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Open Source: On why not

By Steven Den Beste February 2000

I'm beginning to get a bit tired of people asking everyone and their dog to release the source for every product they can think of.

Somehow people have gotten this idea that this is the wave of the future, and that each and every commercial software vendor needs to get on the bandwagon.

But they're looking at it from the wrong point of view. Open Source has significant drawbacks, because at the lowest level it virtually guarantees easy piracy of the product.

I'm not saying that no-one should release anything Open Source. There's definitely a place for open source. What I'm saying is that there is not and should not be any obligation to do so.

I think the problem is that most of the people making these suggestions have a very concrete understanding of their own situation and of the benefits for them in an Open Source release of something that they use or would like to use, but only a very vague understanding of the actual situation and effects this would have on the producer of the software.

The Open Source advocate knows how expensive the product is, and that's real money from his pocket flowing out.

But it seems as if the conceptual model ends at the point where the money is received at the corporation, as if it somehow vanishes into a black hole at that point. Or perhaps they have this image of it flowing into the wallet of some fat-cat corporate executive (or worse, fat-cat stock holders, who "of course" are scum).

But that's not the case. Those corporations have real expenses and that money is used to pay them. Without that income, the corporation can't exist. (And virtually all of these corporations pay no stock dividends.)

People are talking about Red Hat, for instance, as a big Open Source success story. They went public, their stock went through the roof, the founders are now wealthy beyonds the dreams of avarice, and they now have a market cap above $13 billion dollars.

But now that they're publicly traded, we can examine their books in the cold hard light of their SEC filings. Here's the most recent one, as this is written:

http://www.sec.gov/Archives/edgar/data/1087423/0000912057-00-001361.txt

Someday, somehow, someway, this corporation is actually going to have to make a profit. A big one. Continuously. For a long time.

It sure hasn't happened yet.

In the 9 months ending 11/30/1999, they had gross revenue of $12.6 million and expenses of $7.4 million (cost of sales) plus $15.8 million (operating expenses) for a net loss of $10.6 million. (Rounding errors apply. See the EDGAR report for the precise figures.)

Their fundamental problem is that they're trying to make revenue by selling something which they are obligated to *give* for free to anyone who asks for it. This costs them money (to operate the FTP server and pay for the network connection to it) without giving them any compensating revenue. In the mean time, while they have been developing additional software which they include in their distributions, they're obligated to give all of that away, too. And at least one competitor is now selling, at cut-rate, what amounts to a clone of Red Hat Linux including all their custom code. And there's nothing, nothing at all, that Red Hat can do about it.

Their solution to their revenue bind is to try to sell services along side, and to make the bulk of their revenue from that. So far it isn't working. It remains to be seen whether they can ever turn around.

Red Hat's market capitalization is preposterously high: It's more than a thousand times yearly gross revenue, which is absurd for a company which has never turned a profit and shows no sign of doing so any time soon.

By comparison, Intel's market cap is 32 times revenue. Qualcomm's market cap is 24 times revenue. Sun's market cap is about 20 times revenue. IBM's market cap is about 3 times revenue. Apple's market cap is less than 2 times revenue. And they're all profitable, though Apple's been struggling. (All numbers as of 2/10/2000).

For all the enthusiasm about open source, the fact is that no-one has yet figured out how to make a profit out of it. No corporation which has based its business model on open source is in the black.

And until they do make a profit, you're not going to see a big commercial buy-in to the concept from the traditional software developers which have been using the traditional software-source-is-proprietary business model.

Yes, I know that IBM has released JFS to Open Source. Yes, I know that id released the source to Quake. I know that Netscape released the source to Communicator.

But you don't see IBM releasing the source to AIX or ViaVoice, or id releasing the source to Quake III Arena. And Netscape hasn't released their server code. What they're giving away is things they no longer care about. In the case of id, it was more an acknowledgement of reality than anything else, because the source to Quake had been stolen and was out in the world already. In the case of Netscape, they went open source on Navigator about the time they gave up on trying to make any money selling browsers.

You *haven't* seen any corporation give away the source to one of their crown jewels yet, unless they were legally obligated to do so (as is the case with Red Hat). And you're not going to anytime soon.

And the only major old-line corporations which have embraced open source in a big way are those which are desperate. The best example of this is Corel. Corel has been bleeding money for years, as Michael Cowpland has frantically floundered around trying one thing after another to try to turn the company around. Embracing open source is his latest miracle cure for Corel's chronic losses. It remains to be seen whether it will work any better than the last five things he tried.

Corporations don't live on good will. They need money to operate. Any time they take a successful product and release the source to it, they have to figure that the income stream from it will immediately plummet as people begin to create their own copies for free (whether licensed or not). It won't necessarily drop to zero, but it will definitely dropfootnote.

Let's take a hypothetical small developer with a couple of hundred employees which is privately held by one or two individuals. When you buy a product from them, that money doesn't flow into the owner's pocket. It's not a matter of the difference between a new Ferrari in his garage twice each year instead of only a new Porsche per year.

That kind of mental model makes it easy to think of him as a gouging fat-cat who can easily afford to give away things you want but don't want to pay for. But that's not reality.

