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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.