Transfersummit2011

The Economic value of
Open Source Software

Carlo Daffara
European Working Group on Libre Software
TransferSummit 2011 - Oxford
Conecta Research

The Economic value of
Open Source Software
(for Europe)

Carlo Daffara
European Working Group on Libre Software
TransferSummit 2011 - Oxford Conecta Research

“GPL poses a threat to the intellectual
property of any organization making use of it.
It fundamentally undermines the
independent commercial software
sec tor because it effectively makes it
impossible to distribute software on a basis
where recipients pay for the product rather
than just the cost of distribution. ... In effect, it
puts at risk the continued vitality of the
independent software sector.” (Craig Mundie,
Microsoft, talk at NY University, 2001)

The economic value of Open Source Software

“[..] the aim of free software is not to enable a
healthy business on software but rather to
make it even impossible to make any
income on software as a commercial
produc t.” (Thomas Lutz, Microsoft
representative at Tunis WSIS)


“It is quite possible that the open source
movement will ultimately result in a
collapse of the indus tr y , and that would
not be a good thing.“ (Gene Quinn, patent
attorney)


“[OSS supporters] ... they need to accept the
ground rules that most of us live in a capitalist
society, we have the right to raise and provide
for a family, and that until we all wake up in a
FOSS developer’s paradise, we have to live and
work inside of that context. I’d love to hear
how a proprietary-free software world could
work.” (James Turner, O'Reilly radar)


“(SBU) If the law passes in current form, the
provisions for mandatory use of OSS will have grave
repercussions ... By nature, OSS requires code
sharing, and could pose security concerns for
important BRV institutions, such as PDVSA,
EDELCA (the electric company), or CADIVI (the
Foreign Exchange Control Authority). Though OSS
software has only a one-time license fee -- and
therefore seems more cost-effective -- critics claim
the system can be less-user friendly and requires
frequent technical support (which can often be
costlier than licensing). According to Microsoft, no
government in the world has successfully used Linux
for large operations”. Wikileaks, 06CARACAS1778

“The GPL effectively prevents profit-making
firms from using any of the code since all
derivative products must also be distributed
under the GPL license” (Evans, D., in
“Government policy toward open source
software”, R.W.Hahn, editor, AEI-Brookings
JCRS)


“Open-source software is deliberately
developed outside of market mechanisms... the
nonmarket coordination mechanism fails to
contribute to the creation of value in
development, as opposed to the commercial
software market. [It] does not generate profit,
income, jobs or taxes … In the end, the
developed software cannot be used to
generate profit.” (Kooths S., Lagenfurth M.
“Open Source-Software: An Economic
Assessment” University of Muenster, Muenster
Institute for Computational Economics)

“[Open Source] ... suppresses quality
competition between OS firms and restricts
their output much as an agreement to suppress
competition on quality would. .. We find that
the first-best solution in our model is to tax
OS firms and grant tax breaks to
[proprietar y sw] firms .” (Engelhardt,
Maurer, 2010 Goldman School of Public
Policy)


“Rail travel at high speed is not
possible because passengers, unable to
breathe, would die of asphyxia.” Dr. Dionysus
Lardner (1793-1859), Professor of Natural
Philosophy and Astronomy at University
College, London.

“Heavier-than-air flying machines are
impossible.” Lord Kelvin (1824-1907), ca.
1895, British mathematician and physicist


“A study carried out between January and
June 2010 shows that despite the desired
affirmative action for open source products, in
almos t half (47.5%) of the tenders
there is s till a preference for closed
source vendors or products. This
preference inevitably results in not giving
vendors of FLOSS a fair chance to win the bid.
(Mathieu Paapst, Center for Law and IT,
University of Groningen, the Netherlands)


● The vendor must employ MS certified
employees.
● Asking for an operating system to be used

together with the Microsoft Campus
Agreement.
● If your bid is open source you should give extra

guarantees concerning the stability of the open
source community.
● Not allowing “zero-price” licenses.

● Demanding that offered applications must be

certified by Microsoft, are Oracle 10 compliant
and using the official Microsoft style guide as
much as possible.

Measuring value is complex. A bad way of
doing it: “First we listed the major open source
products. Then we looked at the commercial
equivalents. Next we looked at the average cost
of both the open source products and the
commercial products, giving us a net
commercial cost. We then multiplied the net
cost of the commercial product by our open
source shipping estimates.” (Jim Johnson,
Standish group)


Some groups measured the total revenues of
OSS firms; so Pierre Audoin Consultants found
a total market of 7B€ in 2008. Unfortunately,
HP alone made 2.5B$ in Linux-related
consulting in 2003, while IBM made 4.5B$ in
OSS-related revenues in 2005.

In fact, the majority of OSS-related revenues
are not made by OSS companies at all.

And the software market is not that easy to
define as well.

This provides us with an overall IT spending estimate
for Europe: 492B€

approximately 24% is hardware

software and services market: 374B€

software market: 244B€


Total OSS package adoption value: 41B€


How much Open Source is inside the average
codebase?


