The Economics of Open Source Software: A Survey of the Early Literature. Abstract

Transcription

1 The Economcs of Open Source Software: A Survey of the Early Lterature AARON SCHIFF * Department of Economcs, The Unversty of Auckland Abstract Ths paper revews the recent lterature on the economcs of open source software. Two dfferent sets of ssues are addressed. The frst looks at the ncentves of programmers to partcpate n open source projects. The second consders the busness models used by proft-makng frms n the open source ndustry, and the effects on exstng closed source frms. Some possble future research drectons are also gven. 1 Introducton to open source software Open source software s a rapdly expandng phenomenon n the computer software ndustry. A more precse defnton of open source software wll be gven n subsecton 1.1, but for now t wll suffce to say t s software that s freely dstrbuted and can be freely modfed. The open source ndustry today s large and growng. There are tens of thousands of open source developers worldwde and a good number of frms are tryng to make profts out of actvtes related to open source software. Whle these frms cannot make profts from the software drectly (t s free, after all), they sell complementary products and servces, such as servce and support, and documentaton. More statstcs on the sze of the open source ndustry wll be gven n subsecton 1.2. Open source software has the potental to fundamentally change the economcs of the computer software ndustry. It wll affect how tradtonal software frms structure the ncentves that they provde to ther programmers, the product markets n whch they compete, and the busness models and strateges that they use. It wll also mpact on the career choces of software developers, and provdes an addtonal means for potental programmers to enter the software ndustry. Open source thus rases many nterestng economc questons. Most of these questons can be grouped nto two broad categores. As the majorty of the partcpants n open source projects are unpad volunteers, the frst set of questons concerns the ncentves and motvatons for these ndvduals. The second set of questons s related to the busness models used by frms n ndustres related to open source software, and the effects of open source on the exstng software ndustry. * Malng address: Department of Economcs, Unversty of Auckland, Prvate Bag 92019, Auckland, New Zealand. E-mal address: a.schff@auckland.ac.nz The author thanks Adam Warner and a referee for very helpful comments, and the Centre for Research n Network Economcs and Communcatons for fnancal support. 66

2 Ths paper summarses the current state of the lterature on the economcs of open source, wth specal reference to these two groups of questons. But, before turnng to the economc ssues, t s necessary to understand n more detal the defnton and scope of open source software. The next two subsectons provde a bref ntroducton to open source software and dscuss the extent of open source development actvty. 1.1 What s open source software? The source code of a computer program s the nstructons for the program, wrtten n a human-readable format, usually followng the syntax of a hgh-level programmng language such as C or Perl. Instructons n source code cannot be drectly executed by a computer and must frst be run through a specal program called a compler whch produces machne-readable bnary or object code. Whle source code can easly be read, understood, and modfed by a programmer, t s very dffcult to understand bnary code, and even more dffcult to modfy t. For ths reason, a program only dstrbuted as bnary code s called a closed source program. A program where the source code s dstrbuted and can be freely modfed (wthout payment of a royalty or fee) by other programmers s, loosely speakng, called open source software. 1 Varous restrctons may be placed on what can be done wth a partcular open source program, dependng on the lcense used by the orgnal author(s). Lcensng ssues are not the focus of ths paper; for the detals of many dfferent open source lcenses, see In general, however, open source software can be modfed, extended, adapted, and ncorporated nto other programs by other programmers, wthout payng a fee to any prevous contrbutors to the software. The most common restrcton placed on such actvty s that any future modfcatons or dervatve programs must also be released as open source software The extent and scope of open source development A large number, n the order of tens of thousands, of ndvduals worldwde spend at least some of ther tme contrbutng to open source programmng. 3 A sgnfcant number also contrbute to related actvtes such as wrtng documentaton and user support. The webste provdes a daly lst of new and upgraded open source software, and ths lst typcally contans 20 to 30 programs each day. On 11 February 2002, the webste s statstcs lst 18,540 open source projects and 109,191 regstered users. A wde range of software s avalable as open source. The most famous example s Lnux, a sophstcated computer operatng system kernel. Other well-known examples nclude Apache (a popular and relable webste server), The Gmp (a powerful mage manpulaton program), and MySQL (a relatonal database envronment). The reader s 1 Open source s stll a relatvely new term, and s referred to as free software n some cases. A defnton of free software s provded by the Free Software Foundaton: phlosophy/free-sw.html. For a more precse defnton of open source software, ncludng some subtletes not consdered here, see 2 The popular General Publc Lcense (GPL), among others, mposes the restrcton that software must be released as open source f bnares of the software are dstrbuted. That s, modfcatons made solely for prvate use do not have to be released as open source. 3 Ths statstc s a very rough estmate based on browsng open source developer webstes, such as and 67

