[Fsfe-uk] Microsoft's "Open Source is Economically Disadvantageous" Talk

[Robin Green]

On hearing of the talk I submitted the following to a free software
related news site. It was turned down because there was a query which
I didn't respond to in time and by that time the talk had been and gone.
Rather than waste the piece, I thought I'd post most of it here.

Unfortunately I was not able to attend the talk so I had to base it
entirely on the abstract that's already been forwarded to the list.

----- Forwarded message from Robin Green <address@hidden> -----

The text below is released by me into the public domain, so feel free
to use it as is or as the basis for an article, if you wish.

The forwarded email at the end of this email (which reached me via a
circuitious route involving the UK Association For Free Software list)
advertises a "public lecture" on the economics
of open source tommorow lunchtime, hosted by Microsoft Research in
Cambridge, UK, and given by Dr. Stefan Kooths of the University of
Muenster Institute for Computational Economics in Germany. (That would be
computer-assisted economic modelling, rather than economics applied
specifically to the computer industry, I presume!)

(Unfortunately I am not able to attend the talk due to prior commitments
- otherwise I would do so and submit a report -
but I will try to critique the abstract given.)

According to the abstract, Dr. Kooths will argue that promotion of
open source software is economically dangerous, and
"not economically justifiable for the state". The danger of Kooths'
argument, in my view, is that not only does it suggest that governments
should not actively promote the use of open source software, it suggests
that they should go much further and oppose it and avoid using it,
because of its *alleged* economic hazards.
(Although Kooths does not draw this conclusion explicitly in his abstract,
his ambiguous "the state should not promote OSS" conclusion sits oddly
with his idea that OSS is some kind of economic cancer - to borrow the
phrase of a certain Microsoft executive a few years ago.)

Secondly, this conclusion talks about "the state" as if _all_ states
- irrespective of their circumstances and level of development -
would overall benefit by supporting proprietary software (which quite
often means supporting Microsoft, directly or indirectly).

Arguably, his logic is at its weakest when applied to nations for whom
the largest long-term effect of excessive use of proprietary software on the
national economy could be the diversion of large amounts of money offshore
into the coffers of US companies such as Microsoft! It seems to be
an all-too common weakness of a number of macro-economists (not all,
of course, but quite a few) to draw conclusions based on abstract
economic models without adequately considering the specific
circumstances of a country - as, in another context, the former World
Bank Chief Economist Joseph Stiglitz has cogently documented, in his
book "Globalization and its Discontents" [1].

But even for countries that reap significant benefits - in at least a crude
sense, in terms of jobs created, tax paid and such things - from having a
large proprietary software industry, I don't think the argument is quite
as one-sided as Dr. Kooths makes out.

Actually, at this juncture it should be pointed out that Microsoft paid no
tax at all in 1999, despite reporting $12.3 *billion* in profits, and
apparently this was all quite legal [2]. And as for jobs, the open source
community has long argued that a vibrant IT economy can be sustained
around open source, in terms of training, technical support, custom
development, and other such services.

Dr. Kooths seems to be aware of this argument, because he refers to
"packaged software" in his abstract - presumably meaning shrinkwrapped
software such as Microsoft Office that you can buy in a store, as distinct
from software developed from scratch or customised for a particular
organisation or group of organisations. But brittle, packaged,
closed-source software has formed the minority in the world of
software since the early days. The great majority of programmers in the
world are employed maintaining or developing custom code, not writing
code for Microsoft Office or the like. This would continue in a world
with a healthier balance of open source and proprietary software.

Likewise, for the vast majority of companies and organisations - and
governments - out there, software is predominantly a cost centre, not
a profit centre. It is therefore a powerful argument that the overall
economic effect of more use of open source code could be the freeing
up of cash previously spent on proprietary software licenses (and
the time and money frustratingly wasted on trying to cope with the
hideous bug and interoperability problems of many common
proprietary apps) into lowering costs and increasing productivity
elsewhere in the economy. Actual productivity, that is -
rather than paying Microsoft for the ephemeral activity of issuing
you one more license.

