Business Strategies for Open Source Players in Enterprise ...



Business Strategies for Open Source Players in Enterprise Computing

Strategic Computing and Communications Technology

MBA290C/EECS 201/IS224/E298A

Aaron Brick

Arindam Chakrabarti

Nicole Kim

Kedar Shah

1. Introduction

We intend to describe the primary incentives and strategies surrounding software openness. We analyze the decision-making for both suppliers and adopters, cast in the context of the current trends towards openness and expansion of IT markets. We will illustrate how the open source movement actively commoditizes sectors of the software market, forcing proprietary vendors to defend their market share through differentiation. This increase in competition will increase the value of software for customers and users.

2. Openness Incentives

2.1 The Open Source Spectrum

In proceeding to analyze software license decision-making, it is useful to consider existing and potential licenses along an axis, as an openness spectrum. Rather than being defined in terms of one specific criterion of these licenses, the measure is a general reflection of overall openness.

The most closed kind of software cannot be stored on a user’s machine; in these cases the closedness is so severe that the supplier manages the software's actual execution and exposes only an interface to its clients. Many online service providers follow this model.

Slightly more open and much more common is the case of the binary-only distribution; here users are given a copy of the software, in a largely unintelligible format. This is the model adhered to by Microsoft, Adobe, and other corporate software suppliers.

In some cases suppliers will openly reveal APIs to their otherwise closed software and allow it to be “glued” together with other applications on the demand side. Some graphics driver software is released like this.

In uncommon cases, source code is distributed in a nondisclosable, hands-off manner. Microsoft was recently forced to do this with Windows for some of its most important customers. They were not allowed to modify or mention its contents, but their visibility made certain peripheral tasks easier.

From this point on, licenses are regarded as “open source.” Most common, and restrictive, among those is the GNU General Public License (GPL). It requires source distribution, credit where due, and for derived works to carry the same license (leading to the charge of “viral” licensing). Linux is probably the most significant example of software under the GPL.

The Berkeley Systems Distribution (BSD) license is so open that it allows redistribution for profit. The BSD OS kernel, having forked several times, was incorporated into Apple's OS X, which includes closed components and is sold. This would not be legally feasible to do with Linux.

The most open of all are works in the public domain (PD). They can be used under the least onerous license terms imaginable: none. However, limited amounts of software are available in the PD.

2.2 Trends

It was observed[1] that “the more liberal you make the terms under which customers can have access to your product, the more valuable it is to them.” Thus, all else being equal, customers will prefer more open systems. Exploitation of this fact by movement towards openness has accelerated in recent years: Closed software used to be the norm, but now almost all applications are available in an open form. This movement is closely related with the advent of the public Internet: it has lowered transaction costs so much that distributed collaboration is much easier and adoption does not require any special infrastructure.

Software opening is a form of commoditization; it only takes one supplier whose goal is complementary to a given system to commoditize it in order to broaden access to their profitable product or service. (An intriguing corollary is the supplier industry's panic over piracy; they are battling its commoditization with predictably little success.)

2.3 Incentives towards closedness for suppliers

The flipside of customers' preference for openness is the supplier preference for closedness. Most important for them is to retain their customer base, by ensuring that clients be locked in by high switching costs. This affords the vendor more control over the product's pricing.

Closedness is faster than openness because of the latter's high overhead costs. Suppliers can act unilaterally in the market with much greater agility than they can orchestrate standards agreements. This quickness and flexibility, together with marketing dollars, can potentially help them capture the first-mover advantage.

If a supplier has truly unique software, which cannot easily be re-implemented, it can charge a premium for it. Part of this premium usually comes in the form of closed licensing terms, restricting the transferability and transparency of the product. Attempting to take over a market niche with such a product is dramatic, difficult, and potentially very rewarding: this is the classic “performance play.”

Suppliers with unique software, marketing budgets, and locked-in users tend to be prestigious, established companies like Microsoft, Adobe, or specialty vendors. They are driven by profit and tend to be hierarchically organized.

