[Linuxcommand-announce] [LinuxCommand.org: Tips, News And Rants] The Financial Physics of Free Software

[William S. <bs...@pa...>]

In the Internet age, does software have value? Of course software is
valuable in the sense that it provides service and is useful, but does
software have monetary value?




If one looks at the law of supply and demand, the fact that software,
like all other forms of digital content, can be endlessly reproduced
and distributed at virtually no cost negates its value because software
distributed this way lacks scarcity. Digital content is simply not a
scarce resource. This hasn't stopped people from trying to impose
artificial scarcity on digital data through the use of digital
restrictions management (DRM) and draconian imaginary property laws but
these approaches have had only limited success. This is not surprising
as attempting to create an artificial shortage goes against the
physical nature of the Internet and of computers themselves.





The Proprietary Model




If you have ever checked out my resume, you know that I spent the
greater portion of my career in the proprietary software world and was,
at one time, a big supporter of proprietary software. I was fortunate
to have spent all of my years in the software industry working for
small companies where one could wander the halls and learn every aspect
of the business. In addition to being a technical manager, I had number
of marketing and sales assignments as well.




Software development in the proprietary world is speculative.
Typically, a product manager or marketing director is given the
assignment of coming up with the "next big thing," a product that can
sold to many customers at a profit. The reason that it has to be big is
because proprietary software development is fantastically expensive.
The product manager will present ideas to management and get approval
for some personnel and a budget based on the product manager's
forecasts for delivery dates and sales targets. After approval, the
software development process begins, In some companies this process is
very formal including requirements specifications, design reviews, test
plans, etc. At the end of the process, the software product goes to
market. This involves a number significant expenses including
marketing, advertising, trade shows, etc.




It is important to remember that proprietary software companies don't
actually sell software. They sell licenses. It is through this
mechanism that they attempt to create a scarcity that gives their
product value.




Proprietary software only has value once it is written. You will
sometimes see product announcements appear for non-existent
yet-to-be-developed products. Such products are derisively known
as "vaporware" in the industry because proprietary software does not
have value until it is written and actually availabile in short supply.





The Free Software Model




To members of the proprietary software community, the notion of free
software appears insane. This is because they think that free software
means that they have to go through all of the steps and expense of the
process above and then not collect any revenue on the back-end. There
are a number of problems with this assumption.




The development process for free software is fundamentally different.
First off, it is not speculative. Developers of free software typically
have an interest in actually using the program they want to write. It
also means that free software developers are usually subject matter
experts for their chosen program.




Free software is much less expensive to produce than proprietary
software. The development process is much less formal than closed
proprietary processes owing to the fact that development is done in the
open. This allows a more natural and organic method of solving problems
and fixing bugs and, unlike proprietary development, the development
tools and shared software components are free. Free software also does
not incur the engineering overhead of implementing "copy protection,"
user registration systems, and tiered product versions that are used to
establish upgrade paths for proprietary products.




Finally, free software products don't have the marketing and sales
expenses of proprietary software.





Making Money




While the proprietary software appears to make a lot of money now, is
it sustainable? Will the Internet and its ability to perform infinite
duplication and distribution drain the value from software? Only time
will tell, but I'm betting that the Internet will emerge victorious. We
can already see the signs of this victory with the rise of "cloud
computing" which is eliminating the need for software all together. But
cloud computing raises a number of issues including privacy and
security, as well as freedom.





There has been a lot of discussion of how to make money with free
software. Most of the ideas put forth involve charging for services.
After all, Red Hat, a very successful software company, makes its money
that way, but I want to suggest another possibility.




As we saw, proprietary software only has value after it is written and
is available for license sales. The free software model assumes from
the start that once a program is written it no longer has value because
it is not scarce. In contrast to proprietary software, free software
only has value before it is written. The absence of a desired software
program is the ultimate scarcity. There exists an opportunity to
exploit this fact. It's not really a new idea by any means. This is how
the custom software business works. Clients want something and pay big
money to get something written. What I envision is a business that
somehow aligns many clients with developers so that the cost of
development can be spread out among many clients.




What will such a business look like? That's an exercise I will leave to
my more entrepreneurial readers.





Further Reading

- http://www.gnu.org/philosophy/selling.html
- http://news.cnet.com/8301-13505_3-10307348-16.html

- http://blog.ninapaley.com/2009/04/06/understanding-free-content/
-
http://www.guardian.co.uk/technology/2008/sep/29/cloud.computing.richard.stallman






--
Posted By William Shotts to LinuxCommand.org: Tips, News And Rants at
4/27/2010 07:38:00 PM