The Economic value ofFree/Libre Open Source Software

Carlo DaffaraEuropean Working Group on Libre Software

CloudWeavers

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The Economic value ofFree/Libre Open Source Software

(for Europe)

Carlo DaffaraEuropean Working Group on Libre Software

Conecta Research

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“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)

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“[..] 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)

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“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)

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“[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)

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“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

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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)

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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.

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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€

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How much FLOSS is inside the average codebase?

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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

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● 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%

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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”)

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

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“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”)

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"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”)

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"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”)

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

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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

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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%

Project success data:

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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

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“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”)

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● 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%

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14% reduction in maintenance and development costs → 34B€/year

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Deshpande, Riehle “The Total Growth of Open Source”

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

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Total value of OSS reuse per year: 114B€

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

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● “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 )

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

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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

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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

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Source: Venice International University TEDIS study

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DrupalCon 2010, Copenhagen

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● 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

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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

Microsoft

Product-Oriented

Partner (e.g.,ISV, IHV)

Services-Oriented

Partner (e.g.,SI, Hoster)

Value-Added Partner(e.g., VAR)

Logistics-OrientedPartner (e.g., LargeAccount Reseller)

Retail LogisticsPartner (e.g., LargeRetail Electronics

Store)

$1 $4.09 $2.44 $2.30 $2.70 $2.931 24% 40.9% 43.5% 37% 34%

Source: Partner Opportunity in the Microsoft Ecosystem, IDC 2011; analysis by Daffara

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● 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”

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

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● Innovation from end-users:

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● 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”)

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Thanks!

Carlo Daffara

cdaffara@conecta.ithttp://carlodaffara.conecta.it

Twitter: @cdaffara

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“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 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)

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● 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.

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