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Open source software is obviously extremely interesting to companies from a utilitarian viewpoint: it means they can reduce costs and – more significantly – decrease their dependence on single suppliers. But there's another reason...

Open source software is obviously extremely interesting to companies from a utilitarian viewpoint: it means they can reduce costs and – more significantly – decrease their dependence on single suppliers. But there's another reason why businesses should be following the evolution of this field: it offers important lessons about how the economics of a certain class of products is changing.

Free software licences recognise that it is dealing with a good that has vanishingly-small marginal cost; as classical economics teaches us, this means that the price for such goods tends to zero. This bold idea was accepted within the enterprise in a rather interesting way.

First, free software appeared among the hacker community, where price was irrelevant, since the culture was largely one of sharing. From there, it seeped into companies, usually unbeknownst to management, which only found out about the fact later. By that time, the open source applications – notably GNU/Linux, Samba and Apache - had not only proved their technical quality, they had shown that something that cost nothing could, indeed, be worth much more than its nominal price tag.

Since then, we've seen the emergence of companies that have sought to create business models around that free software using various approaches. I don't want go into the details of those models, since I've written much about it elsewhere; instead, I'd just like to emphasise that these open source companies have all found ways of making money by giving away stuff.

Generally speaking, this has been achieved by accepting that the software they produce is abundant, and therefore cannot be charged for directly, but noting that there are associated products and services that are scarce, and can therefore support a non-zero price tag.

This is important, because the phenomenon is not limited to software. Basically, *any* digital good is subject to the same pressure to reduce its asking price to zero. We have seen the effects of this in two industries in particular: music and film.

Ever since Napster was created a decade ago, the music industry has been waging an unwinnable war against the underlying economics of abundance. Now that music is essentially a digital file, its marginal cost is zero, and so its price will drop to zero. Again, we've already seen that, with the difference from free software that there are very few legal services adopting this approach. Instead, the music companies' refusal to adapt themselves to this new situation mean that a vast, global market for unauthorised copies has grown up.

The film industry was, until relatively recently, spared the same fate only because the file size for a typical film is many orders of magnitude larger than that of music. This simply meant that it took a few years for the average download speeds to increase sufficiently to make swapping video files as easy as sharing music. We are now at that stage, and the sharing of video files is starting to take off.

The question is not whether these industries can cope with this shift, but how. The situation for music is reasonably clear: top artists *already* make more money from their live shows than from their music sales. That's to be expected: live performances are scarce, and cannot be copied, which means that premium prices can be demanded. There are many other ways in which different kinds of scarcity can be used to generate money (for example, see this incredibly inventive approach from Jill Sobule.)

As far as films are concerned, we've recently witnessed a rather nice demonstration of how to use analogue scarcity to offset digital abundance in the case of “Avatar”. The integral nature of the 3-D technology employed means that the full immersive experience is only available in cinemas; indeed, unauthorised copies of DVDs are likely to be such a pale imitation of a vist to the cinema that they will drive many people to buy tickets. This is similar to the case whereby shared copies of music files encourage people to pay large amounts of money for tickets to live performances: digital goods here become a means of marketing.

Ways of making money from free digital content by developing scarce, analogue products are becoming well-established in the fields of music and film. But I was interested to read the following perceptive analysis from someone who is not a musician or film-maker, but a photographer:

Value is a complex thing. Either in a currency system, or in a system of barter, value is something that must be discussed, negotiated, settled. It depends essentially on the ratio between offer and demand, and offer depends on the scarcity of each of the components that make up each good or service. Demand is even more complex, depending on what is needed, but increasingly, on what is wanted.

In great part, the history of Humanity is the history of technology. Fire is technology. The wheel is technology. Writing, mathematics, farming, bureaucracy – they’re all technologies. And technology upsets the status quo of what scarcity is. The wheel made distance a less expensive commodity. Gutenberg made information so simple to disseminate to the point that it transformed something easy to safeguard to something easy to copy. The loom made textiles worthy of a King available to the poorest. And technology keeps its relentless pace.

The correct response to the current shift to abundant, digital artefacts, according to this writer, is to give away your stuff for free. Why?

Because the money to be earned is not on things that can be copied. That’s a lost battle. If you’re a musician, you can make more money on concerts and events. If you’re a photographer, more money can be made by shooting specific assignments for customers, or on photography workshops. If you’re a writer, you can make more money by participating as a speaker at conferences. The era of making something and just making your livelihood from just that is nearing its end. And getting your creations known to the widest possible audience is the key for getting work that can’t be replicated.

Sadly, this kind of insight is still rare – especially amongst those running companies in industries most affected by these changes. But those who can grasp the key ideas now will find themselves well placed for the future. And there's no better way to learn about and understand what's happening than in the world of open source software.

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