Transfersummit2011

The Economic value ofOpen Source Software

Carlo DaffaraEuropean Working Group on Libre Software

Conecta ResearchTransferSummit 2011 - Oxford

The Economic value ofOpen Source Software

(for Europe)

Carlo DaffaraEuropean Working Group on Libre Software

Conecta ResearchTransferSummit 2011 - Oxford

“GPL poses a threat to the intellectual property of any organization making use of it. It fundamentally undermines the independent commercial software sector because it effectively makes it impossible to distribute software on a basis where recipients pay for the product rather than just the cost of distribution. ... In effect, it puts at risk the continued vitality of the independent software sector.” (Craig Mundie, Microsoft, talk at NY University, 2001)

The economic value of Open Source Software

“[..] the aim of free software is not to enable a healthy business on software but rather to make it even impossible to make any income on software as a commercial product.” (Thomas Lutz, Microsoft representative at Tunis WSIS)


“It is quite possible that the open source movement will ultimately result in a collapse of the industry , and that would not be a good thing.“ (Gene Quinn, patent attorney)


“[OSS supporters] ... they need to accept the ground rules that most of us live in a capitalist society, we have the right to raise and provide for a family, and that until we all wake up in a FOSS developer’s paradise, we have to live and work inside of that context. I’d love to hear how a proprietary-free software world could work.” (James Turner, O'Reilly radar)


“(SBU) If the law passes in current form, the provisions for mandatory use of OSS will have grave repercussions ... By nature, OSS requires code sharing, and could pose security concerns for important BRV institutions, such as PDVSA, EDELCA (the electric company), or CADIVI (the Foreign Exchange Control Authority). Though OSS software has only a one-time license fee -- and therefore seems more cost-effective -- critics claim the system can be less-user friendly and requires frequent technical support (which can often be costlier than licensing). According to Microsoft, no government in the world has successfully used Linux for large operations”. Wikileaks, 06CARACAS1778


“The GPL effectively prevents profit-making firms from using any of the code since all derivative products must also be distributed under the GPL license” (Evans, D., in “Government policy toward open source software”, R.W.Hahn, editor, AEI-Brookings JCRS)


“Open-source software is deliberately developed outside of market mechanisms... the nonmarket coordination mechanism fails to contribute to the creation of value in development, as opposed to the commercial software market. [It] does not generate profit, income, jobs or taxes … In the end, the developed software cannot be used to generate profit.” (Kooths S., Lagenfurth M. “Open Source-Software: An Economic Assessment” University of Muenster, Muenster Institute for Computational Economics)


“[Open Source] ... suppresses quality competition between OS firms and restricts their output much as an agreement to suppress competition on quality would. .. We find that the first-best solution in our model is to tax OS firms and grant tax breaks to [proprietary sw] firms.” (Engelhardt, Maurer, 2010 Goldman School of Public Policy)


“Rail travel at high speed is not possible because passengers, unable to breathe, would die of asphyxia.” Dr. Dionysus Lardner (1793-1859), Professor of Natural Philosophy and Astronomy at University College, London.

“Heavier-than-air flying machines are impossible.” Lord Kelvin (1824-1907), ca. 1895, British mathematician and physicist


“A study carried out between January and June 2010 shows that despite the desired affirmative action for open source products, in almost half (47.5%) of the tenders there is s till a preference for closed source vendors or products. This preference inevitably results in not giving vendors of FLOSS a fair chance to win the bid. (Mathieu Paapst, Center for Law and IT, University of Groningen, the Netherlands)


● The vendor must employ MS certified employees.

● Asking for an operating system to be used together with the Microsoft Campus Agreement.

● If your bid is open source you should give extra guarantees concerning the stability of the open source community.

● Not allowing “zero-price” licenses.● Demanding that offered applications must be certified by Microsoft, are Oracle 10 compliant and using the official Microsoft style guide as much as possible.The economic value of Open Source Software

Measuring value is complex. A bad way of doing it: “First we listed the major open source products. Then we looked at the commercial equivalents. Next we looked at the average cost of both the open source products and the commercial products, giving us a net commercial cost. We then multiplied the net cost of the commercial product by our open source shipping estimates.” (Jim Johnson, Standish group)


Some groups measured the total revenues of OSS firms; so Pierre Audoin Consultants found a total market of 7B€ in 2008. Unfortunately, HP alone made 2.5B$ in Linux-related consulting in 2003, while IBM made 4.5B$ in OSS-related revenues in 2005.

In fact, the majority of OSS-related revenues are not made by OSS companies at all.

And the software market is not that easy to define as well.


This provides us with an overall IT spending estimate for Europe: 492B€

approximately 24% is hardware

software and services market: 374B€

software market: 244B€


Total OSS package adoption value: 41B€


How much Open Source is inside the average codebase?


