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The Economic value of
                 Free/Libre Open
                 Source Software



                                             Carlo Daffara
                         European Working Group on Libre Software
                                                    CloudWeavers

SfsConf 2012
The Economic value of
                 Free/Libre Open
                 Source Software
                    (for Europe)

                                             Carlo Daffara
                         European Working Group on Libre Software
                                                Conecta Research
SfsConf 2012
“The GPL effectively prevents profit-
making firms from using any of the
code since all derivative products must also be
distributed under the GPL license” (Evans, D.,
in “Government policy toward open source
software”, R.W.Hahn, editor, AEI-Brookings
JCRS)




SfsConf 2012
“[..] the aim of free software is not to enable a
healthy business on software but rather to
make it even impossible to make any
income on software as a commercial
produc t.”      (Thomas      Lutz,     Microsoft
representative at Tunis WSIS, 2005)




SfsConf 2012
“Open-source     software    is    deliberately
developed outside of market mechanisms... the
nonmarket coordination mechanism fails to
contribute to the creation of value in
development, as opposed to the commercial
software market. [It] does not generate profit,
income, jobs or taxes … In the end, the
developed software cannot be used to
generate profit.” (Kooths S., Lagenfurth M.
“Open Source-Software: An Economic
Assessment” University of Muenster, Muenster
Institute for Computational Economics)
SfsConf 2012
“[Open Source] ... suppresses quality
competition between OS firms and restricts
their output much as an agreement to suppress
competition on quality would. .. We find that
the first-best solution in our model is to tax
OS firms and grant tax breaks to
[proprietar y sw] firms .” (Engelhardt,
Maurer, 2010 Goldman School of Public
Policy)




SfsConf 2012
“Rail travel at high speed is not
possible because passengers, unable to
breathe, would die of asphyxia.” Dr. Dionysus
Lardner (1793-1859), Professor of Natural
Philosophy and Astronomy at University
College, London.


“Heavier-than-air flying machines are
impossible.” Lord Kelvin (1824-1907), ca.
1895, British mathematician and physicist


SfsConf 2012
Measuring value is complex. A bad way of
doing it: “...First we listed the major open
source products. Then we looked at the
commercial equivalents. Next we looked at the
average cost of both the open source products
and the commercial products, giving us a net
commercial cost. We then multiplied the net
cost of the commercial product by our open
source shipping estimates.” (Jim Johnson,
Standish group)



SfsConf 2012
Some groups measured the total revenues of
FLOSS firms; so Pierre Audoin Consultants
found a total market of 8B€ in 2008.
Unfortunately, HP alone made 2.5B$ in Linux-
related consulting in 2003, while IBM made
4.5B$ in OSS-related revenues in 2005 (as an
example, the OSS PBX market alone is 1.2B$
alone.)
In fact, the majority of FLOSS-related
revenues are not made by FLOSS companies at
all.
And the software market is not that easy to
define as well.
SfsConf 2012
SfsConf 2012
SfsConf 2012
This provides us with an overall IT spending estimate
for Europe: 492B€

approximately 24% is hardware

software and services market: 374B€

software market alone: 244B€



SfsConf 2012
How much FLOSS is inside the average
  codebase?




SfsConf 2012
SfsConf 2012
How much FLOSS is inside the average
  codebase?
● On     average,     30%    of    implemented
  functionalities is based on reused OSS code
  (Sojer M., Henkel J. “Code reuse in Open
  Source Software Development”)
● Gartner   reported that among the surveyed
  customers, 26% of the code deployed was
  Open Source
● The Koders survey in 2010 found that 44% of

  all code was Open Source


SfsConf 2012
● Black Duck analysis of large code projects
  (avg. 700MB of code): 22% is FLOSS, up to
  80% of new development is avoided through
  FLOSS
● “sampling continues to find that between 30%

  and 70% of code submitted is .. in the form of
  OSS components and commercial libraries”
  (Veracode, “State of Software Security Report
  volume 3”, 2011)
● Sampling   shows that FLOSS use increases
  with time → average usage for last 5 years:
  35%

SfsConf 2012
SfsConf 2012
What value does FLOSS reuse brings in?
(Abts, Boehm, Bailey Clark “Empirical
observations on COTS software integration
effort based on the initial COCOTS calibration
database”)




SfsConf 2012
35% of code reuse provide a reduction in
actual costs of 31%: 75B€/year




SfsConf 2012
“Figures suppor t the idea that FOSS
solu tions are more innovative than
proprietar y ones: indeed, in all the three
dimensions, experts’ evaluations are higher for
FOSS than for proprietary software. … FOSS
software not only show different levels of
innovativity, but, as far as, new to the world
products are concerned, they are also shaped
by different innovation processes: radical
innovation in the FOSS vs. incremental
innovation in proprietary field.” (Rossi,
Lorenzi, “Innovativeness of Free/Open Source
solutions”)
SfsConf 2012
"The growing rate, or the number of functions
added, was greater in the open source projects
than in the closed source projects. This
indicates that the OSS approach may be able
to provide more features over time than by
using the closed source approach. (Paulson,
Succi, Eberlein “An Empirical Study of Open
Source and Closed Source Software
Products”)




SfsConf 2012
"Findings indicate that community Open Source
applications show a slower growth of
maintenance effort over time.” (Capra,
Francalanci, Merlo “The Economics of
Community Open Source Software Projects:
An Empirical Analysis of Maintenance
Effort”)

