The Impact of Open Source Software on Competition on Software Markets Jens Mundhenke Kiel Institute...

The Impact of Open Source Software

on Competition on Software Markets

Jens MundhenkeJens Mundhenke

Kiel Institute for World EconomicsKiel Institute for World Economics

Baltic IT&T 2005 ForumBaltic IT&T 2005 Forum

Seminar “Open Source Software: Are You Prepared?”Seminar “Open Source Software: Are You Prepared?”

Riga, April 7, 2005Riga, April 7, 2005

Jens MundhenkeKiel Institute for World Economics

The Impact of Open Source Software on CompetitionBaltic IT&T 2005 Forum

7 April 2005, Riga2

Outline

The Empirical PictureThe Empirical Picture Economic Properties of Software Economic Properties of Software Characteristics of Open Source Software Characteristics of Open Source Software

and Implications for Competition and and Implications for Competition and InnovationInnovation

Supply- and Demand-Side Challenges Supply- and Demand-Side Challenges Legal AspectsLegal Aspects ConclusionConclusion



7 April 2005, Riga3

United Kingdom

19%

France15%

Italy11%

Spain6%

Other EU16%

Non-EU5%

Eastern Europe

7% Germany22%

Worldwide and European ICT Markets 2002, Million €

Source: European Information Technology Observatory 2003, Tables 7, 11.

Total: 2,153,072

USA700 526

Europe632 039

Japan267 753

Rest of World

552 753



7 April 2005, Riga4

IT Services in Germany: Distribution of Firms and Revenue According to Firm Size

23,6%20,9%

28,3%

8,6%7,2% 6,1%

11,5%

58,3%

3,5%0,6%1,0%1,2%

5,0%

0,6% 1,1%3,3%

2,3%3,8%

7,9%

5,1%

0%

20%

40%

60%

16 620 -50 000 €

< 100 000€

< 250 000€

< 500 000€

< 1 Mill. € < 2 Mill. € < 5 Mill. € < 10 Mill.€

< 25 Mill.€

> 25 Mill.€

Firms Revenue

Source: German Federal Statistical Office (2004), Annual Services Statistics 2002.



7 April 2005, Riga5

“Market” Shares in High-Technology Industries (1999/ 2000)

Source: Evans and Schmalensee, in Jaffe/ Lerner/ Scott, Innovation Policy and the Economy 2, NBER 2002, Table 1.3, p. 19.

Product market Geographic market Leading firm Market share

Narrowband internet access U.S. AOL 50%

Internet routers Worldwide Cisco 80%

Online auctions Worldwide eBay 80%

PC microprocessors Worldwide Intel 82%

PC operating systems Worldwide Microsoft 94%

Relational database management (UNIX)

Worldwide Oracle 63%

Traditional workstations U.S. Sun 66%



7 April 2005, Riga6

Software is a Special Good

High first copy costs, low marginal costsHigh first copy costs, low marginal costs– Supply-side economies of scale Supply-side economies of scale – Instant scalabilityInstant scalability– Non-rivalry in consumptionNon-rivalry in consumption

Network effectsNetwork effects– Economies of scale in consumptionEconomies of scale in consumption– Path dependenciesPath dependencies

No technical deteriorationNo technical deterioration



7 April 2005, Riga7

Characteristics of Software Markets

Basic requirement: Basic requirement:

Excludability of consumersExcludability of consumers

Market structure:Market structure:– Tendency towards concentrationTendency towards concentration– Advantages for established firmsAdvantages for established firms

Market dynamics: Innovation is imperativeMarket dynamics: Innovation is imperative



7 April 2005, Riga8

What is Open Source Software?

Access to the source code Access to the source code andand

A free license:A free license:– Unrestricted usageUnrestricted usage– Modifications are allowedModifications are allowed– Software can be copied and distributed Software can be copied and distributed

without license feeswithout license fees



7 April 2005, Riga9

Implications for Innovation and Competition

Low market barriers: Low market barriers: – Code can be re-usedCode can be re-used– Competition is intensifiedCompetition is intensified– Technical platform for new productsTechnical platform for new products

Accumulation of human capitalAccumulation of human capital

Open interfacesOpen interfaces– Use of existing networksUse of existing networks– No supplier-specific lock-inNo supplier-specific lock-in



7 April 2005, Riga10

Challenges for OSS: Supply

Is there a broad choice of software? Is there a broad choice of software?

Individual contributorsIndividual contributors– Motivation? Motivation? – Preferences of work areas? Preferences of work areas?

Firms’ activitiesFirms’ activities– Balance: Community — BusinessBalance: Community — Business– Viability of business modelsViability of business models




Preferences of Work Areas

26,9

22,7

17,8

16,4

5,3

5,3

2,9

1,9

0,9

Networking

Web Services

Office/ Business

Hom e & Desktop

Gam es

Graphics

Multim edia & Design

Audio

Wireless Appliactaions

Source: Ghosh et al. (2002) FLOSS-Study, Part IV, Figure 19, p. 28.




The Use of Open Source Software

Open Source Software is regarded as a Open Source Software is regarded as a realistic optionrealistic option

Application areas: Application areas: Server, Internet services, development, data Server, Internet services, development, data basesbases

Economic criteria: Economic criteria: Stability, security, costsStability, security, costs




Challenges for OSS: Demand

Low market penetration:Low market penetration:Missing applications, no end-user orientation, Missing applications, no end-user orientation, compatibility with established standardscompatibility with established standards

Scepticism on decentralized development: Scepticism on decentralized development: Support, market fragmentation, binding Support, market fragmentation, binding roadmapsroadmaps

Lack of knowledge, uncertainty:Lack of knowledge, uncertainty:Legal implications of OS-licenses, reference Legal implications of OS-licenses, reference implementations, user acceptanceimplementations, user acceptance




Recommendations

Increase market transparency, promote Increase market transparency, promote dissemination of informationdissemination of information

Non-discriminatory use of Open Source Non-discriminatory use of Open Source Software in the public sectorSoftware in the public sector

Support interoperability, promote open Support interoperability, promote open standardsstandards

Adapt the legal frameworkAdapt the legal framework




The Legal Framework

Conformity with existing laws?Conformity with existing laws?– CopyrightCopyright– Contract lawContract law

Software PatentsSoftware Patents– EU-“Directive on the Patentability of EU-“Directive on the Patentability of

Computer-Implemented Inventions” Computer-Implemented Inventions”




Problems of Software Patents

Monopolization of IdeasMonopolization of Ideas

High transaction costsHigh transaction costs

Specific disadvantages for Open Source Specific disadvantages for Open Source Software Software

Strategic use of patentsStrategic use of patents

Availability of alternative mechanisms of Availability of alternative mechanisms of protectionprotection




Recommendations on Patents

Strong and clearly defined requirements Strong and clearly defined requirements neededneeded

Increase efficiency of patent system Increase efficiency of patent system

Attenuate negative effects of patentsAttenuate negative effects of patents

Specific rules for software?Specific rules for software?




Conclusion

Open Source Software increases Open Source Software increases (potential) competition.(potential) competition.

However:However:– Successful business models?Successful business models?– Availability of information?Availability of information?– Fair competition?Fair competition?– Adequate lawsAdequate laws??

Thank you!

Jens MundhenkeJens Mundhenke

Kiel Institute for World EconomicsKiel Institute for World Economics

Düsternbrooker Weg 120Düsternbrooker Weg 120

24105 Kiel, Germany24105 Kiel, Germany

[email protected]@ifw-kiel.de

The Impact of Open Source Software on Competition on Software Markets Jens Mundhenke Kiel Institute...

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