Tuesday, April 24, 2007

Economics 101 for Web 2.0+

I've been holding back this outburst since the late 90s. But today I read something that made me lose my patience. Jeff Atwood has a roundup of blogs addressing the question, where are all the open-source billionaires?

Jeff's post is a good post, and he provides a much calmer and nicer answer than I'm about to, but I don't have his vast reserves of patience. That is the stupidest question in the world. Where are all the air billionaires? Where are all the gravity billionaires? What about the light billionaires? Huh? Huh? Where are they? Tell me! If light is so damn useful, why hasn't anyone been able to license the sun? It must not be worth anything!

Wow. Good point there, Einstein.

The motivator for open source contributions isn't usually economic. It could be, in the case of somebody who wants to raise their profile by making open source contributions, but most open source doesn't come from such a mercenary point of view. People contribute to open source projects because they like working with good software. Open source contributions make software better, and keep good software alive.

The economic effect of this is the same effect any continuous trend of innovation and improvement has: it makes excellence cheaper, and thereby more commonplace. That's a paradox, but there can be enormous power in paradox. Look at the iPod; there's great money in making excellence commonplace. But the iPod isn't open source. The money's in the service you provide or the way you leverage existing resources.

This is why you should never, ever accept equity from a company that doesn't have a firm economic reason for its anticipated success. Amazon undercut the operating costs of Borders and Barnes & Noble; Google introduced a superior pricing model and superior performance metrics to advertizing; eBay leveraged the economic value of existing assets that was being blocked by normal sales channels and enabled prices to become more fluid in the process. Web success stories that don't have firm economic underpinnings are gambling winnings. Web stories like Amazon, Google, and eBay can all easily be explained afterwards by an economist.

The same is true for open source. Imagine if real estate suddenly became free. You wouldn't have to spend as much time apartment-hunting; a huge chunk of everybody's budget would suddenly be freed. What would you do with all that extra money and all that extra time? How different would moving to a new city be? How different would it be to open a new restaurant? Would anyone ever pay for parking again in their lives? That's open source: a massive economic disruption which transforms industries permanently.

Open source, sooner or later, is going to spell doom for venture capital. Your infrastructure costs, your development costs, all these things shrink to near zero. Building a Web app, these days, is like writing or drawing. All you really need to write something brilliant is pencil and paper. All you really need to draw something beautiful is a pencil and paper too. You can't build Web apps with a pencil and paper, but open source has made the startup costs almost that low. If you can get on a computer connected to the Internet, you can build a Web app.

With Amazon, Google, and eBay, you're looking at companies which made a lot of money by freeing up money which had been trapped in the market inefficiencies of old systems. That's the key; these systems dramatically improved the efficiency of existing industries. In the case of travel agencies, the inefficiencies were so strong they supported an entire sub-industry - travel agents - which the Internet has almost completely destroyed. It's usually not about new goods or services; it's usually about optimizing infrastructure.

Open source is a huge infrastructure optimization. It frees up money also, but it doesn't make money in the process. That's because there's a huge difference between generating new wealth and generating new concentrations of wealth. Asking where the open source billionaries are is like pointing to the French Revolution and saying, "If democracy is such a good idea, how come France doesn't have any more kings?" Because the kings were the problem.

What the mighty king Bill Gates contributed to the economy was a series of traps, dead-ends, and strategic victories that leveraged market inefficiences in distribution and manufacturing into a virtual monopoly. Microsoft was always pushing inferior software, even in their heyday. The Reagan soundbite "A rising tide lifts all ships" only actually applies when that rising tide hasn't already been trapped and channelled before it even rose by a massive complex of dams and reservoirs. If you can funnel the tide to one ship, and your walls are high enough, the tide can keep rising forever with only one ship being lifted. Open source erodes those walls.

And that isn't the only reason that "Where are all the open source billionaires?" is a stupid question. The other reason is, as Jeff points out, they're at Google. And Amazon.

2 comments:

  1. I see what you're saying. I haven't seen anyone explain it this way before. The thing with OS is it makes people in our profession wonder, "If software is free, how am I going to make money?" I guess your answer is, "Become more than just a programmer." An analogy that comes to mind is to become a service developer (like a product developer in terms of tangible products). We don't have to give up our programming skills. We just have to be more cognizant of what people actually want, which is not a bad thing.

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  2. Well yeah. Also there are more programmers today than there used to be, and the reason is open source. Compared to twenty years ago there are programmers everywhere today. Again, there's a difference between more wealth and more concentrations of wealth. The muppets who read business magazines but not economics books don't seem to realize this, but a billion dollars is equally useful to the economy whether those dollars are all in one wallet or spread out across a billion wallets. It makes no difference. It's a billion dollars either way. In fact a wider distribution is probably better for the economy as a whole.

    Also, the practical question, if software is free, how am I going to make money, really, you make money by charging people for stuff. Most people can't even program an alarm clock. The more the world runs on software, the easier it becomes to make a living as a programmer.

    Wow, I seem grumpy.

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