The economic case for open source (for Google, Nokia etc.)
Published by Martin Kleppmann on 10 Jan 2008.
Over the Christmas holidays I was reading
Joel on Software,
the book summarising some of the most interesting material from
Joel Spolsky’s blog. (The book is worth reading, although I did
find it quite a shame that it was pretty much verbatim the blog contents pressed on paper for easier
reading. It would have been nicer if the writing style had been changed from the slightly rambling,
disconnected style of blogs to a more coherent style expected from a book. But the stuff Joel talks
about is definitely worth reading for software engineers, in whatever form.)
The article which I
found most interesting is his “Strategy Letter V” (page 281), which is also
available on the web. It explains
why, in his opinion, so many large companies are investing in open source software.
On the surface,
open source seems a strange model for a business – why should a company spend a lot of time and
money developing software, and then simply give it away? The claim that they have suddenly given up
on capitalism isn’t exactly convincing. The claim that it’s cheaper from them to get free code
contributions from teenagers than to write it themselves… not so sure about that one either.
gives the first answer which I actually find convincing. He explains open source investment in
economic terms, through so-called complements. For example, flights to Venice and accomodation in
Venice are complements of each other: customers need both in order to get a holiday in Venice, but
they are sold by completely different companies. And if flights to Venice get cheaper, more people
want to go there, so there is higher demand on accomodation, so prices of hotel rooms in Venice go
up. And vice versa. This economic effect of complements has been observed in many different
So, if A and B are complements of each other, and the price of A goes down, then the price
of B will go up. So, if you are a company selling B, and you are clever, you will try to push the
price of A down as far as possible, even commodify it. That way, you can sell B for a higher price
and you’ll be better off.
And now if you look around who is investing in open source software,
you’ll notice that often the software released in this free manner is actually a complement of what
that company is trying to sell. For instance:
- Google want to sell advertising on mobile web sites. Mobile web browsers and
mobile operating systems are complements of mobile web sites, so Google make
Android and release it freely in
order to drive down the price of these
- Our friends at Collabora are
paid by Nokia to work on an open source platform
for Nokia’s internet tablets. Nokia sell phone hardware, and the operating system is a complement of
the hardware, so it makes sense for Nokia to commoditise it. Moreover, third-party applications are
a complement of the hardware, so by opening the platform to the wide variety of freely available
Linux software, Nokia increases the value of its hardware even more.
Once you think about
it this way, it’s amazing how the economics begin to make sense!