Open source, like digital media, doesn't suck money out of hitherto profitable industries. Instead, the opening up of software and information simply changes where the money gets made.
This is obvious to the Googles of the world. It's probably equally obvious to the Microsofts of the world. The difference is that the latter can see the train coming but is powerless to stop it, and the former is driving the train.
The evidence for this is increasingly clear and is driven by a shift in how content is sold and consumed. The problem is neatly summarized by Google CEO Eric Schmidt in a Wall Street Journal op-ed piece directed at the newspaper industry:
[T]he Internet has broken down the entire news package with articles read individually, reached from a blog or search engine, and abandoned if there is no good reason to hang around once the story is finished. It's what we have come to call internally the atomic unit of consumption.
That newspaper was "the package," but is increasingly too slow and out-of-sync with how people prefer to discover news content. New packaging is rising, including Google News, that will shift who makes money on news content.
Reporters will still get paid. They'll just have a new employer on their payroll check. Maybe it will be Google.
Think about what is happening in music. I could download New Order's "Regret" for free using LimeWire, but I bought it on iTunes because of the "packaging" which makes my experience easy, high-quality, and legal.
Still, the primary drivers are ease and quality.
Such packaging is worth a lot of money--and to an entirely new breed of vendor--as a quick look at Google's latest income statement suggests.
It's happening in software, too, particularly in open-source software. Red Hat is an example of a company that does a great job of turning software license into an ongoing service contract that enterprises buy. It does this by packaging the power of others' development in the form of a subscription, as Red Hat CEO Jim Whitehurst recently highlighted.
But Red Hat is just Open Source 1.5. Open Source 2.0 looks more like Google or IBM. For every dollar Red Hat makes selling subscriptions to use open-source software like Linux and JBoss, both Google and IBM make multiples of that dollar using open-source software to sell something else, something they've packaged in hardware or Web-based services.
The hardware is running open source. The services are based on open source. The money is made in the packaging of open source.
... Read MoreOpen source hasn't traditionally been thought of as an innovative force, but based on suggestions that the media industry is borrowing its leading business model, perhaps open source is at least the sexiest nun in the convent.
Whether you're selling software or newspapers, it's tough to get paid in the digital age. This is due, in part, to shifting value.
As Arnon Mishkin, a media consultant with Mitchell Madison Group, suggests, "The vast majority of the value [in news media] gets captured by aggregators linking and scraping rather than by the news organizations that get linked and scraped." According to Mishkin, this sets up an untenable situation where the Googles of the world get rich on the work of organizations like The New York Times...which ultimately can't afford to be "scraped" anymore.
Rather than rage against the digital machine, however, some organizations are fighting back, and doing so with one of the open-source industry's preferred tools: open core.
The Financial Times, for example, is looking for ways to balance free use of its news assets while charging for premium content through micropayments (for individual articles) and subscriptions. The idea is to give away the core of its product to casual readers and charge for more "professional" interest.
It's Zimbra's business model, but for newspapers.
This is the right approach to digital commoditization, rather than the sue-them-until-they-pay approach that the music industry has taken (and which the U.S. Department of Justice appears to condone). Users of digital goods, as Linus Torvalds will tell you, are not parasites or thieves: they're customers waiting to be converted.
The Open Core approach is working very well for the companies that employ it (Disclosure: Alfresco, my employer, increasingly uses this model), and sees various permutations even outside digital goods. The airline industry, for example, is being turned on its head by the discount carriers, which have discovered all sorts of innovative ways to make big business on low prices.
If there's sufficient value, users can be converted to customers. The question is 'how?' Open Core, with its emphasis on both adoption and monetization, seems to offer a compelling answer, whether you're an open-source project or a global media brand.
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Just as Amazon and Google are obliterating profit margins for old-school publishers, so, too, is open source putting the squeeze on them, whether in cloud computing or in search or...you name it. As the world digitizes, there's a mad rush to commoditize everyone else's business. This is good for consumers (low prices!) but not so good for vendors (low margins!).
The problem (and promise) of digitization is, of course, "free." Everyone loves to pay "free," but few really enjoy selling it. Or competing with it.
As Bill Gurley suggests: "The key question for anyone in business is, 'Can someone do what you do for free?' If the answer is 'yes' you have a problem." In a digital world, that "problem" is wreaking havoc on an increasing array of industries.
The problem, however, isn't "free.'" It's that old businesses persist in trying to charge for goods that others give away.
Twitter, for example, may not be making much money from its service, but a host of companies are starting to derive considerable cash from the sale of ancillary software or services, as TechCrunch points out.
Or take the media industry. As Andrew Savikas persuasively argues, media continues to think it's a content business, while the world believes it's a services business.
JP Rangaswami illustrates why:
What if the troglodytes finally began to realise that customers were scarce and digital music was abundant? What if they finally began to realise that downloads were an excellent way to advertise scarce things like concerts and physical memorabilia, as Prince figured out?
And what if the customers have given up and moved on, from the download to the stream?
It was never about owning content. It was always about listening to music.
It was never about product. It was always about service.