2.4 Incentives towards openness for suppliers

Along with preferring openness, consumers are known to be fond of that which is free. Adoption can be meteoric when the product is available for no charge. Such products can potentially capture the first-mover advantage. Interested programmers can now hack together a program, upload and announce it, and receive feedback and participation on the order of days.

Several benefits are available to suppliers with large networks of users, especially those where trust is established. Users can constitute an important resource for quality assurance of products in development, because while less disciplined than the supplier's own professional testers, their numbers are so much greater. Plaudits and improved reputation can also be earned by suppliers seen as good citizens, contributors to the public good; marketing and advertising can even be colored by these aspects.

As previously mentioned, the commoditization of a niche of the software market happens when open alternatives to traditional, expensive software become available. Coopetition is a main manner of achieving the process: Groups collaborate and share the burden of reimplementation, then compete in the complements market.

Community-oriented commoditizers tend to be volunteer organizations or academic projects, meritocratic and driven by personal interest and altruism.

2.5 Incentives towards closedness for adopters

It was long assumed that good software was expensive and restricted, so this was users' choice by default. With the recent trend towards openness and much greater availability of open software, this supposition has been losing ground. That said, most organizations use some combination of open and closed software. This is unlikely to change overall, because proprietary suppliers will always dominate uncommoditized niche markets, and many users are in some niche or another.

One advantage of adopting closed software is that tight control generally corresponds to professional service. Buyers can be confident that versions, upgrades, and personal support will be available. It is also easy to identify the software's source, which helps in situations with rigorous responsibility tracking.

If a closed product is the market standard, then users may be coerced into adopting it. If one relies on direct network effects – trading files with other users – who use the dominant application, then there is a high barrier to adopting an incompatible solution. In other words, the storage and transfer of these files is not commoditized, as it is tightly controlled and developed to promote lock-in.

Proprietary, closed software has a deserved reputation for quality in certain areas. It frequently is more polished and caters better to the user than open products. The vendor might be known for the excellence of their products. After all, if people will buy it for a hundred or a thousand dollars, isn't it worth that much?

2.6 Incentives towards openness for adopters

This is the section with the most recent growth. The following incentives were not well-known previously because there was almost no software with which to observe it. The largest change enabling distributed development and release is, of course, the Internet. With its help, the market for software is much more liquid – and more sectors commoditized – than was previously the case.

As observed a priori, all else equal, customer value correlates with openness. Adopting open source software (OSS) means no exploitation by entrenched suppliers; lower lock-in by not sinking any purchase costs; and the assurance that document formats won't prevent migration. Being available for free, specifically, is a powerful motivator. David Wheeler recently estimated[2] the hypothetical cost of redevelopment of Linux at $612 million; it's a significant public good, easily sharable.

Source code is a program's complement. It enhances users' ability to debug, integrate, and improve the software. It will certainly be the case that an organization's own programmers are more responsive to its needs than those of a software supplier. This makes the product versionable on the demand side – users can themselves tailor the application for their needs. In the case of large deployments, this may very well be a better choice than building from the ground up or buying a supplier-versioned product. And if the improver isn't concerned about extracting competitive advantage from that slice of code, it might be a good unilateral contribution to the public good.

There are reasons to believe that open software is of high quality as well. Some programs have been in use for decades and are generally recognized as reliable. OSS features security through transparency, in which potential exploits are noticed, publicized, and fixed in short order. Active projects tend to have developer networks big enough to guarantee attention in the short term.

3. Openness Strategies

3.1 The Internet’s Impact

The introduction of the Internet has acted as a key enabler for the dissemination of OSS in general. It has made a significant impact particularly with the development process for the open development process, facilitating user accessibility and deriving complementary reactions in the market. As the very essence of OSS is based on collaborative efforts, the Internet has made it possible for users to easily contribute valuable input, improving the quality of a program at a much more rapid pace than proprietary software is developed. The Internet has also made distribution of OSS possible; for instance, it would certainly have been inconceivable for Linus Torvalds’ original attempts to have been distributed through retail chains and other such distribution avenues available to proprietary software. The Internet also helps crystallize demand-side network effects, allowing Linux users to collaborate with each other through bulletin boards and mailing lists to create a support network to replace support services offered by proprietary software companies for users of their software.

