Open Source: Value Destruction vs. Value Creation
I would go so far as to say that very few open source startups will ever get anywhere near to $1 billion. Not because they are incompetent, or because open source will “fail” in any sense. But because the economics of open source software – and therefore the business dynamics – are so different from those of traditional software that it simply won’t be possible in most markets.
Via Knut Staring:
Glyn Moody, who talks with Red Hat CEO Jim Whitehurst, about the question: Why No Billion-Dollar Open Source Companies?
… has a cogent analysis of the value destruction and creation cycle achieved by open source software (and which would be true for open and shared designs as well).
Glyn Moody (excerpt):
“His answer was a good one. He said that he did think that Red Hat could get to $5 billion in due course, but that this entailed “replacing $50 billion of revenue” currently enjoyed by other computer companies. What he meant was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion. Selling $50 billion-worth of software – even if it only costs $5 billion – is somewhat hard, which is why it will take a while to achieve.
I think this is the first time I’ve heard someone as senior as Whitehurst admit something rather profound: that open source solutions save money for customers by doing away with the fat margins for existing computer companies – and thus shrink the overall market. Opponents of open source like to paint this as “value destruction” that takes money “out of the economy” – as if free software went around burning down offices and warehouses.
What they fail to grasp is that the 90% savings do not just vanish like the smoke from those supposed conflagrations. That money is still in the economy, it’s just spent on other items: free software allows people to use their hard-won money for things other than operating systems, office suites and applications. In developing countries, for example, it might mean more funds available for education or health.
…
As Whitehurst pointed out, open source software typically costs just 10% of the proprietary equivalent, and so the profits – and outflows – are reduced proportionately.
Whichever way you look at it, open source is good news for companies and consumers: they pay less in the first place, and as a result even less leaves the local economies – which means that more can be spent with indigenous companies on locally-produced goods and services.
However, there is a very important corollary to this – the point that Whitehurst made several times. Indeed, practically his opening words were: “selling free software is hard”. A knock-on consequence is that it harder – roughly *ten* times harder – for an open source company to grow to a given revenue level than it is for the corresponding proprietary company.”
June 20th, 2010 at 8:56 am
I doubt the value destroyed by free software is replaced, dollar for dollar, by money spent elsewhere. As more and more of what we consume has its price driven down in competition with Free, people will trade part of the savings for increased leisure. We will almost certainly see a shrinkage of the entire GDP and of the total amount of wage employment.