Posted by: commonsresource | June 30, 2010

Adam Smith (?) on open source software business models

Continuing with the theme of open source business models, I strongly recommend Mike Masnick’s The Lack Of A Billion Dollar Pureplay Open Source Software Company Shows The Market Is Working Properly post on his Techdirt Economics blog.  Mike builds from Glyn Moody’s Why No Billion-Dollar Open Source Companies? post discussed in my Hats off to Red Hat – Thoughts 0n Billion-Dollar Open Source Companies. After acknowledging several key contributors to the discussion surrounding Glyn’s post, Mike puts forward the following points:

  1. There absolutely are billion dollar open-source companies, but they’re not pure play open source companies. But that’s okay, because a “pure play” open source company is like a record label trying to focus on just selling music. You’re in the wrong business — trying to sell infinite goods — so of course the direct profits should be limited.
  2. The lack of billion dollar pure play open source software companies is a sign of a working efficient economy. In fact, billion dollar pure play open source companies would be a sign of a market failure.

In the course of developing both points, he points out “what Adam Smith saw nearly two and a half centuries ago. If you give companies monopolies, they will take monopoly profits, but those monopoly profits come at the expense of innovation and consumer benefits.”

While I take issue with Mike’s somewhat simplistic analysis around the economic impact of intellectual property protection, I strongly agree with his concluding comments:

When a market is made more efficient, that actually spreads throughout other areas and helps consumer surplus, economic growth and the rest of the world benefit. Automobiles and airplanes “shrunk” the railroad market, but opened up massive new markets. The end result was a much bigger economy and greater economic opportunity and consumer surplus. Automated telephone dialing “shrunk” the telephone operator business, but opened up massive new efficiencies, leading to advancements like the internet itself. And that created massive economic efficiencies and growth and consumer surplus.

So, just as we shouldn’t worry about the lack of “billion dollar” pure play open source software firms, we should also not fall sway to the complaints of companies who are being disrupted by these models, about how all that money they make is somehow “disappearing” if the government doesn’t come in and protect their business model. What’s actually happening is all that money is being put to more efficient use. Unfortunately, it’s rare to see politicians or business leaders who actually understand this simple, but important fact, and it leads them to propping up legacy businesses, which actually slows down innovation, economic growth and consumer surplus.

At the time that I was digesting Mike’s post, I came across yet another reference to Adam Smith (the 18th century Scottish economist and philosopher) and his “The Wealth of Nations” work in Nat Torkington’s  Observation on hiring from open source post on O’ Reilly radar. While I will let you read Nat’s short, insightful and humorous piece, I am confident that Adam Smith would be very proud of the  posts by Nat and Mike and the very business of open source software itself!


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