The steady growth of OSS has followed the lead of the explosive growth of the Internet. Studies show the percentage of Linux shipments has been consistently increasing since 1997[3]. By May 2000, 36% of public websites available on the Internet were run on Linux, demonstrating its growing popularity and acceptance by users.[4] Sales of Linux servers increased 200% from 1997 to 1998, 92% from 1998 to 1999, 63% from 2001 to 2002, and 54.6% from 2003 to 2003.[5]

3.2 Open Source Option Changes the Game

Proprietary software like Microsoft products have forced users and ISVs to become locked-in to their proprietary interfaces and format, confining users and ISVs capabilities to the functionality offered by a singular company. Microsoft has profited greatly by making itself the standard in B2B environments, exacerbating compatibility issues between business users not on the same platform. Yet with OSS, users are free from this confinement, enjoying benefits like low switching costs and customization options.

The use of open source programs frees users from some limitations that proprietary software places on users. Aspects such as licensing agreements, affordability, security, and reliability are not hindered by the restrictive nature of proprietary material.

3.3 Analysis of strategies being pursued by Linux vendors

The actions of the major Linux vendors, like Novell and Red Hat, exhibit interesting examples of coopetition. Red Hat, Novell, and SuSE (prior to being bought by Novell) were direct competitors. All three of them were selling Linux distributions: proprietary application software, device drivers, and middleware bundled around the GNU-controlled Linux kernel. However, all three of them were moving in divergent directions, and there was considerable pressure on each of them to differentiate in order to appear to be the most technologically advanced of all the Linux distributions, though, of course, all three used the same kernel as the core of their offering. This pressure to differentiate was leading to differences in interfaces, contributing to chaos, and hurting Linux adoption among mainstream, pragmatic customers.

In 2003, Novell bought a competitor, SuSE, for $210M. Currently, Novell, valued at $3B, and Red Hat, valued at $4.1B, are well-poised to cooperate to maximize the benefits they can achieve from demand-side network effects, and to minimize the lock-in and network effects of their competitors, primarily Microsoft and to a lesser extent, UNIX systems.

Red Hat and Novell are cooperating in the expected ways: they continue to support the Free Standards Group’s Linux Standards Base Project. Recently they both reaffirmed their commitment to LSB by supporting the LSB 2.0.1 specification released in September 2004. Interestingly, neither Novell nor Red Hat will benefit significantly from LSB, as the major application vendors for Linux-family operating systems already inter-operate with both Red Hat and Novell, the two biggest Linux vendors. The LSB specification will help smaller Linux vendors much more: smaller Linux-family OS versions like MandrakeSoft SA, Gentoo, and even a few larger ones like Debian and Cobalt (both small compared to Red Hat), which otherwise would have had a lot more trouble achieving inter-operability with Linux-based application vendors.

Thus, clearly Red Hat and Novell are giving up on differentiation on basics in favor of standardization of interfaces, even at the cost of helping their smaller competitors, and being forced to give up on technological innovations that would have helped them differentiate themselves against each other. This is clearly an example of coopetition, where competitors are finding it profitable to cooperate to help fight a much bigger and more powerful rival: Microsoft.

Novell, as one-time owner of the UNIX System V patents, trademarks, and copyrights, is in a unique position to defend Linux against legal challenges from SCO. In 1995, SCO’s predecessor, the Santa Cruz Operation, bought “all rights and ownership of Unix and Unixware” (according to the contract) from Novell; however, the corresponding asset purchase agreement filed with the SEC, specifically excludes “all copyrights” and “all patents” from the purchase.[6] The lawyers who drafted the SCO-Novell agreement in 1995 added a further paragraph that, when stripped of legalese, appears to assign to SCO the right to enforce Unix copyrights and patents, while it says nothing about whether this intellectual property is vested in Novell or SCO.