The customer is the scarcity.
That scarcity only appears to grow as digital goods proliferate. So much content seeking audience with comparatively few consumers. Something has to give.
That something is, first of all, old business models premised on selling an abundantly available good as if it were scarce. The real model is to foster abundance while selling the scarcity that naturally accompanies it. Google gives away search so that it can help you narrow that search with ads; Red Hat encourages open-source development so that it can boil down that teeming mass of uncertainty to a certified, stable build of Linux; and so on.
Some in the software world don't get this. Microsoft CEO Steve Ballmer can repeat ad infinitum that "We just keep coming and coming and coming" with the same strategy, the same software, the same everything.
But eventually it won't, because even Microsoft's bank balance and "Tenacious. Tenacious. Tenacious" approach can't withstand a perennial battle with 'free' (or enterprise customers' apparent indifference to more of the same). Not unless it can re-learn how to make 'free' work for it, as it has with SharePoint.
The same is true for the media industries as well as new-school software companies like Google. Today's profit center is almost certainly going to be given away by one's competitor.
That's why creative destruction must be creative to pay off. It's what drives innovation. No one is entitled to its business model forever, for which consumers should be very, very grateful.
Follow me on Twitter @mjasay.
Even as the decline in DVD sales--both in the U.S. and abroad--has accelerated since 2006, DVD rentals through services such as Netflix (adding 25 percent more customers since 2008) and Redbox (adding 500 machines per month) have been booming.
The reason, as The Economist surmises, may be a shifting view on how consumers prefer to consume entertainment:
The real worry (for the movie industry), then, is not that people are abandoning DVDs but that they are abandoning the notion of owning them.
This is perhaps exacerbated by an industry that can't seem to make up its mind by what it means by ownership, as Ogilvy Group U.K.'s Rory Sutherland writes in The Spectator:
(The) piracy debate is far from one-sided. The very same record industry which today bleats on about intellectual property seemed conveniently blind to the concept back in the early 1990s when they charged us 19 pounds (about $31) for every CD they reissued--even when we already owned the very same album on vinyl....
The BBC often commits the same offense. Why should I pay full price for a DVD boxed set of "The Office" when I have already paid for the series through my license fee? Either the value lies in the physical packaging or in the content itself. Publishers try to charge for both; to have their cake and sell it. This is questionable.
Indeed, it is. Whether we're moving to a rental market or finding new ways to apply ownership to digital goods through digital rights management (DRM) and other means, those industries that sell digital content (movies, books, news, software, music, etc.) need to get their story straight. Is the value in the content, or is it in the packaging?
For Apple, it's both. Apple has long insisted that consumers prefer to own rather than rent, and it has sold more than 6 billion songs through its iTunes Store to prove it. But arguably, the value in Apple is in its distribution service (iTunes), more than the bits and bytes of the songs themselves. I can download Bob Marley for free, but I elect to buy through iTunes for a fee. The service justifies the price.
In software, it's increasingly packaging and ancillary services that drive purchasing because the "content" (i.e,. the software) is a free download. That packaging, like Apple's iTunes, is worthless without the content, but together, they're a good deal.
Is this the future?
Trent Reznor seems to think so. You?
Follow me on Twitter @mjasay.
As the Internet dismantles one business after another, it's surprising how fungible the responses to the Web have become.
Reading a recent Economist description of the changing newspaper business, for example, I was surprised by how much its transformation mirrors the software business. The Economist suggests a change to the economics of news businesses:
(T)he plight of the news business does not presage the end of news. As large branches of the industry wither, new shoots are rising. The result is a business that is smaller and less profitable, but also more efficient and innovative.
This is almost certainly what open-source software is doing to the traditional develop-a-product-and-license-a-million-copies proprietary software business. Open source is not a monastic pledge to poverty; instead, it's an alternative way to wring profits from a bloated industry that has gotten away with monopoly rents for far too long.
Intriguingly, though, even the business models that appear to be working for News 2.0 are the very same models being deployed by budding open-source software companies. The Wall Street Journal's bifurcated content model sounds suspiciously like open-source software's Open Core model and our attempts to create hybrid-source business models:
The Wall Street Journal takes a shrewd route to a similar destination. Rather than charging certain types of user, it charges for certain types of news. Earlier this week, it offered for nothing a story about swine flu, a review of the new "Star Trek" film and a report on looming cuts at car dealerships. It charged for pieces on Cigna Corporation's pension plan, Lockheed Martin's quarterly lobbying expenditures and a lawsuit against a bottling company which alleges that a board meeting was held improperly. In short, the fun articles are free. The dry, obscure stuff costs money.
The open-source analog is Zimbra giving away its standard e-mail software but charging for the "boring" (but necessary to enterprise roll-outs) bits like multi-domain support and Outlook/MAPI sync.
This is why I often talk about the entertainment industry, newspapers, etc. in the midst of an open-source software column.
The solution to the music industry's P2P woes should provide significant insight into the business models that will fuel open-source software for the decades to come. The best models for open-source software will almost certainly suggest clues for monetizing Twitter, online video, and more.