3 recommended to browse to fully apprecate the scope of open source software that s avalable and the rapd pace of development. Untl recently, almost all open source developers were people who had a strong nterest n computers and dd the programmng n ther spare tme, or were academcs. However, two new trends have emerged. Frst, some exstng closed source programs have been re-released as open source, such as Netscape s Mozlla web browser. 4 Second, proftorented companes have appeared n the open source communty. These companes do not make money from open source software drectly, but sell complementary products and servces. Two such examples are Red Hat, whch dstrbutes Lnux and sells servce and support packages, and O Relly and Assocates, whch publshes books on open source software. Ths phenomenon wll be dscussed n secton 2.2, but for now note that such frms wll further ncrease the extent and scope of open source software development actvty. 2 The economcs of open source software In ths secton, the two groups of economc questons relatng to open source software mentoned n the ntroducton are addressed n turn, and the nsghts from the exstng economc lterature are explaned. 2.1 Incentves to partcpate Whlst some programmers are employed to spend some or all of ther tme workng on open source projects by frms lke Red Hat or are academcs dong research, the majorty of contrbutors to open source projects are unpad volunteers. What motvates sklled programmers to expend tme and effort for no mmedate monetary reward? Economc answers to ths queston have been dscussed extensvely by Lerner and Trole (2000). 5 Explanatons put forth by some non-economc commentators nclude thngs lke altrusm, programmng s fun, for the ntellectual challenge, or to make a poltcal statement. Whle a few programmers may have poltcal motvatons, Lerner and Trole pont out that the altrusm hypothess does not explan why programmers do not focus ther attenton on more needy causes, and why free rdng would be less prevalent than n other ndustres. Furthermore, they remark that we should be sceptcal of the other explanatons, snce t s unclear why programmers cannot fnd such challenges n pad employment. We must therefore look for alternatve economc explanatons of ths behavour. Basc economc theory tells us that a programmer wll partcpate n an open source project only f t gves a postve net beneft. Lerner and Trole dentfy the followng mmedate benefts and costs. Frst, the programmer may receve monetary compensaton f workng for a commercal frm. Second, the programmer may be customsng an exstng 4 See 5 See also secton 2.1 of Lerner and Trole (2001). More generally, the economc lterature on socal culture, such as Fang (2001), could be used as a context for analysng these ssues. The economc theory of socal culture s beyond the scope of ths paper. 68

4 program or fxng a bug, whch gves a drect beneft. 6 On the cost sde, there s an opportunty cost of tme whlst workng on the project, whch depends on a number of factors ncludng the ndvdual s enjoyment of programmng. Let us compare these mmedate costs and benefts between closed and open source projects. Frst, Lerner and Trole note that because open source code s freely avalable, t s often used n unverstes and schools for teachng, and so may already be famlar to programmers, thus reducng ther cost of partcpatng n an open source project. Lerner and Trole call ths the alumn effect. Second, by contrbutng to an open source project, a programmer may derve some prvate beneft through bug fxng or customsaton that could not be done wth a closed source program. In addton to these mmedate costs and benefts, Lerner and Trole also emphasse the exstence of delayed payoffs from open source projects. They separate delayed payoffs nto two dfferent ncentves: the career concern ncentve, whch relates to future job offers or future access to the venture captal market, and the ego gratfcaton ncentve, whch stems from a desre for peer recognton. 7 Lerner and Trole group these two ncentves together under the headng of the sgnallng ncentve, and argue that labour economcs, and especally the lterature on career concerns such as Holmström (1999), provdes useful nsghts n ths regard. From ths lterature, Lerner and Trole dentfy three factors that wll ncrease the sgnallng ncentve: () the more vsble the performance to the relevant audence, () the hgher the mpact of effort on performance, and () the more nformatve the performance about talent. 8 Lerner and Trole dentfy several reasons why the sgnallng ncentve may be greater n open source projects compared to closed source ones. Frst, performance measurement s better under open source. Ths s because only the functonalty and usage of a closed source program can be observed by outsders, whle under open source the contrbuton of each ndvdual and the qualty of hs or her code can be drectly nferred. Second, an open source programmer takes full responsblty for hs or her project or subproject whereas n a tradtonal frm envronment, an ndvdual s performance depends on that of others. Fnally, open source programmers are less lkely to have frm-specfc human captal, thus makng the labour market more flud. Lerner and Trole also argue that these theores can shed lght on the type of people that are more lkely to contrbute to open source projects, and what types of programs are suted to open source. Frst, sophstcated users are lkely to contrbute because they can derve drect benefts from customsng or bug fxng. Second, ndvduals wth strong sgnallng ncentves, for example someone who lacks formal qualfcatons but s 6 The programmer wll get these benefts whether or not the customsaton or bug fx s shared wth others. However, such mprovements are only possble wth open source programs because they requre access to the source code to mplement. 7 Erc Raymond, a leader n the open source communty, n an nfluental paper advocatng open source development called The Cathedral and the Bazaar (2000a), also emphasses the ego gratfcaton ncentve: The utlty functon Lnux hackers are maxmzng s not classcally economc, but s the ntangble of ther own ego satsfacton and reputaton among other hackers.... Voluntary cultures that work ths way are not actually uncommon; one other n whch I have long partcpated s scence fcton fandom, whch unlke hackerdom has long explctly recognzed egoboo (ego-boostng, or the enhancement of one s reputaton among other fans) as the basc drve behnd volunteer actvty. Ths egoboo phenomenon may be one of the motvatons for tenured academcs to publsh papers! 8 Note that () creates network effects: programmers wll want to work on software projects that wll attract a large number of other programmers. Ths may gve rse to multple equlbra, as n Katz and Shapro (1985). 69

