1. The Economic value of
Free/Libre Open
Source Software
Carlo Daffara
European Working Group on Libre Software
CloudWeavers
SfsConf 2012

2. The Economic value of
Free/Libre Open
Source Software
(for Europe)
Carlo Daffara
European Working Group on Libre Software
Conecta Research
SfsConf 2012

3. “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)
SfsConf 2012

4. “[..] 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 product.” (Thomas
Lutz, Microsoft representative at Tunis WSIS,
2005)
SfsConf 2012

5. “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)
SfsConf 2012

6. “[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 [proprietary
sw] firms.” (Engelhardt, Maurer, 2010 Goldman
School of Public Policy)
SfsConf 2012

7. “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
SfsConf 2012

8. 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)
SfsConf 2012

9. Some groups measured the total revenues of
FLOSS firms; so Pierre Audoin Consultants
found a total market of 8B€ 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 (as an
example, the OSS PBX market alone is 1.2B$
alone.)
In fact, the majority of FLOSS-related revenues
are not made by FLOSS companies at all.
And the software market is not that easy to
define as well.
SfsConf 2012

10. SfsConf 2012

11. SfsConf 2012

12. This provides us with an overall IT spending estimate
for Europe: 492B€
approximately 24% is hardware
software and services market: 374B€
software market alone: 244B€
SfsConf 2012

13. How much FLOSS is inside the average
codebase?
SfsConf 2012

14. SfsConf 2012

15. How much FLOSS is inside the average
codebase?
● On average, 30% of implemented functionalities
is based on reused OSS code (Sojer M., Henkel
J. “Code reuse in Open Source Software
Development”)
● Gartner reported that among the surveyed
customers, 26% of the code deployed was Open
Source
● The Koders survey in 2010 found that 44% of
all code was Open Source
SfsConf 2012

16. ● Black Duck analysis of large code projects (avg.
700MB of code): 22% is FLOSS, up to 80% of
new development is avoided through FLOSS
● “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)
● Sampling shows that FLOSS use increases with
time → average usage for last 5 years: 35%
SfsConf 2012

17. SfsConf 2012

18. What value does FLOSS reuse brings in?
(Abts, Boehm, Bailey Clark “Empirical
observations on COTS software integration
effort based on the initial COCOTS calibration
database”)
SfsConf 2012

19. 35% of code reuse provide a reduction in actual
costs of 31%: 75B€/year
SfsConf 2012

20. “Figures support the idea that FOSS
solutions are more innovative than
proprietary 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”)
SfsConf 2012

21. "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”)
SfsConf 2012

22. "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”)
SfsConf 2012

23. (Mohagheghi, Conradi, Killi and Schwarz “An
Empirical Study of Software Reuse vs. Defect-
Density and Stability”)
SfsConf 2012

24. Project failure data:
● Jones :“the cancellation rate for applications in
the 10,000 function point size range is about
31%. The average cost for these cancelled
projects is about $35,000,000”
● Standish group, 2009: 24% of projects are
canceled before deployment
● Sauer & Cuthbertson, in an Oxford university
survey of 2003: 10%
● Dynamic Markets Limited: 25%+ of all software
and services projects are canceled before
completion
SfsConf 2012

25. Project success data:
Size People Time success
rate
< 750K$ 6 6 55%
750K to 1.5M 12 9 33%
1.5M to 3M 25 12 25%
3 to 6 40 18 15%
6 to 10 250+ 24+ 8%
>10M 500+ 36+ 0%
SfsConf 2012

26. By reducing effort, staffing and duration the
35% code reuse introduces a reduction on these
parameters of 10% → a reduction in the failure
rate of 2% → 4.9B€/year
SfsConf 2012

27. “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”)
SfsConf 2012

28. ● OSS maintenance effort is substantially lower
than the average (Capra E., Francalanci C.,
Merlo F., “The Economics of Community Open
Source Software Projects: An Empirical
Analysis of Maintenance Effort”)
● Using a model by Jones and Bonsignour,
traditional code does have a cost of 2000$ per
function point, while code shared or developed
using best practices costs 1200$ per FP
● the shared code in a reused OSS project
introduces an additional reduction in
maintenance and dev. effort of 14%
SfsConf 2012

29. 14% reduction in maintenance and development
costs → 34B€/year
SfsConf 2012

30. Deshpande, Riehle “The Total Growth of Open Source”
SfsConf 2012

31. Source: Dirk Riehle, “The open source big bang”
SfsConf 2012

32. Total value of OSS reuse per year: 114B€
SfsConf 2012

33. ● What is the second order effect?
● We know that most of these savings are
reinvested:
SfsConf 2012

34. SfsConf 2012

35. ● “The principal results from this econometric
analysis are: 1) the measured output contribution
of computerization in the short-run are
approximately equal to computer capital costs,
2) the measured long-run contributions of
computerization are significantly above
computer capital costs (a factor of five or more
in point estimates), and 3) that the estimated
contributions steadily increase as we move from
short to long differences. (“Computing productivity:
firm-level evidence”, Erik Brynjolfsson, Lorin M. Hitt;
Review of Economics and Statistics, November, 2003 )
SfsConf 2012

36. With a 3 years investment discount period,
model based on linear growth in efficiency due
to reinvestment → 342B€/year
SfsConf 2012

37. 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
SfsConf 2012

38. 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
SfsConf 2012

39. SfsConf 2012

40. Source: Venice International University TEDIS study
SfsConf 2012

41. DrupalCon 2010, Copenhagen
SfsConf 2012

42. ● Does the increase in efficiency reduces local
revenues for incumbents?
● For commercial products (that is, proprietary
products that embed OSS): the producer reduces
its production costs with no other impact on the
business itself, so it can either increase its
margins or pass some of the savings to the
customer.
● For internally developed products, the savings
are direct, with no other effects on the external
market
● OSS reinvestment are mainly local
SfsConf 2012

43. 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
SfsConf 2012

44. ● Still missing in the model: “pull” adoption
● More difficult to assess – huge variability in
outcomes
● In desktops, with successful migrations, TCO
reduction ranges from 10% to 25% (typical) up
to 50% (for high-uniformity environments)
● Movement towards web-apps is changing
substantially the economics of moving from/to a
different platform, reducing the transition cost
→ requires a move away from “pure
substitution” to “reengineering for the future”
SfsConf 2012

45. From: "The future of computing: indispensable or unsustainable?" Royal
Academy of Engineering, 2011
SfsConf 2012

46. SfsConf 2012

47. ● Innovation from end-users:
SfsConf 2012

48. ● Non-code contributions: value deriving from
anything that is not directly compilable
● “[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”)
SfsConf 2012

50. Thanks!
Carlo Daffara
cdaffara@conecta.it
http://carlodaffara.conecta.it
Twitter: @cdaffara
SfsConf 2012

51. SfsConf 2012

52. “A study carried out between January and June
2010 shows that despite the desired affirmative
action for open source products, in almost half
(47.5%) of the tenders there is still 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)
SfsConf 2012

53. ● 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.
SfsConf 2012

54. SfsConf 2012

55. SfsConf 2012