Open Source Business Strategies Had A Bubble Too

from the now-its-growing-again dept

Matt Asay points us to a fascinating paper (pdf) by Oliver Alexy of Technische Universitat Munchen (TUM) Business School, that looks at how the stock market reacts to companies that announce open-source software releases. The paper looks at how stock prices move the day the news is released in an effort to gauge how Wall Street evaluates open-source-oriented business strategies. The study found a couple of interesting things. First Wall Street reacted positively to open-source announcements in 1999 and 2000, negatively in 2002-2004, and then positively again in the last couple of years. This suggests an open source bubble that coincided with the broader tech bubble. That was followed by a period of open source pessimism while the technology industry was in the doldrums. More recently, as open-source-related business strategies have matured, investor attitudes have become positive once again, and source code releases are rapidly becoming standard in some parts of the software industry.

Second, Alexy finds that Wall Street reacts more positively to business models that use open source as a way to directly cut costs or enhance revenue (for example by selling support services) than they do to longer-term strategies aimed at using open source as a "competitive weapon." Asay suggests the paper shows that a business will do poorly "if a vendor is more worried about pulverizing its competitors than it is in serving its customers," but that's not exactly what the paper is focused on. Rather, "competitive weapon" is used in the paper as a kind of catch-all term for source code releases focused on long-term strategic concerns rather than short-term revenue generation. For example, releasing a product as open source might help a company's preferred file format or networking protocol become the industry standard rather than a competitor's format. Alexy suggests that it's harder for companies to explain such long-range strategies to investors, and harder for investors to evaluate their effect on a company's bottom line. As Wall Street has become more familiar with the long-term benefits of open source software releases (for example, IBM's 2001 support of Eclipse) investor attitudes toward decisions to release software for long-term strategic reasons have become more positive.

One weakness of the study (which Alexy acknowledges) is that it focuses on source code releases by large, publicly traded companies. There was no way around this given the methodology they used, but it might give a somewhat skewed perspective on the benefits of open source strategies. Open source strategies are likely to be of the greatest benefit to small, young firms that have few resources and are racing to establish themselves in the marketplace. Opening their source code can be an effective way to both lower development costs and get their product in the hands of a lot of potential customers very quickly. Open source can benefit large companies too, of course, but the benefits are likely to be smaller, as large companies are already well-known in their industries and have much more money to spend on R&D. It seems likely that if Alexy found a way to conduct a similar study on small firms, the effects would be even more positive.

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    chris (profile), 25 Oct 2007 @ 1:49pm

    the four models

    long ago the business of open source was broken down in to 4 categories.

    they are:

    service selling: giving away the software and selling support, services, and consulting. webhosts do this (use FLOSS to run their hosting services) and so do software companies like MySQL and canonical.

    loss leadership: giving away part of your software/service as open source to create value for your proprietary offerings. groupware companies give away their server software as open source and sell proprietary plugins for outlook.

    widget frosting: giving away the software that powers your device/appliance to the community and sell the device for profit. linksys and entangle do this with their router products.

    accessorizing: selling accessories that make better use of open source software. websites that host articles or forums and sell ads, people who write books on open source, most projects that sell t-shirts to fans do this.

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