Tuesday, January 26, 2010

The Opensource Marginal Cost

Recently I had a nice discussion on Twtitter. The topic was opensource. I find it interesting a lot of people still believe that opensource is an ideology, or a development model. It is interesting too there are a lot of people who are trying to create new ways to define opensource, such as "Open source is a business tactic, not a business model"[1], I do not understand the problem in considering opensource a business model. Although I am an engineer, I have studied business administration and I am very comfortable with opensource as a "Business Model". Moreover, I believe that a "tactic" is based on some business model. So, I do not see the difference. As a result I will consider “business tactic” and “business model” as synonyms.

Many of us are used to selling opensource to the "technical departments". But, of times when we are facing a top level management people, for various reasons, we have experience difficult in explaining opensource as a suitable alternative! One of the reasons for this difficulty is we are used to and prepared to explain opensource from technical perspective. But, our technical arguments are not well understood by many management types. Most management types understand business models, business strategies and business tactic, whichever you prefer to call them. That is not a “knock” against management types. They understand their domains just as engineers understand their technical domains. So, you can imagine the difficulty in management understanding the technical reasons for using open source. Likewise, you can imagine the difficulty engineers have in understanding some business models, strategies, tactics, etc.

I think the question really comes down to, “How are CIOs and managers to trust in something, or rely on something, they do not fully understand from a business perspective or a technical perspective?” It is for this reason, I believe if we better positioned the business case and business reasons for using opensource as an alternative rather than using technical reasons, we would have a much better chance in convincing CIOs and managers opensource solutions can indeed reduce their cost and also provide benefits to their customers.

In the study of economics there is a concept called "Marginal Costs"[2], In general terms, marginal cost at each level of production includes any additional costs required to produce the next unit. If producing additional vehicles requires, for example, building a new factory, the marginal cost of those “extra” vehicles includes the cost of the new factory. In practice, the analysis is segregated into short and long-run cases, and over the long run, all costs are marginal. At each level of production and time period being considered, marginal costs include all costs which vary with the level of production, and other costs are considered fixed costs. This is a concept that can by also applied into opensource industry.

For JBoss Enterprise subscriptions, or any other product family, Red Hat has a cost to keep a number of employees contributing, testing, certifying, collaborating, writing documentation, training a support team, consulting team etc. For this reason, the"Opensource Marginal Cost" is really low. That's why Red Hat never charges expensive prices for their products. That is also one of the biggest advantages for any company who follows this kind of business model in order to create a really profitable company offering opensource solutions. Obviously, Red Hat receives many contributions, but any contribution must be certified, and supported by Red Hat. Tor this reason, even for collaborations, there is a cost to test and to provide the security that this contribution will not cause any damage to "Subscription Buyers". However, this cost is still low, compared to "Proprietary Software".

"Opensource Marginal Cost" offers companies to save as much as 80% in the software acquisition.

Industry will accept "opensource" when the advantages are tangible factors, and not only merely words of text. I cannot see any company keeping their doors open creating innovative solutions without a way sell them.

In fact, I saw a huge company trying jump in the opensource market without a good plan, and the result turned out to be catastrophic. This particular company was acquired by another proprietary vendor. Some think this end result is a "proprietary win over the opensource". However, in fact, in my humble opinion this is a "strategic company win over a company with a poor opensource strategy ".

I live into a country where a lot of companies are looking for ways to reduce their costs in software, not only because opensource is "a new trend", but because some of them must trim their “IT” budgets to make them more competitive. I have seen many companies who have reduced their cost of software licencing, and with the saved software licensing costs they offered their employees not only better salaries, but also better environments for employees to work in as well as additional training and incentives for education.

Opensource is not only a way to develop software, it is a way to make employees happier by saving money which can then be invested in what is really relevant for the company, the employees!

There are many others factos that shows how opensource is an alternative for the future, replacing the retrograde proprietary industry software, such as bio alternatives as true substitutes for gasoline and its derivatives. In the end, everything is economics. We must open our minds, and not only think just as engineers, but also begin to think in terms of long term business.

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