While SCO’s legal battles are, at least for now, primarily against IBM (IBM is accused, in a $1 B lawsuit, of allowing Unix code to get into Linux) and IBM customers using Linux (accused of using Linux, an alleged derivative of allegedly SCO’s Unix technology without permission from SCO), Novell has emerged at the forefront of the defense against SCO by repeatedly pointing out that it never sold any Unix copyrights or patents to SCO in 1995 (a claim SCO contests as we discussed above). Further, Novell declared in October 2004 that it would not use any of its Unix patents against Linux vendors (IBM has declared a similar policy). This is another example of coopetition, because IBM and Novell are direct competitors in the business of selling services for Linux platforms and applications.

3.4 Strategies of software industry to leverage OSS community

The Microsoft Office Suite, consisting of extremely useful and widely used programs such a Microsoft Word, Microsoft Powerpoint, Microsoft Excel, etc. is one of the major reasons for many businesses to use Microsoft platforms. All these programs use secret and proprietary data formats, and demand-side indirect network effects can make it very hard for a customer of enterprise computing to shift away from a Microsoft platform. The open source community has made numerous attempts to commoditize the Windows platform with projects such as WINE (Windows Emulator), but has not been successful. The Wine has been under development since 1993, but 11 years later in 2004, not seasoned enough yet to be a serious rival to Windows.

In 1999, however, Sun Microsystems noticed a company called StarDivision that had made a product very similar to Microsoft Office. Sun quickly realized that this product had great potential in reducing the customer lock-in and demand-side network effects of Microsoft Office. Sun acquired StarDivision in 1999 and invested significant effort on the project over a year, and came up with Sun StarOffice. In 2000, it forked the code base and donated one half to the open source community. However, the license terms under which Sun made it available to the open source community were extremely innovative. Sun is allowed to continue to collaborate with the open source community (represented by , the entity that manages OpenOffice, “” is an entity, not just a website address), and make its own contributions to the OpenOffice codebase, and it is also allowed to take snapshots of the code base to convert into proprietary StarOffice versions.

This is an interesting example of an attempt by a proprietary software company to use the resources of the open source community to help maintain and develop a proprietary software product. Of course, this was only possible because StarOffice is intended to reduce the demand-side network effects and customer lock-in of Microsoft Office. This kind of open-source-proprietary collaboration can only work when the proprietary software company is an underdog. Thus, overall, this is an example of coopetition between open source and proprietary software industries: an underdog proprietary software company gets help from open source to fight its battles against the dominant proprietary player, and the open source community gets paid with valuable intellectual property.

A similar example of coopetition is observed in the way Sun Microsystems leverages the resources of the open source community to maximize demand-side (programmer) network effects for its Java programming language. Sun distributes the source code of all its Java libraries, allowing the open source community to implement libraries with additional functionality. Sun also uses a carefully organized self-filtering process to get valuable intellectual property involving suggestions for improvements to the JVM specification and implementation, and improvements to the Java language.

It is interesting to note that like StarOffice, Java is another attempt by Sun to reduce Microsoft’s lock-in on ISVs (Independent Software Vendors) and indirect network effects involving ISVs and customers. The Win32 API is extremely complicated, and very different from that of other OSes like Unix-variants, AIX, Linux, etc. Thus, it is very difficult for an ISV to port an application from Windows to any other platform; the effort required is comparable to that involved in a reimplementation of the application from scratch. With Windows NT and Windows Server 2003 holding 38% market share in the enterprise computing market, there is a strong indirect network effect motivating an ISV to develop applications for the Windows platform. However, this strengthens indirect network effects that urge a customer to choose Windows instead of Linux or Unix.

