I have read a recent article from the Harvard Business Review (April 2008) about the economics of open source. In the article, a company CEO was confronted with opening the code of her beloved software. The main arguments for doing so were (if I recall accurately):

1. the “community” is doing it anyway
2. the “community” will get the features it wants
3. the “community” will alleviate pressure on the developers
4. The first argument poses an interesting dilemma for most companies as it is/can be seen as pure “theft” of intellectual property – after all, people are reverse-engineering their software and releasing unofficial versions…
5. This argument is at the core of going open source… after all a company’s product is meant to give the customer what he wants. But what if it doesn’t know what a customer wants? then let the customer satisfy its own needs.
6. The 3rd argument is the easiest to see from a company’s perspective: programmers reuse code = they spend more time on value-adding bits = reduction in costs.

Where the value lies…

A company has developed a product that is currently selling very well. This product has some sort of software that allows it to do all the cool tidbits, which give the product its value (that’s why customers pay for it after all). There is however a gap from the customer’s point of view: the difference between gross value (what the customer thinks the product will do) and net value (what the product actually does). The difference being a perception cost, which importance can go from disappointment (”oh, it doesn’t do that”) to frustration (”I’m never buying from this company again”).

… in reducing perception cost

So far so good, all companies know they need to reduce this perception cost if they want to improve their turnover. The problem is however twofold:

• the perception cost is hard to qualify (what does the customer want?)
• in our fast moving world, the perception cost changes quickly (what does the customer want now?)

The first point should be addressed by a good marketing department. The second point can only be addressed through the constant release of new products (or new patches, updates, upgrades…). Firefox is a typical example is this domain. The customer wants Ajax support, here’s a release, the customer wants tabbed browsing, here’s another release1. I didn’t choose Firefox innocently because here is where the power of open source truly lies:

open source allows customers to be involved in the product fabrication

… in customer’s eyes

With this argument in mind, one could wonder: so where is the value of my product? and why would a customer pay for something he can get for free?

The answers to these questions are industry and sector specific, you cannot compare the way Nokia makes money to the way Talend makes money despite the fact that both companies use open source. Open source is a new dimension to the business world that will be explored in another post.

Firefox actually got a lot cleverer with the release cycle through the use of addons allowing it to provide and test new functions before official releases [↩]