That money doesn't go to the owner; most of it goes to pay for the operating expenses of the corporation, and the single biggest operating expense is the payroll. If you ask the owner to give away a product he's now selling, it means he has to select at least one of his employees and sacrifice that employee on the altar of Open Source by laying him off.

Our corporation owner also works there. He knows the names of every single person working for him. He sees them in meetings. He talks to them in the halls. He visits their booths and sees the pictures of their spouse and children. He gets to meet those families at the corporate picnic. The employees are his family; he cares about them; and he knows that the salaries they earn support their lives and their own families. To reduce his revenue so as to prove that he "Gets It" about Open Source would require him to seriously harm someone he cares about and feels responsibility for. There's a price for everything, and that's the price you're asking him to pay so that he "Gets It".

How can you be so heartless as to ask him to do this? Does it make it any better just because you don't know the name of the person who's going to get laid off and because you don't have to be the one to tell him the bad news and escort him to the door?

So unless you can show how this corporation will get offsetting revenue which compensates him for the revenue lost by giving away a product he now sells, and I mean immediate revenue in large quantities, don't bother asking him to open source anything.

"Good Will" doesn't appear on the books. "PR" doesn't pay the salary of the unfortunate employee who's going to have to be laid off. "Getting It" isn't legal tender to render to the IRS for corporate taxes. Salaries and taxes require lots of money, and they require that money RIGHT NOW. So don't bother with an explanation of how it will increase their revenue some day, if the winds blow right, maybe.

Show a financial case RIGHT NOW why releasing the source to one of his products will increase his revenue overall (or at the very least break even) RIGHT NOW, or don't bother asking.

Think like a capitalist. It's the money, stupid.

If you want him to open the source to something, you better explain to him how he can do that without destroying the life of someone he cares deeply about: one of his employees, who is also his friend, who would have to be laid off if corporate revenues decline.

If the cost of going open source is laying off people, then the price is too high.

The exact same thing applies to a large corporation like IBM. It's larger, but it's still made up of people. The revenue they take in still goes primarily to payroll. "Why doesn't IBM release the source to OS/2?" I've heard again and again. Because if IBM does so, it will cost them a lot of moneyfootnote and reduce their revenues, and that's a shitty way to do business. It's generally not popular with stockholders to increase your investment in some product so as to deliberately reduce your revenue from that product. But more important is that if they do that, someone's got to be laid off.

Every time someone suggests that IBM should do this, I ask what benefit it would have for IBM. And ever time, no-one comes up with a direct source of revenue which would offset the loss in sales and the increase in engineering expenses. Instead they talk about nebulous concepts like PR and Customer Good Will and "Getting It".

That's horseshit. What that really means is "I want them to release it and I don't really have a good reason why it would be good for them."

Good will and PR and "Getting It" don't appear on the corporate spreadsheet, and you're not going to get Lou Gerstner's attention until you can demonstrate a source of revenue -- dollars, bucks, moolah, simoleons, cash -- created by doing this.

That's not because Lou "Doesn't Get It", but because he has a legal obligation to his stockholders to operate his company in a profitable fashion (not to mention a moral responsibility to his employees).

"Revenue" is not a dirty word. There's nothing immoral about selling software. Doing so employs people. There is *no* obligation to put anything into Open Source.

If someone wants to do that voluntarily, more power to them. But don't demand, or even suggest, that someone do so unless you can show them how it benefits them directly, immediately, personally.

If the one you want to influence is a business, don't bother bringing it up unless you can make a convincing case that doing so will increase their profits.

Eric Raymond (a major proponent of open source) said it best:

"Either open source is a net win for both producers and consumers on pure self-interest grounds or it is not. If it is, you cannot lose; if it is not you cannot (and should not) win."

Footnotes:

IBM releasing the source to OS/2 would not be free for them. IBM doesn't own it all. It contains source which belongs to other corporations, and also source written by IBM which is based on intellectual property of other corporations. Some of that IP is covered by non-disclosure agreements and most of it is covered by royalty agreements. Before IBM could release even part of the source of OS/2, it would be necessary to make a very thorough pass through it to identify those files which IBM owns 100%, and those which contain either source or IP belonging to other corporations. Probably they'd have to do it twice, with two different teams, just to make sure they didn't make a mistake -- for the lawsuits which would result if they screw up would be most impressive.

I'm aware that philosophically "open source" doesn't mean "free", in theory. But in the real world, as soon as you release the source to something, nothing can prevent a determined individual from creating their own working version of it without paying you anything, and nothing can prevent him from spreading it around to other people who aren't willing to do that work for themselves. Irrespective of the philosophy of the open source movement, as a practical matter there will always be a drop in revenue from sales if the source to some product is released.

I'm aware that lots of companies have built their business plans on open source, and that many of them have gone public and now have really impressive market capitalizations. But none of them have made a profit yet. You can't operate a business in the red indefinitely; the investment money will run out. Eventually the corporation has to actually turn a profit. So far, none of them have done so, including the ones who claim they'll do it by making their money on support. That's not to say that this is impossible; we don't know yet. But it's a bit disheartening that of all those companies, every one is bleeding cash rapidly.

Steven Den Beste’s Home page

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