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Economics of open source
The economic impact of open source models is going to be very high, not only in the software industry, but in society in general. In this section, we discuss in some detail some of the more foreseeable issues related to this impact. Some of them are just projections from current trends, but some others have already arrived. To begin with, several new economic models for open source projects will be presented (externally funded, internally funded, unfunded, and internally used). Later on, the issue of total cost of ownership will be discussed in subsection 5.5. In subsection 5.6 some discussion on the macro-economic consequences of widespread use of open source will be introduced. To finish this section, some impressions on the future of the software market, considering open source models, are discussed in subsection 5.7.
The subsections on new economic models are important because many traditional models of the software industry are heavily based on proprietary software where the income is directly related to per-copy price (particularly in the case of shrink-wrapped software). With some exceptions, these traditional models are not viable with open source software, since income cannot come from selling copies of the software (freedom of redistribution tends to set the price at the point where marginal cost of reproduction is near zero). Therefore, open source business must look for other sources of income.
The taxonomy of models presented in this section is not just an analysis of currently existing models, even considering that some of them have been already tested in the industry. On the contrary, we have tried to create as complete as possible a categorization of models that can be self-sustaining, or at least feasible from a business point of view. However, real examples are added to each categories wherever we know of them.
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Interested readers can refer to [7] for another taxonomy of open source business models, more focused on what is currently available, and to [8], which includes the results of a survey about how do open source business behave. In addition, in appendix B we provide information about some real business based on free software, which can be used as case examples.
New economic models Externally funded ventures
We consider in this category groups or companies which develop open source software through the initiative (at least in the financial sense) of some external organization. Usually those external entities determine how the funds are to be spent, and where the development efforts are headed. The developer entity just follows those more or less strict guidelines. In some sense, it could be said that the external entity 'sponsors the development of some given open source software. In this category, we can distinguish at least three models, according to who funds the project and why. We have called them public funding, 'needed improvement funding, and indirect funding.
Public funding
Working groups or individuals receive funding for the development of a good software product, documentation, test cases or whatever. Usually, the only constraints imposed by the funding entity are that funds must be used to complete the project. This is typical of large computer science projects, and the funding usually comes from universities or from national science grants. In fact, many large projects in radioastronomy, computational chemistry, and biology are funded this way. In addition, some consortiums for the development of Internet tools and technologies have (or have had) such a funding structure. It is important to notice that in these cases the funding institution is not expecting to recover the investment, or to directly benefit from it. Usually, some expectation of social improvement is the reason for the funding.
'Needed improvement funding
A company or organization may need a new or improved version of a software package, and fund some consultant or software manufacturer to do the work. Later on, the resulting software is redistributed as open source to take advantage of the large pool of skilled developers who can debug and improve it.
An example of this model is the work commissioned to Macadamian Software by Corel Corporation to improve the Wine Windows emulator. This work allowed Corel to port its entire software suite to several additional platforms (the suite was based in MS-Windows) with a simple recompilation process. This was of course significantly cheaper than accomplishing a complete porting process, or than building a proprietary Windows emulator, since Wine was already partially built. The work (still in progress) significantly improved the quality of the emulator, and the improvements made by Macadamian were integrated directly into the Wine code base.
Indirect funding
A company may decide to fund open source software projects if those projects can create a significant revenue source for related products, not directly connected with source code or software.
An example of this case is OReilly & Associates, a publisher specialized in technical books. They paid some of the most important Perl programmers as a way to ensure continued development of the language, this way allowing for more sales of Perl-related books (which they publish).
Another example is VA Research, a seller of hardware systems preinstalled with GNU/Linux. They enrolled as developers many important Linux kernel programmers, thus helping to guarantee the continuous development of the Linux kernel. With a better Linux kernel, the areas of possible use of GNU/Linux expand, and with this the sales of Linux hardware. Even when other hardware vendors profit from this growth, VA Linux Systems owns a healthy market share of it, which justifies the spending of money for the general improvement of Linux. For instance, VA Linux is spending about 1 million USD in kernel improvement, while the overall market growth is of about 00 million USD, of which VA Linux systems has about 0% (or 40 millions), which leads to additional revenues of about 4 million USD. This obviously justifies the spending of the 1 million.
Yet another case is the writing of software needed to run hardware, for instance, operating system drivers for specific hardware. In fact, many hardware manufacturers are already distributing gratis software drivers. Some of them are already distributing some of their drivers (specially those for the Linux kernel) as open source software.
On other side, Red Hat is also a good example. They founded the Red Hat Advanced Development Labs, and hired several skilled programmers to work on strategic (for Red Hat) open source software (mainly the GNOME system). By funding this project they helped to create a valuable product for their main product (the Red Hat Linux distribution), while collaborating to develop new open source software.
New economic models Internal use
Some projects can get started as a lower-cost alternative to proprietary systems. In this case, the developer company does not have (at least in the beginning) any plan to get external income related to the sale of the software or services related to it. The company develops some system because it is useful for them, and later decides to make it open source, and distribute it widely, just to benefit from the open source development source. Probably they will get some contributions, improvements and bug fixes from external developers interested in the software, and some bug reports. Later on, the product may even reach some market acceptance, and the developer company could even get some economic benefits from it.
For instance, a large enterprise with several thousand desktop computers can decide to create some software internally, and to make this software available under an open source licence to get the benefits of a larger base of developers that may be interested in helping out. The Cisco printing system is a good case example of this kind of model.
