Had a good conversation with Dennis Byron of ebizQ recently... most of our discussion was about FiveRuns and the Ruby on Rails ecosystem. But we had an interesting tangent conversation that didn't make Dennis's article - yet-another "role-of-open-source-in-the-industry" type discussion, but hopefully an interesting one:
I happen to have a number of friends in the energy industry, and the big energy companies typically have two types of businesses: regulated (by the government) and unregulated. The regulated energy biz in the US is all about predictability - turn the lights on, and, more often than not, they work (and our electric bill rises with the cost of living & energy over time). That predictability works the other way, too, as energy companies have pretty stable subscription bases of customers (because they have legal monopolies) that makes their revenue and earnings predictable, quarter after quarter.
In the energy companies' unregulated businesses, things are quite different. These divisions are all about buying and selling energy to maximize profits - finding arbitrage opportunities in the national or international energy trading marketplace, and using complex financial deals to leverage the regulated cash-flow into much more profitable (and often risky) opportunities. Here's an article that gives you a flavor (disclaimer: this article is from 2001, so many of the market conditions have changed since). If Enron comes to mind here, you're in the right ballpark. But remember that Enron was simply crooked - many companies have solid, law-abiding unregulated businesses.
So here's the analogy: open source companies are much like regulated energy companies, although they are regulated not by governments, but by communities and customers. Red Hat's solid business is "regulated" by the Linux community and open source software licenses, and the level of service expected by its customers. Customers get predictable, stable service at a fair market price (because the switching costs are certainly lower than proprietary software), and Red Hat gets a solid, predictable business based on a growing base of subscribers.
Proprietary software companies, however, aren't regulated by either a community or an open source license. So they are free to charge whatever they can get, and the fewer competitors there are, the more they can charge (the switching costs and barriers to entry are high). This isn't immoral - in fact, it's good business if you can get it. But the advantage begins to go away when credible open source alternatives (or lower-cost proprietary alternatives) become viable, as we have seen with Linux, MySQL, JBoss, Apache, etc.
Interestingly, the software industry as we know it grew up with unregulated businesses - and only in the last decade has open source created these credible alternatives. I think the future looks similar to the energy industry: large technology companies will have a mix of regulated and unregulated businesses, that maximizes the advantages of both. For standard, widely-used technologies, open source "regulation" makes sense because it lowers development costs and provides a standards-based, predictable subscription base of business. For niche and high-end software, companies will still expect a substantial return on their development cost, and therefore will protect that IP and sell it at a premium until competition makes that impossible. The most successful of these integrated companies will be careful not to exploit the community, and will be respected for having transparency between what parts of their business are "regulated", and which parts aren't. Thoughts?
Well, I think you're letting off the unregulated a bit too easily. The current financial sector meltdown is also all about unregulated businesses who, free to come up with riskier and riskier ways to try to make higher and higher profits, did so in spades and are now twisting in the breeze as inevitably some of those risks materialized. The world economy may literally go into a depression because of deregulation.
As to Enron--the untold story of Enron is that, sure, the top guys were crooks in the sense of embezzling from their own company, but that was just an extension of their broader crooked practices which victimized the consumer. The latter were and are quite common. Everywhere you find unregulated businesses, you find victimized consumers, whether it's in energy, finance, the chemical industry--or software. Why do you think businesses started being regulated in the first place? It's because citizens got sick and tired of being scammed and fleeced and insisted their elected representatives make some rules saying "no scamming, no fleecing". Why do you think many of those regulations were removed? Because businesses wishing to make more money paid those elected representatives to ignore the citizens.
Given that, while I think your analogy very apt, I think the notion of there being some sort of natural, appropriate balance between regulated and unregulated is quite wrong.
Posted by: Rufus Polson | April 03, 2008 at 01:41 AM
Great points, Rufus - but I don't necessarily agree. I'm a fan of free markets in principle (and better enforcement of laws on the books). Not to say that all regulation is bad - I just think it's a leap to say that deregulation is the the potential cause of the economic condition we are in. Thanks for the thoughtful comment!
Posted by: Todd Barr | April 03, 2008 at 09:49 PM
In general, no new substance forms in a physical change.
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