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2010-01-22 09:43:51
That's the point - bypass the middleman's sales overhead and profit.
On one hand, Company A buys software from Company B, indirectly funding the
development of the software. If Company A wants changes or new features, they
can beg and plead for them, and they might get them. Company A will indirectly
pay for development at Company B whether or not they get the changes they want.
Company B will then sell the software, possibly incorporating Company A's ideas
and improvements, to all of Company A's competitors. Company B's customers pay
the cost of the development, plus the cost of sales (marketing, commissions,
etc.), plus a markup.
On the other hand, Company A hires developers to improve software that others
have made freely available. They get exactly the changes they want. Company A's
competitors also get those changes, but the reverse is true: Company A gets
Company C's improvements. Both companies find this agreeable because neither
can gain an advantage through the software, and both have reduced the cost of
developing it. Company A has cut out the middlemen, avoiding the cost of sales
and profits extracted by Company B.
You can't gain an advantage over your competition by buying your software from
a third party, because your competitor can buy it, too. You can't gain an
advantage over your competition by hiring developers to write open source
software, because your competitor can dowload it, too. There's no difference
between open source software and third party commercial closed source software
as far as advantage over a competitor. The only way to use software as a
competitive differentiator is to develop it internally, keep it closed, don't
sell it, and pay the high cost of developing for a single customer - yourself.
In economic terms, software is a complementary good. Intel sells processors,
which are not useful without software. But every dollar spent on software is a
dollar that isn't spent on processors. Red Hat is in a similar situation; they
sell support, not software, and giving away software makes money available for
support.
The economics are simple. Any software that has a large enough base to support
sales in binary form has a large enough base to support shared development
under open source licenses with a lower overhead. Selling binaries is a
temporary aberration caused by network effects during the initial growth of the
market. As the market matures, sales of mass market software will decline.