Sun came up with the brilliant idea of commoditizing the Windows platform by creating a platform-independent programming language that would let ISVs write programs that would run on any platform. That would have completely destroyed the lock-in Microsoft enjoys with ISVs, and contributed to weakening indirect network effects on customers.

Thus, interestingly, in both attempts to negate Microsoft’s lock-in and network effects, Sun has made use of the resources of the open source community. This is an example of coopetition between proprietary and OSS industries.

3.5 Strategic interrelationship between Microsoft and its complementors

Though Linux development started in 1991, and a 1.0 version was released as early as 1994, its emergence as a commercially significant commodity did not happen until later. Linux was allowed to be x86-compatible by Intel, which saw the emergence of a free operating system as an excellent (though, till recently, rather unlikely) possibility which would commoditize the complement OS Microsoft Windows of Intel’s hardware products. Commoditizing the OS would reduce Microsoft’s bargaining power vis-à-vis Intel; and also reduce the cost of an OS, lessening the amount of money a customer would need to pay to buy a computer, pushing up computer sales, helping Intel. This is another example of coopetition between Microsoft and its complement Intel.

For similar reasons, computer distributors IBM and Dell see it to their advantage to commoditize Microsoft’s OS complement using Linux. The next section will substantiate the above theoretical analysis with factual information.

3.6 Benefits reaped by IBM with its Linux strategy for the enterprise computing market

In 2001, IBM invested $1B to make Linux available on its full line of servers, porting its line of application software and middleware to run in Linux, training its personnel to work with Linux, and publicity. In January 2002, IBM reported that the investment was recouped through higher server hardware sales and services. Since then, IBM has reported quickly-growing profits made through services provided around Linux in enterprise computing. In 2003, the profit reported was approximately $2B. More interestingly, in 2003, IBM made a 2.1% improvement in its market share in server sales, even as the worldwide server market shrank 8% that same year.[7]

Linux vendors have, since 2000, managed to find ways to earn significant revenue through Linux-based services and Linux-based proprietary applications and middleware. In 1999, 1.35 million copies of Linux were sold to enterprise computing users (free downloads of Linux are not included in this figure). This constituted 25% of the 5.4 million pieces of server OS copies sold in 1999. And yet, Linux vendors in 1999 earned only $32M, less than 1% of the $5.7 B server OS market. Windows NT, in comparison, earned $1.7B in 1999.[8] Thus, Windows NT was earning more money in one afternoon than the money the Linux vendors earned in a whole year !

However, today in 2004, Linux represents 9.5% of revenues in the server OS market, which compares very well with Microsoft’s 34.4% share of the server OS revenues.[9] It would thus appear that the stage is thus set for a confrontation between Microsoft and OSS.

3.7 Microsoft openness strategies

Microsoft should not attempt to crush Linux, because the latter is a sign of shifting competitive advantage in the software industry and is too decentralized to attack. Microsoft’s Chief Linux Strategist Martin Taylor correctly notes, ”Linux is going to be around forever.”[10] Previously, proprietary software had a great competitive advantage over open source because of better organization, resources, and distribution. But now the advent of the Internet, the evolution of more organized open source models, increased security problems with proprietary software, and the corporate backing and demand-side push for open source have caused this competitive advantage to be diminished. As there simply are too many uncontrolled factors facilitating the growth of open source, proprietary distributors such as Microsoft must adapt to the competition from open source by offering superior quality software and services. With the Internet facilitating the rapid distribution of open applications and software piracy rampant, particularly in developing regions, the strength of proprietary lock-in has been diminished.

Yet to a certain extent, Microsoft’s ability to defeat competition through acquisition is still applicable to its OSS battle. One brilliant move it made was to buy out resellers working for its rivals like Novell. This has led to increase in the cost of ownership of Linux, as suddenly support services are made unavailable, and emerging demand-side network effects favoring Linux are disrupted.