'Best knowledge here without constraints
In this model, a company works as a paid consultant, with contracts granted on the basis of the higher level of knowledge of their employees. Any company can implement this model, as there are no limitations that prevent a competent technician from gaining an arbitrarily deep experience of open source software systems. Of course, this also means that any firm using this model is exposed to the risk of being superseded by someone else, if the level of competence is reached but not maintained. An example of this model is LinuxCare, a firm specializing in consulting on GNU/Linux systems, which also sells support.
'Best knowledge here with constraints
To prevent competitors from 'stealing customers, a firm can place arbitrary limitations on the process of knowledge sharing, through patents or trade secrets. Of course this is incompatible with the diffusion of software through an open source licence. However, it can be implemented by placing under a more restrictive licence just a small (but fundamental) part of the code, usually considering it as a ''black box. This kind of limitation can be introduced just to have an additional legal right, for example to avoid patent litigation. In the past this kind of limit has been avoided by the open source community by recoding the 'black box and creating an open source alternative, for instance by creating a loadable library with identical interfaces.
'Best code here without constraints
In this model, a company develops some open source code, and sells consulting and maintenance services on it. This is similar to 'best knowledge here, but with an additional advantage in terms of time, since a competitor needs some months to create a similar code, or to understand all the intricacies of someone elses source. This gives a time advantage to the company or group that creates the software in the first place. Examples are Cygnus solutions and their support of the gcc/egcs compiler and the glibc library. AbiSoft, BitWizard, and Digital Creations are other firms with a similar business model.
'Best code here with constraints
The preceding model can be completed with some additional limits, usually to get a wider gap of saleability of the code. The most common limit is the 'delayed availability, where the author of the code imposes some artificial limit that decays with time or with successive releases of the software product. An example is Alladin with their GhostScript Postscript-compatible printing engine.
'Special licences
It is also possible to sell 'exceptions to an open source licence for specific commercial applications. For example, SleepyCat software distributes the dbm database engine under the GPL, but can grant 'exceptions under an alternative licence which allows for integration into proprietary projects, which is impossible with the GPLed version (they also provide services as consultants on the same code).
'Brand selling
If a name gets recognized enough, it becomes a selling media by itself, like regular 'brand selling in other marketing fields. An example is Red Hat, that has promoted its distribution with such success that many people identify GNU/Linux with this specific brand of distribution. This also helps to explain the relatively high market capitalization that Red Hat achieved with its initial public offering in the American stock markets.
New economic models Unfunded developments
If there is enough 'network effect, there may be no need for funding, just a minimal effort for the organization of releases and patches. Examples of these kinds of open source projects are the Linux kernel, GNU/Linux distributions like Debian, BSD-based operating systems such as FreeBSD, NetBSD, or OpenBSD, and the Mesa OpenGL-like library. These efforts started in many cases as the effort of a single man, or of a small group, and through good organization and volunteer work they created an extended networked structure that maintains the code. Even with some (limited) funding for some projects, all of these efforts become successful without an external grant or without explicit money offerings. In fact, this is the case for hundreds of small open source projects.
The big (macro-economic) picture
The existence of free (open source) software has a complex and important impact on the economy as a whole. The fact that information technology becomes more accessible and is more trusted is an enabler for the creation of new markets. The existence of a population of pro-users (users that are also producers of software and information) plays a key role in the take-up of new activities and branches, as illustrated by the example of music, digital photography and personal home pages. New products (for instance appliances), new services (for instance training or information services) and new branches of activity can develop on this basis. In specific fields, such as education, the reduction in total cost of ownership that is enabled by use of open source platforms, and even more the mobilisation of the creative abilities of all players in the field lead to an increased efficiency of the public services. The dynamic stability enabled by open source platforms, that is the possibility to have long-term trajectories of innovation, make possible more efficient investment strategies in user industries.
However, while the reality of these macro-economic effects is well documented, their quantification, and their comparison (taking in account possible negative macro-economic impact) is not possible today, because of the lack of adequate detailed statistical data on free and open source usage and its detailed links with economical and non-economical activities. The development of the proper macro-economic indicators is needed if decisions with respect to the impact of open source on the economy of a whole country are to be taken based in facts.
Open source software and renewed competition in the software market
A common discussion, even within the open source community, is whether open source software models are more or less productive than proprietary models. From our point of view, in most situations, proprietary software can only be profitable if no other competing open source software product exists with similar characteristics. And the open source software model seems to ensure that once it enters a niche with enough energy, it can produce a product capable of competing with any proprietary counterpart. The cases of Gnat and Apache are clear in this respect17. And cases like Zope18 seem to demonstrate that at least some investors have realized that fact.
If this opinion is true, open source software models should all become self-sustaining. That is, as time goes by, enough resources should be collected by open source projects to maintain a steady level of development. And resources are not reduced to money, as the Linux case demonstrates. Important resources are, for instance, developers time, or beta testers. However, a company producing a new product should consider going open source if there is already a dominant producer in its niche. If not, probably it wont achieve great results, since competing with the proprietary rules is hard for starters, especially in established markets. But going open source, the whole environment, and the rules, change. The dominant producer no longer has all the advantage, and many customers will be motivated enough (by lower costs, by a better product, by more control on the development path, or whatever) to give the open source product a try. And this forces the dominant producer to change its strategy, improving on the quality of the product and service, switching to an open source model or offering any improvement that represents value to the buyer of the software product. Right now, this seems to be affecting even big players, like any Unix vendor which tries to compete with GNU/Linux, or any WWW server vendor which tries to compete with Apache.
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