Dr. Kooths' insinuation that open source software is by its nature
as a development model, unresponsive to user requirements because
of the "lack of a market price", is simply silly. There is no other
word for it. Firstly, to the extent that developers are also users
- which they are in cases like gcc - it works really quite well.
Secondly, the responsiveness of developers to
user requests is variable, and in many projects can be quite good
- better even than paid commercial support from certain companies!
Thirdly, as two counterexamples, I put forward:

- the Kroupware project - originally commissioned by a branch
of the German government to build upon existing open source software
to produce a groupware system to meet their precise needs;

- and, also concerning groupware, the Open Source Application
Foundation's recent announcement that it had obtained $2.75m additional
funding from a consortium of US universities and a non-profit foundation
to extend the OSAF's Chandler groupware project to meet the needs of
large organisations like universities [3]. This is a promising and
interesting model for funding (and thus speeding up) large and complex
open source project developments where individual users or organisations
might be unable to fund/create a project - but putting their heads
together, they can co-fund it and all win. It reminds me of the
scientists who've decided they don't like journal publishers charging
monopoly rents for the privilege of being published in a journal,
and then charging again for copies of the journal, and have decided
to set up their own online journals. It's quite a similar case in some
ways.

Granted, there are many cases where open source projects have not
yet got around to meeting the needs of absolutely _all_ users - but
this also holds true with Microsoft applications and special needs.

The difference, which favours open source, is that not-for-profit
organisations, generous individuals etc. can fund or give their time
to alteration projects which would otherwise be almost or completely
uneconomic (especially to a company like Microsoft, for whom even a
million dollars is less than 0.1% of its bank balance, let alone its
total assets) due to their smaller market size.

Finally, whether as *many* programmer jobs will be needed in future as
open source software improves and matures is a debatable point, and I
personally think it is a point that could be conceded. Certainly
programmers will be needed for the forseeable future, but perhaps not
so many.

But even if were conceded, it does not really make sense to ask
all the other sectors of a national economy - and the government itself -
to somehow forgoe the huge benefits of open source software - just to protect
programmer jobs[4] (and, incidentally, the profits of companies like
Microsoft, who would be the biggest beneficiaries of such an implausible
move, let's not forget). It seems to me that Microsoft, and their old-guard
supporters such as Forbes and Dr. Kooths, are playing King Canute.

The above text, including the footnotes below, is released into the public 
domain.

--
Robin Green

---

[1] 
http://www.amazon.com/exec/obidos/tg/detail/-/0393051242/ref=ase_initiativef08-20/002-1227153-6545600?v=glance&s=books

[2] http://www.ctj.org/html/corp0402.htm

[3] http://www.osafoundation.org/Chandler_in_higher_ed_TOC_3002_05_13.htm

[4] The tendency of technology to shrink employment in one sector - and often
create employment in another, but not always - is a whole 'nother issue that
I'm not going to get into here. 

----- Forwarded message -----

Subject: Microsoft Research External Lecture: Dr Stefan Kooths, University of 
Muenster

MICROSOFT RESEARCH LECTURE
This is a PUBLIC lecture 

________________________________

TITLE: The Economics of Open Source Software - Prospects, Pitfalls and
Politics
SPEAKER: Dr Stefan Kooths
INSTITUTION: University of Muenster
HOST: Alexander Braendle, University Relations
DATE: 15 January 2004
TIME: 13:30 - 14:30
MEETING ROOM: Lecture Theatre
ADDRESS: Microsoft Research Ltd, 7 J J Thomson Avenue (Off Madingley
Road), Cambridge


Open Source Software does not represent a suitable alternative to the
commercial software market from an economic point of view, neither in
terms of creating value-added nor in terms of economic efficiency. OSS
does not create any new value-added potential, and offers only a
fraction of the opportunities of the commercial market. The impact of
OSS on sales and employment are therefore less than the effects of
commercial software. Furthermore the de facto free availability of
GPL-licensed software, and hence the lack of a market price, have
far-reaching economic consequences that are elaborated in the
presentation. As far as packaged software is concerned its free
availability very much limits the creation of profits, income, jobs or
taxes. The loss of turnover in the area of software sales cannot be
fully recovered with services linked to the software. So-called
complementary OSS-business models work in the smaller customized
software sector only. The incomes earned there are substitutive and not
additional to those created in the commercial software sector. The lack
of cost-reflecting prices for GPL-licensed standard software also has
consequences for the market process as the pricing mechanism is
associated with an important information and coordination function in a
market economy. If there is no price, and hence no decisive guide figure
for a market, it is, for example, more difficult to identify customer
requirements. Further problems can be identified when it comes to the
allocation of resources, productivity-oriented factor compensation and
incentives for innovations. The lower value-added potential and the
reduced efficiency of coordination are weighty economic arguments. They
demonstrate quite clearly that the promotion of open-source software
cannot be an economically justifiable role for the state. 

 
________________________________

----- End forwarded message -----