5 nevertheless accomplshed at programmng, may use open source to enter the software ndustry. Wth regard to the types of programs best suted to open source, programs whose natural audence s computer programmers, such as operatng systems and programmng languages, would create the strongest sgnallng ncentves. 9 An alternatve approach to explanng the partcpaton of programmers n open source projects s gven by Johnson (2001) who develops a game-theoretc model of programmer behavour that borrows from the theory of prvate provson of publc goods. 10 Ths model attempts to explan why purely self-nterested programmers may wsh to make an mprovement to an open source program even when t s known that there are other programmers who may make the same mprovement, and even when programmers cannot coordnate ther actons. In Johnson s model there are n user-developers. Each agent knows of a possble mprovement to an open source program and each can develop ths enhancement at a prvate cost c.. The agents ndependently choose whether to develop the software, and f t s developed by at least one agent then t s avalable to all. If the enhancement s developed then all the agents receve ther prvately known valuatons v. It s assumed that all agents costs and valuatons are ndependent and dentcal draws from a smooth jont dstrbuton G ( c, v), wth support on a fnte rectangle defned by {( c, v) : cl c vl, vl v vh }, wth c L > 0 and v H 0. Each agent s strategy s a decson to develop or not develop, condtonal on ther realsed cost and valuaton, and gven ther belefs about what the other agents wll do. These belefs can be convenently summarsed by the probablty wth whch agent beleves that the development wll take place f he or she does not develop t, π. An agent thus chooses to develop the program f v c > π v, whch mples v ( π ) / > 1/ 1, that s, f the agent s value-cost rato s large enough. c Johnson consders symmetrc Bayesan Nash equlbra of ths game n order to answer a number of questons. Frst, he analyses what happens when the number of userdevelopers ncreases. Obvously, an ncrease n n makes development more lkely smply because t s more lkely that there wll exst a developer wth a hgh enough value-cost rato. On the other hand, an ncrease n n ncreases the ncentve of all agents to free-rde. Therefore, the change n the equlbrum probablty of development s ambguous, and depends on the dstrbuton G. However, wthout any assumptons about G, Johnson shows that any declne n the development probablty arsng from an ncrease n n s bounded and converges to zero as n gets large. Ths s because, when n s large, the margnal effect of an addtonal agent on the probablty of development s small. Johnson then shows that expected socal welfare s ncreasng n n. Ths s because each ndvdual s better off n expectaton when n ncreases, due to the fact that the probablty that another agent develops the project ncreases wth n. 11 Another result Johnson derves s that as n goes to nfnty, the equlbrum probablty of development s bounded and less than one. Thus, even an nfnte number of open source developers may not lead to a desrable enhancement beng made. Ths s because, n the lmt, only agents wth the hghest value-cost ratos wll choose to develop 9 Whle there s ndeed a bas n open source software towards ths type of program, there s also a sgnfcant number of consumer -type programs, such as Gnome (a graphcal desktop nterface), StarOffce (a productvty package ncludng word processor and spreadsheet), as well as numerous games. 10 See, for example, Chamberln (1974) and Blss and Nalebuff (1984). 11 Note, however, that an ndvdual agent and socety may be worse off n some states of nature. 70