● Black Duck analysis of large code projects
(avg. 700MB of code): 22% is OSS, up to
80% of new development is avoided through
OSS
● On average, 30% of implemented
functionalities is based on reused OSS code
(Sojer M., Henkel J. “Code reuse in Open
Source Software Development”)
● “sampling continues to find that between 30%

and 70% of code submitted is .. in the form of
OSS components and commercial libraries”
(Veracode, “State of Software Security Report
volume 3”, 2011)

35% of code created in the last 5 years


What value does OSS reuse brings in?
(Abts, Boehm, Bailey Clark “Empirical
observations on COTS software integration
effort based on the initial COCOTS calibration
database”)


Total OSS source adoption value: 41B€


“Figures suppor t the idea that FOSS
solu tions are more innovative than
proprietar y ones: indeed, in all the three
dimensions, experts’ evaluations are higher for
FOSS than for proprietary software. … FOSS
software not only show different levels of
innovativity, but, as far as, new to the world
products are concerned, they are also shaped
by different innovation processes: radical
innovation in the FOSS vs. incremental
innovation in proprietary field.” (Rossi,
Lorenzi, “Innovativeness of Free/Open Source
solutions”)

"The growing rate, or the number of functions
added, was greater in the open source projects
than in the closed source projects. This
indicates that the OSS approach may be able
to provide more features over time than by
using the closed source approach. (Paulson,
Succi, Eberlein “An Empirical Study of Open
Source and Closed Source Software
Products”)


(Mohagheghi, Conradi, Killi and Schwarz “An
Empirical Study of Software Reuse vs. Defect-
Density and Stability”)

"Findings indicate that community Open Source
applications show a slower growth of
maintenance eﬀort over time.” (Capra,
Francalanci, Merlo “The Economics of
Community Open Source Software Projects:
An Empirical Analysis of Maintenance
Effort”)

“The fourth law of software evolution,
implying constant incremental effort, might be
violated (Koch “Evolution of Open Source
Software Systems – A Large-Scale
Investigation”)

Deshpande, Riehle “The Total Growth of Open Source”


Total value of OSS reuse per year: 116B€


“While IBM initially contributed software that was
valued at 40M$, external contributors to the project
created software representing a value of roughly
1.7B$ over the examined period.” (Spaeth,
Stuermer, von Krogh “Enabling knowledge creation
through outsiders: towards a push model of open
innovation”)


“[non-code] outside contributions are
signicant. Open Cascade estimates that they
represent about 20 % of the value of the
software. Matra Datavision had to inject
approximately 2M€ per year to continue to
develop its tools. In 2000, the company limited
the costs to 1.2 million.” (Jullien, Clement-
Fontaine, Dalle “New Economic Models, New
Software Industry Economy”)


With proprietary software, 86% of SW
spending goes outside of Europe-and reduces
local company margins
Ecosystem Revenues compared with MS revenues by partner type
Product- Services- Retail Logistics
Logistics-Oriented
Oriented Oriented Value-Added Partner Partner (e.g., Large
Microsoft Partner (e.g., Large
Partner (e.g., Partner (e.g., (e.g., VAR) Retail Electronics
Account Reseller)
ISV, IHV) SI, Hoster) Store)
$1 $4.09 $2.44 $2.30 $2.70 $2.93
1 24% 40.9% 43.5% 37% 34%
Source: Partner Opportunity in the Microsoft Ecosystem, IDC 2011; analysis by Daffara


If the savings are reinvested in ICT, the
company gains an advantage in terms of
efficiency is substantially larger than the
investment value:
“the measured long-run contributions of
computerization are significantly above
computer capital costs - a factor of five or
more in point estimates” (Brynjolfsson, Hitt
“Computing productivity: firm-level evidence”)


Revenue per employee rating
(FLOSS firms vs. Industry average)
Computer Equipment 182%
Software consultancy and supply 427%
Services (excl. software cons. and supply) 211%
Manufacturing (excl. computer equip.) 136%
Other 204%
ALL: 221%
Source: MERIT


Revenue ratio: FLOSS firms vs. Industry average
(FLOSS firms vs. Industry average)
Computer Equipment 1115%
Software consultancy and supply 262%
Services (excl. software cons. and supply) 177%
Manufacturing (excl. computer equip.) 4501%
Other 1045%
ALL: 758%
Source: MERIT


Source: Venice International University TEDIS study


So – we know now that OSS is a good thing for
Europe and its economy. What can we do to
improve things further? A few hints:

● Government: don't give out big money in big
projects. They end up all in large SIs with
limited real impact on OSS.
● Try to enforce fair tenders – after all,
Government and PAs are one of the largest
market in Europe.
● Knowledge and tools to increase the reuse

percentage

Source: Dirk Riehle, “The open source big bang”


value
appropriated

collaborate and
redefine

champion

contribute
use
Time

engineering driven business driven
denial
single product multiple projects

step 1: crossing the chasm between denial and use. It
requires knowledge on what is available, countering
wrong beliefs and FUD, best practices for adoption and
migration


value step 2: from users to contributors. It requires
appropriated Information on legal aspect, how to cooperate
and interact with projects, partnering

collaborate and
redefine

champion

contribute
use
Time

denial


value step 3: from contributors to champions. Requires
appropriated
information on business models, on sustainability,
on relative profitability of models and the interaction
between licensing and community

collaborate and
redefine

champion

contribute
use
Time

denial


Thanks!

Carlo Daffara
cdaffara@conecta.it
http://carlodaffara.conecta.it

Transfersummit2011

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