To effectively address the threat of OSS will require coopetition with OSS itself. Microsoft has been resourceful starting a number of OSS projects, and donating significant amounts of code to SourceForge. An example is FlexWiki. Through this approach, Microsoft might be able to defeat the open source community at its own game. An open source community led by Microsoft (similar to the way Sun leads the open source initiative on its StarOffice/OpenOffice codebase), rather than an open source community fighting against Microsoft, is certainly better for business, and could be actually better for the world.

The greatest obstacle to Microsoft increasing profits is the physical limitation of its current market in the United States. To create an installed base in new markets, Microsoft is best suited to offer OSS compatible applications at low cost. Using versioning to facilitate differential pricing, Microsoft can still stake a foothold on developing markets. In the United States, the most price-insensitive market, Microsoft’s competitive advantage will continue to be the quality, capability, and reliability of its services. In recent years, the security and durability of Windows has been called into question. The most important goals for Microsoft’s upcoming Longhorn operating system should be to fortify the security of the operating system as well delivering on feature promises such as enhanced Internet search and information organization.

In fortifying Longhorn, Microsoft is best suited to become more open itself in development and quality assurance. Increased openness in its releases would diminish the potential danger of code leaks. Giving the international software community more opportunity to view Microsoft code would improve the identification of bugs. Employing young hackers resembling Bill Gates in his youth for quality assurance would utilize those who are most able to identify security vulnerabilities. Of utmost importance is Microsoft’s continued ability to attract the world’s brightest and talented programmers to ensure the superiority of its technology.[11] Portraying an earnest desire to improve business practices and reaching out to universities and students enhances the attraction of working at Microsoft. Factors such as utilizing great IT talents in developing regions such as India, China, and Russia and offering discounted development software compatible with open source infrastructure will spur the development of Microsoft compatible applications, curbing the novelty of Linux development. While pursuing legal action against Linux is questionable to produce any results, creating technological superiority over open source is critical to maintain differentiation.

4. Open Questions

4.1 Will Linux fragment?

In contrast to the BSD operating system, which has repeatedly forked, Linux in today’s marketplace is guarded by the more restrictive GNU General Public License (GPL) which prevents its resale. The strong corporate backers of Linux, such as IBM, Novell, and Red Hat, have conflicting incentives towards compatibility and differentiation. It is in the interest of these purveyors of Linux to maintain its stability in order to build up its status in the marketplace as a reliable operating system in the server market.

Due to the greatly restrictive nature of the GPL, modification and distribution of Linux has been carefully monitored and continues to ensure a strict adherence to policy in order to avoid a divergence of interests with the technology. The spirit of GPL is evident in the following excerpt:

“Thus, it is not the intent of this section to claim rights or contest your rights to work written entirely by you; rather, the intent is to exercise the right to control the distribution of derivative or collective works based on the Program.”[12]

The GPL makes Linux commercially viable through its control of distribution and derivates, yet it preserves a degree of openness by allowing developers the freedom to innovate and implement software on the Linux platform. While in the last ten years the restrictions on Linux have made it commercially viable, in the future it may be the flexibility, open availability, and ubiquity of Linux software that will make it attractive it for desktop and corporate markets.

Linux and other open source operating systems are particularly well-suited for the growing mobile devices and embedded systems markets. Open source platforms are ideal for establishing standardization and compatibility, exploiting network effects in areas with enormous growth potential. Linux can also offer high performance computing for applications of bioinformatics and protein analysis.

4.2 Will purveyors of Linux and other OSS solutions succeed?

Linux has already proven greatly successful in aiding IBM to overtake HP, Sun, and Dell as the leader in the server hardware market. Novell and Red Hat are best suited to collaborate in providing Linux support and services to customers in order to ensure their survival. Even with SCO’s lawsuit against Linux distributors for patent infringement, SCO’s stock has exhibited the same trend as its competitors Red Hat and Novell. Since survival is such an immediate issue for Linux distributors, they are likely to avoid the pitfalls of in-fighting that plagued previous open-source ventures.