6 the software. Gven that the support of value-cost ratos s bounded, the asymptotc equlbrum probablty of no development must keep the agent wth the hghest value-cost rato ndfferent between developng and not developng. 12 On the other hand, t s possble that two or more programmers wll smultaneously develop the enhancement. However, Johnson shows that the ncentve to free rde puts a bound on such wasteful duplcaton of effort. One crtcsm of Johnson s approach s that t gnores some of the nsghts provded by Lerner and Trole s analyss as to the ncentves for programmers to partcpate n open source projects. In partcular, recall that Lerner and Trole argued that a programmer s utlty from partcpatng n a project should be ncreasng n the sze of the programmer audence, due to the sgnallng ncentves. Johnson s model, on the other hand, focuses purely on the mmedate benefts to the programmer. 2.2 Busness models and compettve effects As mentoned n the ntroducton, the open source phenomenon has spawned a number of frms that are tryng to make profts by sellng complementary products and servces. Raymond (2000b) dentfes seven dfferent busness models that such frms can use. These busness models are summarsed n table 1. Very lttle theoretcal or emprcal work has been done on the vablty of these busness models, competton between such frms, and the effect of frms usng these busness models on exstng closed source software frms. An economc analyss of the nteracton between a closed source monopolst and an open source communty s provded by Mustonen (2001). In hs model, there s an open source program that s a substtute for a program provded by a proft-maxmsng monopolst. It s assumed that consumers valuatons of ether program are proportonal to the amount of development effort that went nto the program. Consumers face an mplementaton cost, whch s equal for both programs, on top of any prce that they must pay to buy the program. There s a large populaton of programmers who can choose to work for the monopolst at a wage that the monopolst sets, or can choose to belong to the open source communty and receve complementary ncome. In order to ncrease development effort, the monopolst must hre more programmers, whch requres offerng a hgher wage, whle the amount of open source development s determned by the occupatonal choces of the programmers. The tmng of the game s as follows. Frst, the monopolst sets the wage that t wll offer to programmers. Programmers then choose ther occupaton. Next, consumers evaluate the two programs and the monopolst sets ts prce level. Fnally, the programs are produced and sold. 12 Johnson notes that ths result depends on the support of the value-cost rato dstrbuton beng bounded. If not, development would occur wth an arbtrarly hgh probablty as n grew large. 71

7 Name Busness model Example Loss-leader / Use open source software to mantan a Netscape s open source Mozlla Market postoner. market poston for a related propretary web browser and software product. propretary server software. Wdget frostng. Sell hardware wth open source drver Apple s MacOS X. Gve away the recpe, open a restaurant. Accessorsng. Free the future, sell the present. Free the software, sell the brand. Free the software, sell the content. software. Dstrbute open source software and sell servce and support contracts. Sell accessores for open source software such as documentaton. Sell closed source software wth a lcense that makes t open source after a specfed tme perod. Sell other developers a brand that certfes ther mplementaton of your open source technologes s compatble wth all others who use the brand. Develop an open source product that receves propretary content that the frm sells. Red Hat. O Relly and Assocates. Aladdn s Ghostscrpt. Sun s StarOffce. Table 1: Busness models related to open source software. Adapted from Raymond (2000b). N/A. Mustonen s model thus consders the effects on a monopolst of constrants n the labour market for programmers and competton from a substtute product that s freely avalable. Mustonen shows that whether the open source program wll be avalable n the market or not depends on the consumers mplementaton costs for programs. In partcular, f ths cost s suffcently low, n equlbrum some consumers wll choose the open source program and the monopolst wll take ths nto account when choosng ts prce and wll not be able to apply full monopoly power n the product market. A more heurstc analyss of the effects of the open source movement on closed source frms s provded by Lerner and Trole (2000). Some advocates of open source, such as Raymond (2000a), argue that t s a superor model of software development n terms of the speed of development and the fxng of bugs, due to the large number and hgh motvaton of open source programmers. In lne wth ths thnkng, Lerner and Trole dscuss the extent to whch closed source frms can emulate the ncentve structure provded by open source. They pont out that closed source frms wll never be able to replcate the vsblty of performance of open source, whch wll reduce the ncentves and motvaton of programmers n closed source frms. On the other hand, closed source frms can, and do, lst people who have contrbuted to software, 13 and promote code-sharng wthn the frm, to try to restore some of these ncentves. 13 Lerner and Trole note that there s a tradeoff from dong ths, because t may also nduce poachng of talented employees by other frms. 72

