struggling. (All numbers as of
2/10/2000).
For
all the enthusiasm about open source, the fact is that no-one has yet figured
out how to make a profit out of it. No corporation which has based its business
model on open source is in the black.
And
until they do make a profit, you're not going to see a big commercial buy-in to
the concept from the traditional software developers which have been using the
traditional software-source-is-proprietary business model.
Yes,
I know that IBM has released JFS to Open Source. Yes, I know that id released
the source to Quake. I know that Netscape released the source to Communicator.
But
you don't see IBM releasing the source to AIX or ViaVoice, or id releasing the
source to Quake III Arena. And Netscape hasn't released their server code. What
they're giving away is things they no longer care about. In the case of id, it
was more an acknowledgement of reality than anything else, because the source
to Quake had been stolen and was out in the world already. In the case of
Netscape, they went open source on Navigator about the time they gave up on
trying to make any money selling browsers.
You
*haven't* seen any corporation give away the source to one of their crown
jewels yet, unless they were legally obligated to do so (as is the case with
Red Hat). And you're not going to anytime soon.
And
the only major old-line corporations which have embraced open source in a big
way are those which are desperate. The best example of this is Corel. Corel has
been bleeding money for years, as Michael Cowpland has frantically floundered
around trying one thing after another to try to turn the company around.
Embracing open source is his latest miracle cure for Corel's chronic losses. It
remains to be seen whether it will work any better than the last five things he
tried.
Corporations
don't live on good will. They need money to operate. Any time they take a
successful product and release the source to it, they have to figure that the
income stream from it will immediately plummet as people begin to create their
own copies for free (whether licensed or not). It won't necessarily drop to
zero, but it will definitely dropfootnote.
Let's
take a hypothetical small developer with a couple of hundred employees which is
privately held by one or two individuals. When you buy a product from them,
that money doesn't flow into the owner's pocket. It's not a matter of the
difference between a new Ferrari in his garage twice each year instead of only
a new Porsche per year.
That
kind of mental model makes it easy to think of him as a gouging fat-cat who can
easily afford to give away things you want but don't want to pay for. But
that's not reality.
That
money doesn't go to the owner; most of it goes to pay for the operating
expenses of the corporation, and the single biggest operating expense is the
payroll. If you ask the owner to give away a product he's now selling, it means
he has to select at least one of his employees and sacrifice that employee on
the altar of Open Source by laying him off.
Our
corporation owner also works there. He knows the names of every single person
working for him. He sees them in meetings. He talks to them in the halls. He
visits their booths and sees the pictures of their spouse and children. He gets
to meet those families at the corporate picnic. The employees are his family;
he cares about them; and he knows that the salaries they earn support their
lives and their own families. To reduce his revenue so as to prove that he
"Gets It" about Open Source would require him to seriously harm
someone he cares about and feels responsibility for. There's a price for
everything, and that's the price you're asking him to pay so that he
"Gets It".
How
can you be so heartless as to ask him to do this? Does it make it any better
just because you don't know the name of the person who's going to get
laid off and because you don't have to be the one to tell him the bad
news and escort him to the door?
So
unless you can show how this corporation will get offsetting revenue which
compensates him for the revenue lost by giving away a product he now sells, and
I mean immediate revenue in large quantities, don't bother asking him to open
source anything.
"Good
Will" doesn't appear on the books. "PR" doesn't pay the salary
of the unfortunate employee who's going to have to be laid off. "Getting
It" isn't legal tender to render to the IRS for corporate taxes. Salaries
and taxes require lots of money, and they require that money RIGHT NOW. So
don't bother with an explanation of how it will increase their revenue some
day, if the winds blow right, maybe.
Show
a financial case RIGHT NOW why releasing the source to one of his products will
increase his revenue overall (or at the very least break even) RIGHT NOW, or
don't bother asking.
Think
like a capitalist. It's the money, stupid.
If
you want him to open the source to something, you better explain to him how he
can do that without destroying the life of someone he cares deeply about: one
of his employees, who is also his friend, who would have to be laid off if
corporate revenues decline.
If
the cost of going open source is laying off people, then the price is too high.
The
exact same thing applies to a large corporation like IBM. It's larger, but it's
still made up of people. The revenue they take in still goes primarily to
payroll. "Why doesn't IBM release the source to OS/2?" I've heard
again and again. Because if IBM does so, it will cost them a lot of moneyfootnote and reduce their revenues, and that's a shitty
way to do business. It's generally not popular with stockholders to increase
your investment in some product so as to deliberately reduce your revenue from
that product. But more important is that if they do that, someone's got to be
laid off.
Every
time someone suggests that IBM should do this, I ask what benefit it would have
for IBM. And ever time, no-one comes up with a direct source of revenue which
would offset the loss in sales and the increase in engineering expenses.
Instead they talk about nebulous concepts like PR and Customer Good Will and
"Getting It".
That's
horseshit. What that really means is "I want them to release it
and I don't really have a good reason why it would be good for them."
Good
will and PR and "Getting It" don't appear on the corporate
spreadsheet, and you're not going to get Lou Gerstner's attention until you can
demonstrate a source of revenue -- dollars, bucks, moolah, simoleons, cash --
created by doing this.
That's
not because Lou "Doesn't Get It", but because he has a legal
obligation to his stockholders to operate his company in a profitable fashion
(not to mention a moral responsibility to his employees).
"Revenue"
is not a dirty word. There's nothing immoral about selling software. Doing so
employs people. There is *no* obligation to put anything into Open Source.
If
someone wants to do that voluntarily, more power to them. But don't demand, or
even suggest, that someone do so unless you can show them how it benefits them
directly, immediately, personally.
If
the one you want to influence is a business, don't bother bringing it up unless
you can make a convincing case that doing so will increase their profits.
Eric
Raymond (a major proponent of open source) said it best:
"Either
open source is a net win for both producers and consumers on pure self-interest
grounds or it is not. If it is, you cannot lose; if it is not you cannot (and
should not) win."
Footnotes:
IBM
releasing the source to OS/2 would not be free for them. IBM doesn't own it
all. It contains source which belongs to other corporations, and also source
written by IBM which is based on intellectual property of other corporations.
Some of that IP is covered by non-disclosure agreements and most of it is
covered by royalty agreements. Before IBM could release even part of the source
of OS/2, it would be necessary to make a very thorough pass through it to
identify those files which IBM owns 100%, and those which contain either source
or IP belonging to other corporations. Probably they'd have to do it twice,
with two different teams, just to make sure they didn't make a mistake -- for
the lawsuits which would result if they screw up would be most impressive.
I'm
aware that philosophically "open source" doesn't mean
"free", in theory. But in the real world, as soon as you release the
source to something, nothing can prevent a determined individual from creating
their own working version of it without paying you anything, and nothing can
prevent him from spreading it around to other people who aren't willing to do
that work for themselves. Irrespective of the philosophy of the open source
movement, as a practical matter there will always be a drop in revenue from
sales if the source to some product is released.
I'm
aware that lots of companies have built their business plans on open source,
and that many of them have gone public and now have really impressive market
capitalizations. But none of them have made a profit yet. You can't operate a
business in the red indefinitely; the investment money will run out. Eventually
the corporation has to actually turn a profit. So far, none of them have done
so, including the ones who claim they'll do it by making their money on
support. That's not to say that this is impossible; we don't know yet. But it's
a bit disheartening that of all those companies, every one is
bleeding cash rapidly.
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Den Beste’s Home page |
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