While Linux has the highest profile among OSS in today’s market, the strategies through which it has been distributed and marketed can extend to middleware and applications. Like platform based infrastructure, open source middleware exists at a critical position in the software abstraction hierarchy. Bundled with either applications or system platform, open source middleware can potentially present a plethora of cost-effective enterprise solutions. In June 2004, HP announced plans to bundle the open source middleware MySQL and JBoss with HP servers. JBoss, a company that distributes open source middleware, is also supported by Unisys, webMethods, and Iona Technologies. The role of JBoss in offering open source middleware solutions is analogous to Red Hat and Novell distributing Linux. HP’s backing can greatly improve the incentive for database developers to offer support and solutions for MySQL.[13] In seeming response to HP’s advancement, IBM recently introduced its middleware platform bundled with Linux for government, retail, and banking sectors. One can envision more enterprises turning to such open-source based services in order to cut down on licensing as well as security costs of proprietary applications. Open source applications servers such as Apache Geronimo can gain market share if bundled with proprietary hardware. By reducing integration costs, such bundling makes open source solutions attractive to the customer, reducing the total cost of ownership. The paradigm of software as an enterprise utility is dawning, where software houses contribute value and generate revenue not from the tools they distribute, but from the services, support, integration, and optimization they supply for systems of large scope and complexity.

4.3 How will open source facilitate the entry of technology into the developing world?

The chief positive externalities of information technology are spreading literacy and education, promoting economic efficiency, and spurring compounded technological and application development. As a public good, open source infrastructure is a gift to an economy, offering the most feasible entry of technology to price-sensitive markets. Open source provides incentive for corporate investment in developing regions by reducing cost and risk, thus facilitating earlier positive returns on investment. Companies such as HP have already launched projects in India, Latin America, and Africa introducing mobile devices, digital networks, and electronic databases in rural areas with the goal of making profit on large volume of sales and services.[14] Major obstacles to such projects are connectivity and interoperability of services in areas of great language and cultural diversity. Companies distributing open source development tools can solve potential technical problems by enabling locals to create customized interfaces, applications, and information translations to suit the needs of particular regions. Such development can create further business opportunities. This example of demand-side driven innovation can provide great returns on corporate investment, in addition to stimulating economies.

5. Conclusion

Open source promises to revolutionize the software industry by commoditizing some aspects of the value chain, yet at the same time enabling the expansion of IT markets and development opportunities. Server operating system software is already demonstrating this trend of commoditization, especially in developing countries. In the near term, hardware companies such as HP and IBM stand to profit from open source at the expense of software companies such as Microsoft. Yet in the long term, open practices and compatibility will provide enhanced competitive advantage in IT services, distribution, and innovation.

Open source as we know it today does not have the scope and resources to commoditize all of software and destroy proprietary incentive for development. Rather it promises to shift the paradigm of proprietary software towards more open practices and standards where value is provided and derived from technological quality, interoperability, and optimization of services. From a macroeconomic perspective, the ultimate benefit of open source to the software industry is to spur demand-side driven innovation, providing greater impetus on proprietary services to offer unique and innovative solutions maximizing customer value.

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[1]Information Rules, p. 97

[2]

[3] Red Hat Annual Report 2000

[4] Red Hat Annual Report 2000

[5] Internation Data Corporation (IDC)

[6] CNET News June 4, 2003.

[7] IDC

[8] IDC, February 2000

[9] IDC, September 2004

[10] Murphy, Victoria. “This is War.” Forbes. New York: Aug 16, 2004

[11] Gates, William G. and Newton, Richard A. “A Conversation with Bill Gates.” University of California, Berkeley, Zellerbach Auditorium. 1 Oct. 2004

[12] GNU GENERAL PUBLIC LICENSE Version 2, June 1991 . Free Software Foundation, Boston, MA

[13] Natis, Yefim V., Weiss, George J., Strange, Kevin H., Feinberg, Donald. “Open Source Initiative Will Strengthen HP as Software Vendor.” Gartner First Take. 2 June 2004

[14] “Beyond the Digital Divide.” The Economist. London, 13 March 2004

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