When Open Source Generates Value (And When It Doesn’t)
Open-source software development strategies have grown in popularity in recent years. But they aren’t always the best approach.
In new research, Tunay Tunca, a professor of management science and operations management at the University of Maryland’s Robert H. Smith School of Business, presents an economic model to study how software licensing attributes affect a software maker’s decisions, with insights into how policymakers might incentivize welfare-improving open-source outcomes.
Generally, the term open source refers to any computer software whose underlying infrastructure, or source code, is made available for use or modification by developers and other users.
Many in the software industry consider this to be a useful feature with wider societal benefits. Society at large is seen to benefit when software makers opt for an open-source development strategy as their products become widely available, customizable and open to community contributions.
Tunca worked with the University of California San Diego’s Terrence August and Hyoduk Shin to develop the economic model to examine the effects of open-sourcing.
“We show that when a competing contributor is apt at reaping the benefits of software development investment, a less restrictive open source license can improve welfare,” they write. “On the other hand, when the originator is better at leveraging investment and service costs are high, a more restrictive license can be best for social welfare, even when a contributor can cost-efficiently develop the software.”
In other words, there are trade-offs.
A company that builds new software has to decide whether to espouse an open approach or a more proprietary strategy. If it chooses the proprietary path, it doesn’t benefit from the value-adding contributions of other developers, who might use the software, expose its flaws, experiment with fixes and build upon the code. On the other hand, it would retain the ability to generate revenue from selling copies of that software.
The software originator who pursues the open-source path forfeits the ability to charge for that now-free software, deciding instead to make money by offering integration and support services for the software. And those services can be of significant value to customers.
In their research, the authors took in the scope of licenses employed in the open-source domain, and studied whether restrictive or permissive licenses are better for company profitability and welfare.
They found that when an open-source contributor is adept in benefiting from its own efforts to a greater extent than the originator, requiring or favoring less restrictive licenses can increase the originator’s profits and its welfare. On the other hand, if the software creator is able to take effective advantage of contributor efforts and maintain high service costs, a more restrictive license can increase developers’ contributions and overall software quality.
The researchers concede that regardless of the potential benefits, some software originators will shun the open-source option, fearing it might benefit a rival and reduce their own competitiveness and profits.
In the past decade, the researchers note, open-source software has become an increasingly prominent tool. “What is even more encouraging,” they note, “is the recent emergence of service-based revenue models that provide steady revenue streams for companies that invest, develop, maintain, and support this important software solution approach.”
Read more: Generating Value through Open Source: Software Service Market Regulation and Licensing Policy is published in Information Systems Research.