In a Capitalist economy, Open Source has no (direct) value.
Open source is not profitable
Let’s start with a few definitions:
- the price is the exchange value of a good or a service in a socio-economic context,
- the production cost is what it costs to build a good or deliver a service,
- added value is the price minus the production cost.
Open-source software delivers an added value close to or below zero. As the price for using it is zero so is the added value, no matter the production cost.
But if we measured the value as the amount of cascading innovation or progress added to society, then it should be trivial that open source projects have the biggest societal added value.
On the other hand, proprietary tech often has a theoretically-infinite added value as the production cost can be averaged to zero across sales.
How can this contradiction be true? My conclusion is that the market is broken. In the sense that (in my opinion) it’s not doing its valuation job properly, therefore impacting our economy.
Disclaimer: I never studied the fields of Economy and Finance. Forgive my simplifications and naive assumptions. Don’t make any investment decision based on my notes.
The creation of value
In our current—Capitalist—economy, Intellectual Property (IP) and Human Labor are seen just the same as any other Production Means.
They can be traded and used to create value. But they aren’t value.
By axiomatic design, labor and IP aren’t free (as in freedom): They are constrained in order to produce value. They are just means to an end (in that case, profit).
Value is what comes out of the profitable exploitation of all these various resources.
“Price is what you pay. Value is what you get.” —Warren Buffett
A (convenient) corollary is that Capital only has to be measured as an amount of Money.
In theory, open source is hugely profitable
If you manage to have Open Source developers contribute for free to your project (or that you just use freely available software to enable your business), then your business’ added value is hugely increased as you reduced your production cost.
End users don’t (have to) care that your code is freely available. For most of them, the only thing they care about is your end product quality and its price (in that case, most often free).
So why does it not always work like this?
The curse of competition
The competitive market is designed to optimise the use of resources.
If you open sourced your business-critical software (IP) with a true Open Source Licence (ie granting See, Edit, and Share rights), then your competitors would be able to simply copy your core value and start competing with you for a $0 entry cost.
Eventually, your only way to be more profitable than your competitors—i.e. to create more value—would be to minimise your use of resources. At the end, with enough competition, your customers (market consumers) should be able to pay for exactly what was the production cost of what you are selling (in = out).
This is a—sort of—ideal competitive market. At least, from a short-term consumer perspective.
But optimising resources also means compromising on the cost of Labor and IP. With unregulated (or not-“enough”-regulated) competition, this leads to poorly paid workers and unbearable working conditions. And/or to really bad products.
In the end, it also means no more investment in IP—i.e. no more Innovation: without added value, there’s no investment feedback loop.
In fact, for your hypothetical company that just decided to open source its business-critical software, it gets even worse. Because you initially invested capital (=money) in the labor (=time) that went into creating your business-critical software, you are now loosing money. Your competitors on the other hand could enter the game at no cost.
As a consequence , an open sourcing strategy would lead to your company going bankrupt (or almost bankrupt) and leaving behind a commoditised market.
A note on corporations abusing open source contributors
There are a few open sourcing strategies that don’t end with bankruptcy.
However, most of them are not true open source. In fact, most of them are just tricking open source contributors into doing free work for the benefit of a for-profit company.
Mostly, we distinguish:
- Open core: the hybrid model (Mattermost, Elastic…).
- Consulting services: the Red Hat model.
- Brand value: the Ubuntu model.
- Disruption tool: the Google model.
- Dual-licensing: the Meta (and Docker) model.
In my opinion, ‘open core’ is an insult to the open source ideology, it’s like a honey pot tricking users and contributors into your ecosystem. But then the value-adding features are close source. The worse kind is the reversed ‘close core (backend) open client (frontend)’, then you really are just exploiting free work for your own benefit. Unfortunately, this is an often necessary and a sometimes a quite smart commercial or marketing strategy.
Consulting services are a very smart and functional business model. It worked well for Red Hat for some time. The only (non-negligible) downside is that it doesn’t scale. It requires 1:1 hiring and therefore profits often can’t compete with close-source solutions.
Brand value is an interesting one. It’s basically implying that a fork (copy) of e.g. “Ubuntu” is worth nothing if you cannot name it “Ubuntu”. Brand valuation has three main downsides:
- It takes time and resources to build,
- It’s hard to quantify,
- And it’s worth nothing if you can’t leverage it (i.e. sell something at a higher price).
Using open source as a disruption tool is also a very interesting and clever one. Google utilised this strategy many times, for example with Android and Kubernetes, in order to disrupt markets where they were not the number one (and therefore, losing —as tech markets are ‘winner takes it all’ situations). This approach not directly profitable, but it’s a good strategy to get there. It’s also not directly abusing open source contributors; but it’s still arguably persuading workers to do free labor for an end that is essentially of benefit to you as a for-profit economic agent.