● Black Duck analysis of large code projects (avg. 700MB of code): 22% is OSS, up to 80% of new development is avoided through OSS

● On average, 30% of implemented functionalities is based on reused OSS code (Sojer M., Henkel J. “Code reuse in Open Source Software Development”)

● “sampling continues to find that between 30% and 70% of code submitted is .. in the form of OSS components and commercial libraries” (Veracode, “State of Software Security Report volume 3”, 2011)The economic value of Open Source Software

35% of code created in the last 5 years


What value does OSS reuse brings in?(Abts, Boehm, Bailey Clark “Empirical observations on COTS software integration effort based on the initial COCOTS calibration database”)


Total OSS source adoption value: 41B€


“Figures support the idea that FOSS solutions are more innovative than proprietary ones: indeed, in all the three dimensions, experts’ evaluations are higher for FOSS than for proprietary software. … FOSS software not only show different levels of innovativity, but, as far as, new to the world products are concerned, they are also shaped by different innovation processes: radical innovation in the FOSS vs. incremental innovation in proprietary field.” (Rossi, Lorenzi, “Innovativeness of Free/Open Source solutions”)The economic value of Open Source Software

"The growing rate, or the number of functions added, was greater in the open source projects than in the closed source projects. This indicates that the OSS approach may be able to provide more features over time than by using the closed source approach. (Paulson, Succi, Eberlein “An Empirical Study of Open Source and Closed Source Software Products”)


(Mohagheghi, Conradi, Killi and Schwarz “An Empirical Study of Software Reuse vs. Defect-Density and Stability”)


"Findings indicate that community Open Source applications show a slower growth of maintenance e ort over time.” (Capra, ffFrancalanci, Merlo “The Economics of Community Open Source Software Projects: An Empirical Analysis of Maintenance Effort”)

“The fourth law of software evolution, implying constant incremental effort, might be violated (Koch “Evolution of Open Source Software Systems – A Large-Scale Investigation”)The economic value of Open Source Software

Deshpande, Riehle “The Total Growth of Open Source”


Total value of OSS reuse per year: 116B€


“While IBM initially contributed software that was valued at 40M$, external contributors to the project created software representing a value of roughly 1.7B$ over the examined period.” (Spaeth, Stuermer, von Krogh “Enabling knowledge creation through outsiders: towards a push model of open innovation”)


“[non-code] outside contributions are signicant. Open Cascade estimates that they represent about 20 % of the value of the software. Matra Datavision had to inject approximately 2M€ per year to continue to develop its tools. In 2000, the company limited the costs to 1.2 million.” (Jullien, Clement-Fontaine, Dalle “New Economic Models, New Software Industry Economy”)


With proprietary software, 86% of SW spending goes outside of Europe-and reduces local company margins


Ecosystem Revenues compared with MS revenues by partner type

Microsoft

Product-Oriented

Partner (e.g.,ISV, IHV)

Services-Oriented

Partner (e.g.,SI, Hoster)

Value-Added Partner(e.g., VAR)

Logistics-OrientedPartner (e.g., LargeAccount Reseller)

Retail LogisticsPartner (e.g., LargeRetail Electronics

Store)

$1 $4.09 $2.44 $2.30 $2.70 $2.931 24% 40.9% 43.5% 37% 34%

Source: Partner Opportunity in the Microsoft Ecosystem, IDC 2011; analysis by Daffara

If the savings are reinvested in ICT, the company gains an advantage in terms of efficiency is substantially larger than the investment value: “the measured long-run contributions of computerization are significantly above computer capital costs - a factor of five or more in point estimates” (Brynjolfsson, Hitt “Computing productivity: firm-level evidence”)



Revenue per employee rating(FLOSS firms vs. Industry average)Computer Equipment 182%Software consultancy and supply 427%Services (excl. software cons. and supply) 211%Manufacturing (excl. computer equip.) 136%Other 204%ALL: 221%Source: MERIT


Revenue ratio: FLOSS firms vs. Industry average(FLOSS firms vs. Industry average)Computer Equipment 1115%Software consultancy and supply 262%Services (excl. software cons. and supply) 177%Manufacturing (excl. computer equip.) 4501%Other 1045%ALL: 758%Source: MERIT


Source: Venice International University TEDIS study

So – we know now that OSS is a good thing for Europe and its economy. What can we do to improve things further? A few hints:

● Government: don't give out big money in big projects. They end up all in large SIs with limited real impact on OSS.

● Try to enforce fair tenders – after all, Government and PAs are one of the largest market in Europe.

● Knowledge and tools to increase the reuse percentage



Source: Dirk Riehle, “The open source big bang”


value appropriated

Time

denial

usecontribute

champion

engineering driven business driven

single product multiple projects

collaborate and redefine

step 1: crossing the chasm between denial and use. Itrequires knowledge on what is available, counteringwrong beliefs and FUD, best practices for adoption andmigration


value appropriated

Time

denial

usecontribute

champion




step 2: from users to contributors. It requires Information on legal aspect, how to cooperate and interact with projects, partnering


value appropriated

Time

denial

usecontribute

champion




step 3: from contributors to champions. Requiresinformation on business models, on sustainability,on relative profitability of models and the interactionbetween licensing and community

Thanks!

Carlo [email protected]

http://carlodaffara.conecta.it

mailto:[email protected]

Transfersummit2011

Technology

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