In his discussion of the Open Source Paradigm Shift, Tim O’Reilly describes open source as an expression of three deep, long-term trends:
- The commoditization of software
- Network-enabled collaboration
- Software customizability (software as a service)
On the commoditization of software:
What are some of the implications of software commoditization? One might be tempted to see only the devaluation of something that was once a locus of enormous value. Thus, Red Hat founder Bob Young once remarked, ‘My goal is to shrink the size of the operating system market’. (Red Hat however aimed to own a large part of that smaller market!) Defenders of the status quo, such as Microsoft VP Jim Allchin, have made statements such as ‘open source is an intellectual property destroyer’, and paint a bleak picture in which a great industry is destroyed, with nothing to take its place.On the surface, Allchin appears to be right. Linux now generates tens of billions of dollars in server hardware related revenue, with the software revenues merely a rounding error. Despite Linux’s emerging dominance in the server market, Red Hat, the largest Linux distribution company, has annual revenues of only $126 million, versus Microsoft’s $32 billion. A huge amount of software value appears to have vaporized.
But is it value or overhead? Open source advocates like to say they’re not destroying actual value, but rather squeezing inefficiencies out of the system. When competition drives down prices, efficiency and average wealth levels go up. Firms unable to adapt to the new price levels undergo what the economist E.F. Schumpeter called ‘creative destruction’, but what was ‘lost’ returns manyfold as higher productivity and new opportunities.
Microsoft benefited, along with consumers, from the last round of ‘creative destruction’ as PC hardware was commoditized. This time around, Microsoft sees the commoditization of operating systems, databases, web servers and browsers, and related software as destructive to its core business. But that destruction has created the opportunity for the killer applications of the Internet era. Yahoo!, Google, Amazon, eBay — to mention only a few — are the beneficiaries.