Finally, the Dual-licensing model is a quite new and interesting model. Meta utilised it with “LLaMa2” (although the open-source nature of models is discussable). The strategy consists of using a conditional Licence. If you’re a free rider but not making a profit, you can keep using it for free. However, if you start being profitable thanks to the use of the open-sourced product, then you fall into the proprietary part of the Licence and have to seek a commercial agreement.
Successful open source companies today are a combination of multiple of these commercialisation strategies.
I am a defender of the ‘open source should always be free’ church, and therefore I don’t consider Dual-licensing or Open core as true open source. Consulting services and Brand value are great strategies but are really hard to leverage and scale. And finally, the Disruption tool strategy is smart but doesn’t serve an immediately leverage-able end.
Open source can’t create value in a Capitalist economy
*Open source can’t create Value in a traditional Capitalist economy
By axiomatic definition, the open source ideology defines labor and Intellectual Property (IP) as being free (as in freedom). This is opposed to the Capitalism axioms explained before.
Therefore, Open Source and Capitalism are incompatible.
These principles, or rather Axioms, are like the Laws of Physics of a Capitalist Economy and of Open Source. One one side, that’s how Investors can make a Profit thanks to their Capital. On the other side, that’s why Open Source contributors are willing to work.
All these thoughts and ideas occupied my mind for quite some time. And I really couldn’t understand how to make sense of them and find a solution. Or at least one that didn’t involve global, coordinated, marxist-style regulations. Until I read the vision statement of DeSo.
What they were building there at DeSo is a decentralised social network leveraging “Influence” (ie, some kind of Brand value) effectively as Capital. You could now invest your Influence, trade someone else’s Influence, accumulate and bet on someone’s—or your own—future Influence.
In parallel, the fact that cryptos markets (DeFi) were able to (at least temporarily) move the traditional Global Economy (TradFi) was a Proof of Concept that building a new, decentralised, “web3”-style Economy could transform the Global System (interesting read on DeFi vs TradFi regulations).
Money, Time, and Influence as Capital (= Value)
If we start considering Time (=work), Influence, and Money as equivalent investment methodologies to build Capital, instead of production means, we have a shot at solving the unsolvable (“A capitalist is somebody who stakes what is for what could be”).
Capital is free. It belongs to everyone. The question is “who is able to leverage it, and who isn’t?” (topic for a later essay).
My principle is that:
- Knowledge shouldn’t be capitalised,
- Everyone should have access to capital,
- All investment should lead to shares.
Brand(t) = Time(t) x Money(t)
The only thing we need to do to solve the open source valuation problem is to create a new economy that sets Time (=Work), Money, and Brand (=Influence) as equivalent parameters of Value creation.
The equation of such system could be:
Brand(t) = Time(t) x Money(t).
Project investors (including investor-leaders, investor-contributors, and investor-consumers) would then compete in order to build the most valuable Brand on the market. They would do so by defining a governance, culture, making decisions and investments in order to create an identity (the Brand) that is the best at serving their consumers (=users).
As software is meant to go to trash (or—in more positive words—is never finished), this would equal to the projects able to attract the most contributions.
The gift of open competition
Open competition (= all projects must be open source) would guarantee the most fair, most innovative, most profitable (for society) race.
This new economy only addresses and solves the innovation market (Knowledge). The traditional market (TradFi) would still need to co-exist in order to support resource-centric businesses and other consulting (Partner-type of) businesses: goods and services.
A change in ideology would ideally mean that workers would eventually collaboratively own factories as they aren’t profitable to former investors anymore. Only freed human labor would then be able to get leveraged to create value in the form of knowledge.
Eventually, the only resources left to optimise in the traditional economy would be natural resources (energy, materials) and commoditised labor (=the one that will eventually be replaced by robotisation and automation).
As a consequence, this new economy would effectively leverage the traditional economy in order to optimise the use of natural resources and maximise innovation.
Disrupting the Capitalist economy
In this new economy, profit will still be possible and still be the incentive. It would however now mostly happen on the side of the new, open economy as traditional resource-centric businesses get commoditised. The profit incentive will reward investors (both traditional capitalists with money and new investor-contributors with work) in shares.
In addition, some profit would still be possible within the traditional economy. Human labor being the only non-commoditised source of value. Profitable businesses with differentiated competitive value coming from non-commoditised labor would still exist. For example, partner-type businesses: lawyer firms, investment funds, restaurants, etc.
Eventually, added value would come exclusively from human creativity.
Eventually, Humans as freed workers would educate more and more in order to collectively keep creating undifferentiated Value (i.e., be more creative and skilled workers).
(This post is part of the “Open Market” series)