2011-08-06

The commoditization of technology, and when to open the source

The point of open source is not to kill competition, it's to enable innovation at a higher level

I have exclusively used Free (as in freedom) and open source technologies for more than 15 years, and have contributed to a number of open source projects. However, virtually every person in the developed world now uses open source technologies every single day, usually without usually even knowing it. We carry open source cellphone software in our pocket if we use Android, we use open source browser technology if we browse the Web with Chrome or Firefox, and at the very least, we request pages from open source webservers running on top of open source operating systems when we view the majority of pages on the Web.


On face value, it seems counter-intuitive that a company could survive if they were to open source their products or technologies, since if the product is available for free in source form, competitors could take these products or technologies and use them to compete without doing their own development work, and/or sell the originating company's products themselves. Consumers could obtain and use products for free without purchasing them, by building the products themselves from source or by using versions built and shared by other consumers.


However, at least from an economics perspective, the point of open source is not to kill competition, it's to enable competition and innovation to take place at a higher level of abstraction than was previously possible.


Frontier science eventually transitions from public to private development


In the early days of space exploration, you couldn’t just buy an off-the-shelf rocket engine; only governments with multi-billion dollar budgets could design and build rockets that could put an object into orbit, much less a man on the moon. However in 2004 a private company, Scaled Composites, won the $10M Ansari X-Prize for putting a civilian in space twice within a two-week period. The US government has subsequently awarded multiple heavy-launch contracts to another private company, Elon Musk's SpaceX, to replace its own aging heavy lift technologies, and recently canceled its own costly Constellation program that was intended to replace the shuttle. The US Government is still debating what technology should replace the shuttle and its launch system, but it is becoming increasingly clear that we have reached an era where the US Government is no longer able to compete with commercial offerings. This is a complete inversion of the situation in the early days of the space race, when there was no way the private sector could afford to compete with the financial resources that the government was able to throw at open-ended space research.




Commoditization is an inevitable process for all technology


Every industry goes through this transition towards the commoditization of technology, which is the stage at which a technology is commercially available in off-the-shelf form, and/or when the knowledge or parts required to build the technology are freely available and anybody with sufficient skill in the art can build it if they expend sufficient effort. When a technology has become commoditized, it becomes the newest "greatest common denominator" for the industry.


The process of commoditization has already happened in the PC hardware space (with the development of generic PCs that took the bottom out of the mainframe and minicomputer markets and made computers accessible to all), it has long been happening in the operating system space (with Linux and BSD), it continues to happen in the web technologies space (with browsers, web servers, web toolkits, the evolution of browser extensions into web standards, etc.), and is currently happening at an alarming rate in the mobile space (with Android in particular).  There are many examples of this in every industry.



 

Price is usually the first thing to go, then a little later it becomes clear that technologies that are free but closed-source, and the communities they serve, stand to benefit substantially from opening the source.

Commoditization of technology enables innovation at a higher level


The interesting thing about the commoditization of technology is that it affords all players a new solid foundation of common-denominator technology to build upon, and innovation can then move up to the next level of abstraction. Nobody builds their own web server anymore -- it doesn’t make sense to reinvent that wheel when there are several incredibly powerful, commoditized open source options; everybody just uses (and innovates on top of) Apache/Cherokee etc. In the mobile space, the availability and commoditization of remarkably rich app development platforms such as Android has led to a Cambrian explosion of diversity in mobile applications that was simply not possible before powerful and featureful mobile operating systems became a commodity on the majority of cellphones.


Those companies that do not innovate on top of commoditized technologies will perish


Most companies are very familiar with the maxim, "innovate or perish."  However, many companies also fear that the commoditization of technology, combined with the open sourcing of commoditized technology, is a recipe for destroying business models and even entire industries. It is understandable that this would be a big concern for many industries, especially if their market is small. However, some companies divert too much energy towards holding onto the IP they already have, doing whatever they can to resist forces that would lead to the commoditization of those technologies. Progress in that market ends up becoming enmired. Ironically, this allows the company to continue to operate within its comfort zone -- but it is not a sustainable model and is certainly not a growth model.


Nobody wins in the long term if a company is attempting to suppress innovation in order to survive. History has shown that companies that understand that commoditization is an inevitable process, disruptive though it is, i.e. companies that learn to adapt nimbly to the changing tech landscape and begin building one level above the current level of abstraction, are the very companies that will survive and become the next generation of market leaders. Those companies that cease to innovate, or cease to move their level of innovation above the level of commodity, are the very companies that inevitably perish due to disruption from below. (The defining work in this area is of course The Innovator's Dilemma by Clayton Christensen.)




