Open Source-onomics - Page 9

"Who will invest in software development if it doesn't yield a return?"

It sounds a preposterous argument on the face of it. How can the cost of software ever be zero? Doesn't it take significant effort to develop software? Even Open Source software is not miraculously produced. Programmers spend many man-months of effort on it. So how can the price of software ever be zero? Selling below cost is considered predatory pricing in many countries. In international trade, it's called "dumping". Is Open Source guilty of "dumping" or predatory pricing? If unchecked, this could destroy the commercial software industry. Who will invest in developing software if they cannot recoup their development costs?

The answer to this question may be surprising; because it overturns many of our fundamental assumptions about the way the world is run. Let's start by observing that if Linux had been developed by a commercial organization, it could never have been free. Commercial organizations, whether funded by debt or by equity, need to show a return on their investment. They cannot waste that investment by giving away their products. Therefore, even if it costs nothing to create additional copies of software (what's called the "marginal cost" of software), the initial costs of development must be spread over many copies, they must be priced in such a way that those costs can be recouped, and a positive return must be shown on the initial investment.

Of course, for this to work, software must be shoehorned into the mould of a physical product. Copying of software by anyone other than the producer must be made a crime. The infinite replicability inherent in software must be artificially curtailed through legislation. Only then can the model work. This is precisely what we have with commercial software today. It is important to understand that the commercial model works by imposing a system of artificial scarcity. It is physically possible and economically feasible to produce as many copies of software as the world needs, but that is however, legally punishable. That means that many people who need software but cannot pay the asking price must go without it. That is the only possible (legal) outcome. There are people who need a software product, and the product can be replicated at little cost, yet the transaction cannot take place. From society's viewpoint, this inefficiency is the price it pays for choosing a commercial vehicle for software development.

But now, consider an alternative to the investment model. If the cost of software development can somehow be treated as an expense, and simply written off, then the software is freed from the requirement to show a return on investment. There will be no need to artificially constrain its natural replicability. The world can have as many copies of it as it needs. There will be no need for restrictive legislation. From society's point of view, what could be more efficient?

Large expenses, however, cannot readily be written off. They need to be "amortized" over a sufficiently large number of units. This is where another property of software becomes invaluable. Software can, quite practicably, be developed by hundreds/thousands of programmers. Other intellectual works such as books, music or movies, while sharing software's trait of infinite replicability, cannot be produced by a cast of thousands. Of all the works of mankind, physical and intellectual, software stands alone in its twin characteristics of infinite replicability and amortizability of effort.

Looked at this way, Open Source seems the more natural and efficient way to build software. Get a large number of interested developers to work on a piece of software. Most of them spend less than a couple of hours a day on it, so they don't mind "writing off" the effort in terms of expecting a monetary return. That is why Open Source operating systems and associated software are free for every man, woman and child on earth to copy. By keeping important software like Linux out of the ambit of commercial interests, society has benefited handsomely.

Software, like wealth itself, is potentially limitless. Capitalism correctly views wealth as potentially infinite, and fuels global growth to increase the overall size of the economic pie. However, the current structure of the commercial software market is not capitalistic at all, but mercantile. It sees software as a limited good that needs to be hoarded and released sparingly. It is therefore incapable of being an engine of growth.

Lest our current "capitalistic" milieu should give anyone the wrong idea, it must be noted as a matter of sociological interest that commercial organizations do not have a divine right to exist. They exist at society's pleasure, because they have hitherto been the most efficient known means of producing quality goods and services at reasonable prices. However, it appears that the investment model that underlies all commercial activity is a grossly inefficient vehicle to deliver to society the levels of software that it needs.

So here's a really subversive thought: Perhaps corporations shouldn't develop software at all! Just as free market advocates call for governments to get out of the business of running industries, perhaps we should call for corporations to get out of the business of writing software. They are applying the wrong economic model to software, and it is proving too costly and inefficient for society to bear. We need a model that takes a capitalistic view of software, not a mercantile one.

What we see today with the gradual success of Open Source is, perhaps society's "invisible hand" turning over software development to the more efficient (from its viewpoint) Open Source vehicle, and gradually relegating commercial software to the fringes of economic activity. Adam Smith would have approved. (Along the way, notice that we have also shown how the cost of software can be effectively reduced to zero, thereby justifying its zero price tag.)