The Lack Of A Billion Dollar Pureplay Open Source Software Company Shows The Market Is Working Properly
A few weeks back, Glyn Moody wrote a column discussing why there were no “billion dollar open source software companies,” in response to a discussion he had with Redhat’s CEO (Redhat is in the $750 million range):
He said that he did think that Red Hat could get to $5 billion in due course, but that this entailed “replacing $50 billion of revenue” currently enjoyed by other computer companies. What he meant was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion. Selling $50 billion-worth of software — even if it only costs $5 billion — is somewhat hard, which is why it will take a while to achieve.
I immediately knew I wanted to write up something about it, as it reminded me of a point I’ve been wanting to discuss for a while. But I got busy with some other things, and in the meantime, a bunch of other folks picked up the ball and ran with it — and each time they did, they added something different to the conversation, which gave me more to think about before writing up this post. Matthew Aslett pointed out that this is leading many companies to adopt hybrid models while Stephen O’grady pointed out that the question was really irrelevant. Katherine Noyes, over at LinuxInsider highlighted many other points that people brought up as a part of the discussion. It’s all a very interesting read, though none really hit on the two key points that Glyn’s original column got me thinking about:
- There absolutely are billion dollar open-source companies, but they’re not pure play open source companies. But that’s okay, because a “pure play” open source company is like a record label trying to focus on just selling music. You’re in the wrong business — trying to sell infinite goods — so of course the direct profits should be limited.
- The lack of billion dollar pure play open source software companies is a sign of a working efficient economy. In fact, billion dollar pure play open source companies would be a sign of a market failure.
On that first point, I would argue that tons of companies are, actually, billion dollar open source companies: Google, IBM, Facebook and many others, for example, all rely heavily on open source software and are valued at well over a billion dollars. It’s unlikely that any of the three would be anywhere near what they are today without open source software. It’s just that all of these companies were smart enough not to be in the bad business of selling an infinite good. Instead, they all looked for ways to use an infinite good — for free — to make something scarce massively more valuable. With Google it was user’s attention and all of the information out on the web. With IBM it was services to support enterprise technology. Even Redhat, the company that kicked off this discussion, really makes its money from services and expertise.
Arguing about the profits directly attributable to pure play software sales of open source software is like only counting CD/digital download sales and claiming that’s the “music business.” It’s not. It’s the recording industry.
But the more interesting and more important point is about the lack of billion dollar pure play open source software companies is the fact that this is a sign of a strong, healthy and efficient marketplace. Even if you go all the way back to your Adam Smith, you would know that when you have a company making outsized profits, competitors will enter that market. That’s the nature of a free market, and it tends to lead to efficiency, innovation and (most importantly) consumer surplus.
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- The Business Lessons Behind Commercial Open Source (ostatic.com)