Companies are born, grow, age and die


There is nothing ad hoc about when companies go through the different stages of innovating, resisting innovation, and then perishing -- in fact, it turns out that these stages are completely predictable. Geoffrey West of the Santa Fe Institute describes this process briefly but eloquently in his recent TED Talk:

  • It is possible to measure something similar to the "metabolic rate" for companies, and, if analyzed this way, all companies are born, grow, age and die just like biological organisms. 
  • Companies demonstrate a sigmoidal growth curve overall (just like any other organism), with slow initial growth, followed by a growth spurt during the company's "teenage years", followed by a decline in growth (senescence), followed by eventual collapse and death. 
  • As companies grow, they benefit from the added efficiency of economies of scale -- efficiencies brought about by the introduction of bureaucracy and levels of administration. 
  • However, eventually every company enters a stage where their metabolism slows down [the company ceases to innovate] and the company soon cannot sustain growth, collapses and dies.
Geoffrey West

Companies typically produce their best innovations in their "prime years", before their growth slows. In their later years, they become bogged down by the very bureaucracy that granted the company economies of scale in its "young adult years". Old companies have so much corporate inertia and bureaucracy that they cease to innovate and collapse under their own weight. Restated, it is in the early years of a company's life that they are able to produce technologies that have the potential to become commodities. In their older years, companies often fight commoditization (i.e. cease to innovate) and eventually lose that battle.


Today, commodity technology inevitably ends up open sourced or ceases to be relevant. It doesn't take a huge jump in logic to realize that if you fight open source, you are in a real sense fighting innovation, and it's a good sign that you have entered the life stage of corporate senescence. Old companies typically try to stifle the innovativeness of their competitors through patent litigation, rather than moving up a level and innovating on top of the new common, commoditized platform (which is doubly ironic, because patents are supposed to encourage innovation rather than stifle it). Such companies lack creativity, skill, nimbleness and innovativeness of their own, and will soon die.


It is worth noting that even though biological organisms and companies all follow the same growth curve, the lifespan of organisms and of companies depends upon their size. Thus, even though death is inevitable, it would make sense that corporate lifespan can be increased by doing whatever is possible to ensure that a company is better able to scale.


How to know when a technology has become commoditized


It's usually clear when a technology has become a commodity. One or more of the following scenarios will hold true:

  • The secret of how to build the technology is out of the bag (it's no longer protected by virtue of being a trade secret)
  • The technology has become easy to duplicate: your competitors are all starting to build the same technology
  • The technology is available for free (designs for or an implementation for the technology are widely available)
  • Alternative implementations of the technology are beginning to surface that either compete head-on with your technology, or promise their own different but competitive feature sets and strengths
  • The technology is regarded as a component part that other more interesting things can be built from
  • The industry is beginning to find ways to work around the need for your technology.
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up to $860 for a jar of air from the French countryside

It makes a lot of sense for everybody to use and contribute to a common shared source code base once a technology has become commoditized. The right way to look at this is not "we're making our competitor's life easier", but rather, "we're making the world a better place for everybody, and enabling a whole new generation of innovative products that can be built upon this platform".  There's almost always plenty of room up there at the next level for everybody.


Embracing open source doesn't require abandoning your business model, it requires rethinking it


There is a lot of discussion about when or even whether a technology should be open sourced. Open source business models typically revolve around expertise for hire (e.g. support contracts) or value-added repackaging of open source products. However several points should be noted:

  1. Software that is partially or completely open source can still be sold, sometimes with additional premium features in the commercial version (depending on actual licensing). "Open source" or "Free (as in freedom) software" does not have to mean "free (as in price) software".
  2. Opening the source code of a piece of software can actually help a business in unexpected ways by revitalizing the entire software ecosystem that the company operates within.
  3. Ideally, open source software also attracts contributions by others in the community and sometimes even brings in contributions from competitors.  "Win-win" is always a healthier mentality than "dog eat dog".
Companies need to learn to respond to the commoditization or open sourcing by competitors of technologies in areas they are seeking to remain competitive, and should not continue to try hard to sell something that is not clearly better than an open or free alternative. For example, the operating system space was commoditized over a decade ago, but Microsoft is still deriving a large percentage of their income from of sales of Windows as a base operating system, even though profit margins are quickly eroding as computing moves online and people use a plethora of devices running open source operating systems to access the Web.

Related reminder: If you're not cannibalizing your own business model from below with the next big thing, then somebody else is. (See how Amazon cannibalized their own book sales with the Kindle for a good example of how to approach an eroding business model.)


A nonexhaustive list of situations when opening the source of a product may be helpful:

  • When the software’s general availability is crucial to the basic vitality of the ecosystem in which a company operates. (e.g. Google created and released their own browser as open source, upping the ante for everybody in terms of both features and speed, and as a result of this competition, all other major browsers became significantly more powerful and featureful within a couple of years. In the end, whatever browser people end up choosing, even if it isn't Chrome, Google still wins.) 
  • When a piece of software has ceased to give a company a competitive edge but would be immensely useful to others. 
  • When a company feels it can still stay ahead by innovating on top of the open sourced code, but there is a clear need in the community for the code and it makes sense to share it. 
  • When a piece of software is being retired but could still prove useful to someone. (a.k.a. “Abandonware”)

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