Indeed, Twitter's founders on Tuesday told CNET that they're focused on building a great product first, and fixating on profits second, which sounds a lot like Red Hat's model over the past few years of growing revenue slowly, but customer value quickly.
We're all in this Internet thing together.
Follow me on Twitter @mjasay.
I was listening to MGMT's "Kids" today on iTunes, and by the end of the song I found that I had shelled out roughly $6 for a few more songs by Arcade Fire, Sonic Youth, Band of Horses, and MGMT.
All of those songs are available for $0.00 on LimeWire, which I have installed on my computer, but which I haven't used in at least a year. I haven't needed to. Everything I want to buy is a click away and, better yet, as happened Monday, Apple keeps helping me find more things to buy with its brilliant Genius service.
It used to be that I'd download music without paying. I didn't want to steal the songs--I simply didn't want to have to go to a CD store to buy the songs that I knew I could be listening to right now. Making customers wait unnecessarily doesn't pay, as The Guardian recently pointed out.
Dave Kusek points to a number of reasons consumers happily pay for otherwise free products: authenticity and immediacy are two.
Software, music, movies, and other digital goods each require new business models, models that assume free transfer of bits and charge for other services that are not easily replicated.
For instance, in open-source software, Red Hat's business model depends upon certification of a closed, Red Hat Enterprise Linux binary, but doubly so on its Red Hat Network that delivers patches and other updates to the software.
Somewhat similarly, Google's depends upon value-added services (search, news, etc.) that aren't related to the underlying open-source software at all.
Free (as in liberty) software has become secondary, in other words, to the generally non-free (as in liberty) services that run on top of it. Tim O'Reilly was right: we truly are in the land of Open Sources 2.0 or, if you will, the post-open source world.
Follow me on Twitter @mjasay.
Ars Technica has the dirt on an admission from Vivendi CEO Jean-Bernard Levy: digital music downloads might not be evil, after all.
Just in case you don't know, Universal Music Group--one of the Big Four record labels--is a wholly owned subsidiary of Vivendi. So this is a big deal.
As Ars Technica reports, Universal's music business is up 3 percent, halting a long-term slide toward oblivion:
Digital, of course, is the big driver of better economic performance. At Warner, for instance, it made up 20 percent of total revenues in the second quarter and generated 39 percent more income that it had a year before. Universal notes that its growth is fueled, in part, by "the momentum of digital sales growth."
Imagine that. Studies have shown that peer-to-peer downloaders tend to pay more for music, but I think the larger trend is that many of us simply want easy ways to consume digital goods and that forcing us into an offline purchase was a losing strategy.
Apple has made it easy to buy music online and has an 85 percent market share as thanks.
Clay Shirky, a new media professor at New York University, recently noted that the music industry is the "skull on a pikestaff as a warning to others about how not to deal with the Internet." Finally, however, things may be changing.
The music industry now needs to continue its experimentation with digital downloads, making it ever easier to discover and consume online media. That's the future.
TechCrunch's post mortem on Yahoo! is a bit overdone, but for me it begs an important question: Is it possible to resurrect a failing technology company?
Look at IBM, and you'd say "Yes." IBM had been on a serious decline, only to be revived by Lou Gerstner. Or how about Apple, which has gone from also-ran to industry leader in ten years.
But there are precious few IBM and Apple stories to tell. Digital? SGI? And so on. There are far more technology companies who rose, plateau'd, and then faded into obsolescence or bankruptcy.
It's hard to recover from a dying brand, even when the money continues to pour in through maintenance contracts.
I'm hopeful that Yahoo! will revive and thrive again. Ditto for Sun and Novell, both of which have reignited interest in their brands through open source.
Is there something these companies should be doing to "ensure" success? Apple's resurrection largely came because of one grand innovation: iMac. IBM's...? Skillful work with IBM's financials to boost the image of the company, among other things. Is there a lesson in this for companies like CA who want to burnish their brands to shine again?
If one ever had to come up with an award for "Clueless Industry of the Millennium," the music industry would win by a landslide. What with the US' RIAA suing homeless people and now the UK's Music Business Group attempting to tax iPods, it's shocking that these jokers get paid at all. It's like Cirque de Soleil. Without the Soleil.
The MBG, conveniently overlooking decades of vinyl-to-cassette personal copying, declares:
We acknowledge that consumers clearly want to format shift and also place enormous value on the transferability of music. Music fans clearly deserve legal clarity in this area as well as the freedom to enjoy any music they have legitimately obtained.
... Read More
The music industry seems to be taking one step forward, and then promptly taking one thousand steps backward. In Universal Music Group v. Augusto, Universal Music Group (UMG) is suing someone for putting its promotional CDs for sale on eBay, seriously altering the standard view of what First Sale doctrine means.
At issue here is who owns the promo CDs. Universal argues strenuously that it never transferred ownership when it sent them out and that the discs are merely "licensed" to those who receive them. Each disc includes text that makes clear that "this CD is the property of the record company and is licensed to the intended recipient for personal use only." According to Universal...
... Read More