8 Some closed source software frms encourage ther programmers to spend part of ther tme workng on open source projects. Lerner and Trole dentfy several reasons why the frms may wsh to do ths. Frst, t allows them to have better knowledge about the state of open source development, and hence ther competton. Second, t s a way of dentfyng talented programmers to hre. Thrd, t may help to provde an ntellectually challengng envronment for ther programmers. Fnally, they may want to pre-empt the development of a standard based on a technology owned by a larger rval frm. Lerner and Trole also consder the attempts of some closed source frms to rerelease ther propretary software under an open source lcense, such as Netscape s Mozlla web browser. Ths partcular project has so far been relatvely unsuccessful n terms of the contrbutons from open source programmers. Lerner and Trole suggest that ths may be n part due to the fact that a corporaton may be unable to credbly commt to keepng all of the source code open and to acknowledgng all contrbutors. Lerner and Trole then pont out that ths provdes a role for ntermedares such as Collab.Net, whch organses open source projects on behalf of other companes, and, as an mpartal thrd party, may be able to provde the needed credblty. It s clear that much work remans to be done on open source busness models and the effects on competton n the software market. The next secton brefly summarses some possble avenues of research. 3 Future drectons From the papers revewed above, t seems that ssues surroundng programmer partcpaton n open source projects can be qute well explaned by exstng economc theory, n partcular the theory of prvate provson of publc goods, and varous results from labour economcs. However, a synthess of the Lerner and Trole (2000) labour economcs approach and the Johnson (2001) publc goods approach may be useful. Future research n the economcs of open source software could also focus on busness models and competton n the software ndustry, and on approprate governance structures for open source projects. In ths regard, one open queston consders the postonng of closed source and open source software products. Software users vary n ther techncal sophstcaton and requrements. Casual observaton suggests that open source software s largely amed at sophstcated users, whle closed source software s often more user-frendly. To some extent ths can be explaned by the fact that open source programmers seek recognton from ther peers, who are sophstcated users. However, t could also be thought of as a product dfferentaton strategy by the closed source frm(s). The queston s then what the optmal degree and determnants of user-frendlness of a closed source program are when faced wth open source competton. Second, as noted above, a possble reacton of closed source frms to the open source phenomenon s to try to emulate some of the open source ncentves wthn the frm. In-depth case studes of modern closed source software development (f possble) would shed lght on the extent to whch frms are dong ths, and the methods that they use. Theoretcal work could also gve some nsght as to the effects of ths mmckng behavour on the open source communty, and whether t s lkely to be successful for the closed source frms. 73

9 Fnally, Lerner and Trole (2001) note that several recent open source projects have been ntated by proft-makng frms, ether from scratch or by re-releasng exstng propretary software as open source. Therefore, they see one of the key ssues as the choce of governance mechansm, to ensure the correct ncentves on all sdes. As suggested above, ths may be facltated by neutral ntermedares wth two-sded reputatons. An economc theory of such enttes would be very useful, not just for the economcs of open source software, but also for understandng a varety of ndustres References Blss, C. and B. Nalebuff (1984) Dragon-slayng and ballroom dancng: The prvate supply of a publc good, Journal of Publc Economcs, 25: 1 2. Chamberln, J. (1974) Provson of Collectve Goods as a Functon of Group Sze, Amercan Poltcal Scence Revew, 68: Dxt, A. (2001) On modes of economc governance, mmeo, Prnceton Unversty. Fang, H. (2001) Socal culture and economc performance, Amercan Economc Revew, 91: Holmström, B. (1999) Manageral ncentve problems: A dynamc perspectve, Revew of Economc Studes, 66: Johnson, J.P. (2001) Economcs of open source software, mmeo, accessed 4 Feb Katz, M.L. and C. Shapro (1985) Network externaltes, competton, and compatblty, Amercan Economc Revew, 75: Lerner, J. and J. Trole (2000) The smple economcs of open source, NBER Workng Paper, No Lerner, J. and J. Trole (2001) The open source movement: Key research questons, European Economc Revew, 45: Mustonen, M. (2001) Copyleft the economcs of Lnux and other open source software, mmeo, Unversty of Helsnk. Raymond, E.S. (2000a) The cathedral and the bazaar, mmeo org/~esr/wrtngs/cathedral-bazaar/, accessed 3 Feb Raymond, E.S. (2000b) The magc cauldron, mmeo, ~esr/wrtngs/magc-cauldron/, accessed 3 Feb Dxt (2001) provdes a startng pont for ths lterature. 74