Open-Source: Offense or Defense?

Simple economics apply to any software strategy and should not be ignored.  This is equally true with respect to open-source software. Using it is often a no-brainer.  Building on top of it requires more deliberation but is still a fairly straightforward decision.  The harder question to answer is "Why might I contribute my software to open-source as a part of my business strategy?"

The Challenging Investor Journal (yeald.com) correctly states that "Corporate open-source must be a strategy to support a business model, not the other way around."  Since software, unlike many traditional goods, can approach commoditization at an astonishing rate and open-source initiatives contribute significantly to this commoditization, the rationale and application of your open-source strategy should be taken seriously.

Economics 101 Review
Overall value can only be increased in trade when each party's relatively scarce goods can be produced more easily than the other.  For example, carpentry comes easy to me while plumbing does not.  I might barter with a plumber to make him a wooden table if he fixes my faucet leak, increasing the overall value of my carpentry supply and his plumbing supply.  This is how the World Economy turns.

Open-sourcing, collectively, effectively increases every producer's 'natural' resources.  Think of open-source software as lumber.  More open-source software means free lumber for all software manufacturer 'builders.'  The question is, why would some builders choose to make and then give away free lumber?  Clearly, if their sole goal was to give away lumber, the business would fail.  There has to be a higher objective that adds overall value to the exchange.

Two roads diverged in a wood…
Software makers in a well-defined software market, rife with increasingly cheap or free alternatives, face two primary alternatives: 1) innovate to redefine the market or 2) start giving your software away.  Several reasons can be cited for giving software away:

• It increases the effectiveness of collaborative research
• It increase labor force mind-share
• It increase the market for higher value software
• It neutralizes a competitive threat

Arguably, increasing labor-force mindshare and creating a larger user base (of your free software)  are reasons to open-source your software because this positively influences sales.  But one might argue that it comes at a high cost and there are better, more traditional approaches to achieving this such as good marketing, making your software highly performant, usable, etc.  However, in a large, increasingly commoditized market where margins are decreasing, neutralizing competitive threats by may be the best rationale for open-sourcing your software.

Neutralizing Competition
Companies like IBM and Sun spend resources and increase some competitive risk by contributing to open-source (or similar) efforts.  So, why they do they do it?  In case of Eclipse vs. Visual Studio, Mike Milinkovich publicly stated (paraphrasing) that 'an original goal for Eclipse was to stave off the increasing threat of Visual Studio for .Net' (btw, dispelling the myth that it was targeted at Netbeans).  Microsoft is becoming a threat to IBM’s business software space.  Because Visual Studio/.Net is designed from the start to be Java developer-friendly, IBM is wise to concern itself with broad threats to the Java community.

In addition, IBM’s heavily reliance on Java technology (and Sun) put it in a vulnerable position if Java suffers.  Sun’s not-so-stellar earnings as of late make this another growing concern.  IBM’s heavy presence in the JCP, regular contributions to the language, JVM implementation and, now, Eclipse all serve to minimize this ‘dependency threat.'

Eclipse keeps developers working with Java and its related technologies.  This kills two birds with one stone, keeping Java healthy and also neutralizing the .Net/Visual Studio threat, all very good for IBM’s business.  Tellingly, Mike Milinkovich added that despite Eclipse’s rather Machievellian origin, IBM remains “committed to working with and growing” Eclipse.org.  Why did he feel this needed saying?  Perhaps because the question “What happens after dealing with Visual Studio?” begs an answer.

The Software Market Cycle
When in later stages of the software market-cycle, the open-sourcing option makes it worthwhile to consider what kinds of threats might be neutralized.  Getting a grasp on this is aided, first off, by understanding key stages in the software market-cycle itself.  This cycle, as first defined here (as far as I'm aware) was inspired by Tim O’Reilly’s keynote at Eclipse Con 2005 and has been continually shaped by many conversations with friends and colleagues:

• Stage 1: Highly unique and valuable software - There is only one viable supplier
• Stage 2: Software facing increased competition - There are multiple proprietary suppliers who compete by increasing value and keeping prices flat.
• Stage 3: Software facing commoditization - Margins decrease even lower as there are increasing numbers of cheap or free, equally viable alternatives.
• Stage 4: Commoditized software - There are so many cheap or free alternatives that there is little differentiated value in the software itself anymore.  Sales are structured around maintenance and support more than anything.

Other defensive strategies include protecting the proprietary nature of your software.  This has been used successfully by Apple and Microsoft for decades to produce vendor lock-in (for better or worse). The problem with this approach is; no software can be all things to all people and, eventually, proprietary lock-in begins to stoke non-proprietary opportunities for other companies, allowing competition to find a backdoor.  To quote John Ragan, a smart man I know; “The challenge is deciding at what point to transition from proprietary to non-proprietary, as for a period of time proprietary and vendor lock-in offers a company a lot of advantages.”

You are Here
So, what stage is your software at?  Are you building truly unique software that commands a high premium?  Is your software aging a bit and facing an increasing number of viable, cheap or even free alternatives?  If so, predominant options are to innovate, redefining your market, or consider open-sourcing and undercut competition while also preserving or increasing your market.  Knowing when to open-source highly depends on the scenario. 

So, is open-sourcing offense or defense?  I guess the answer is: Sometimes offense, more often defense, and maybe a little bit of both.