Saturday, February 17, 2007

The market for free software

Software developers are sometimes concerned that open source software will lead to the collapse of the market for software. If everyone gives software away, how can the programmers make a living?

The usual assumption behind these fears is that software is sold. The image these developers often have in their mind is that of proprietary, shrink-wrapped software like Microsoft Office: the end-user pays money for a copy.

But in reality, software for sale in that fashion is only one small part of the software marketplace, and a very small part at that. The fears of developers seems to be mostly unfounded. IP-Watch has details about the size of the software industry:

In the software market, by far the most money is made in services and the development of tailor-made software. In the EU and in the US, under one fifth of software investment is in (proprietary) packaged software; the rest is in custom software and in-house software.

In terms of jobs, firms selling proprietary packaged software account for well below 10 percent of employment of software developers in the US. Custom software developers and service providers account for about a third. But the majority of programmers work for "user" organizations such as banks, the retail and manufacturing sectors and government.


Most organizations - and a vast majority of programmers - make money selling their time spent writing or supporting software, but not selling the software itself. This is in fact the economic model of free software: sell potentially everything other than the software itself. The report shows that it is the proprietary software industry that is an anomaly in today's software market, with which the economics of free software is more in tune.

More information can be found in a recent report by the European Commission, the FLOSSIMPACT report.

The EU found that free and open source software is already a huge part of the IT landscape: to replace the free software in common use in the IT industry would need 160,000 person-years costing 12 billion euro or more. IT firms have invested an estimated 1.2 billion euro to develop free software. For every euro spent on open source by industry, open source developers have effectively donated nine dollars worth in their own time and effort. That's a huge return on investment.

The Internet is a great example of how this works in practice. Most of the technologies used in the Internet were built, not by corporations or even governments, but by software developers and programmers who had an itch to scratch. They built the tools for free, not necessarily because of altruism but because they needed the tools for their own use, and getting the tool was more important than waiting for some Good Samaritan to offer to pay them for it. By giving the tools away for free, they encouraged other people to use the same technology. This is an especially powerful factor in the rise of the Internet. Networks like the Internet are useless if only one or a few people use it: the real value from the Internet comes from network effects of many users. Fragmenting the network into mutually incompatible pieces is a losing strategy, and anything which discourages more people from adding themselves to the network is going to keep it fragmented.

While the free and open source status of the Internet encouraged connectivity, commercial IT companies were building fragmented, mutually incompatible, proprietary networks, such as CompuServe, GEnie, Prodigy, and AOL. Of these, only AOL has survived, and only by reinventing itself as an Internet Service Provider. Similarly, both Microsoft and Apple tried to create their own networks, MSN and eWorld. eWorld disappeared after only a few years, and the "MicroSoft Network" became a mere part of the Internet.

While all these proprietary, expensive networks were collapsing, the Internet, built cheaply from free software, was going from strength to strength. Today, companies like Microsoft and Apple who invested nothing in the creation of the Internet, have made the free software behind the Internet into critical parts of their business plan. Outside of the IT industry, the Internet is now essential to companies in hundreds of industries.


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