“The fourth law of software evolution,
implying constant incremental effort, might be
violated (Koch “Evolution of Open Source
Software     Systems    –   A     Large-Scale
Investigation”)
SfsConf 2012
(Mohagheghi, Conradi, Killi and Schwarz “An
Empirical Study of Software Reuse vs. Defect-
Density and Stability”)
SfsConf 2012
Project failure data:
● Jones :“the cancellation rate for applications

  in the 10,000 function point size range is
  about 31%. The average cost for these
  cancelled projects is about $35,000,000”
● Standish group, 2009: 24% of projects are

  canceled before deployment
● Sauer & Cuthbertson, in an Oxford university

  survey of 2003: 10%
● Dynamic    Markets Limited: 25%+ of all
  software and services projects are canceled
  before completion

SfsConf 2012
Project success data:
Size              People   Time   success rate


< 750K$           6        6      55%

750K to 1.5M      12       9      33%

1.5M to 3M        25       12     25%

3 to 6            40       18     15%

6 to 10           250+     24+    8%

>10M              500+     36+    0%


SfsConf 2012
By reducing effort, staffing and duration the
35% code reuse introduces a reduction on
these parameters of 10% → a reduction in the
failure rate of 2% → 4.9B€/year




SfsConf 2012
“While IBM initially contributed software that was
valued at 40M$, external contributors to the project
created software representing a value of roughly
1.7B$ over the examined period.” (Spaeth,
Stuermer, von Krogh “Enabling knowledge creation
through outsiders: towards a push model of open
innovation”)




SfsConf 2012
● OSS maintenance effort is substantially lower
  than the average (Capra E., Francalanci C.,
  Merlo F., “The Economics of Community Open
  Source Software Projects: An Empirical
  Analysis of Maintenance Effort”)
● Using   a model by Jones and Bonsignour,
  traditional code does have a cost of 2000$ per
  function point, while code shared or developed
  using best practices costs 1200$ per FP
● the  shared code in a reused OSS project
  introduces an additional reduction in
  maintenance and dev. effort of 14%

SfsConf 2012
14%     reduction   in maintenance   and
development costs → 34B€/year




SfsConf 2012
Deshpande, Riehle “The Total Growth of Open Source”
SfsConf 2012
Source: Dirk Riehle, “The open source big bang”


SfsConf 2012
Total value of OSS reuse per year: 114B€




SfsConf 2012
● What is the second order effect?
● We   know that most of these savings are
  reinvested:




SfsConf 2012
SfsConf 2012
●   “The principal results from this econometric
    analysis are: 1) the measured output
    contribution of computerization in the short-
    run are approximately equal to computer
    capital costs, 2) the measured long-run
    contributions     of    computerization      are
    significantly above computer capital costs (a
    factor of five or more in point estimates), and
    3) that the estimated contributions steadily
    increase as we move from short to long
    differences. (“Computing productivity: firm-level
    evidence”, Erik Brynjolfsson, Lorin M. Hitt; Review of
    Economics and Statistics, November, 2003 )

SfsConf 2012
With a 3 years investment discount period,
model based on linear growth in efficiency due
to reinvestment → 342B€/year




SfsConf 2012
Revenue per employee rating
    (FLOSS firms vs. Industry average)
    Computer Equipment                           182%
    Software consultancy and supply              427%
    Services (excl. software cons. and supply)   211%
    Manufacturing (excl. computer equip.)        136%
    Other                                        204%
    ALL:                                         221%
    Source: MERIT




SfsConf 2012
Revenue ratio: FLOSS firms vs. Industry average
    (FLOSS firms vs. Industry average)
    Computer Equipment                         1115%
    Software consultancy and supply             262%
    Services (excl. software cons. and supply)  177%
    Manufacturing (excl. computer equip.)      4501%
    Other                                      1045%
    ALL:                                        758%
    Source: MERIT




SfsConf 2012
SfsConf 2012
Source: Venice International University TEDIS study


SfsConf 2012
DrupalCon 2010, Copenhagen


SfsConf 2012
● Does the increase in efficiency reduces local
  revenues for incumbents?
● For commercial products (that is, proprietary

  products that embed OSS): the producer
  reduces its production costs with no other
  impact on the business itself, so it can either
  increase its margins or pass some of the
  savings to the customer.
● For internally developed products, the savings

  are direct, with no other effects on the external
  market
● OSS reinvestment are mainly local



SfsConf 2012
With proprietary software, 86% of SW
    spending goes outside of Europe-and reduces
    local company margins
              Ecosystem Revenues compared with MS revenues by partner type
            Product-         Services-                                                    Retail Logistics
                                                                Logistics-Oriented
            Oriented         Oriented       Value-Added Partner                         Partner (e.g., Large
Microsoft                                                       Partner (e.g., Large
          Partner (e.g.,   Partner (e.g.,        (e.g., VAR)                             Retail Electronics
                                                                Account Reseller)
            ISV, IHV)       SI, Hoster)                                                        Store)
   $1          $4.09          $2.44              $2.30                $2.70                    $2.93
    1           24%           40.9%              43.5%                 37%                     34%
Source: Partner Opportunity in the Microsoft Ecosystem, IDC 2011; analysis by Daffara




   SfsConf 2012
● Still missing in the model: “pull” adoption
● More difficult to assess – huge variability in

  outcomes
● In desktops, with successful migrations, TCO

  reduction ranges from 10% to 25% (typical)
  up to 50% (for high-uniformity environments)
● Movement      towards web-apps is changing
  substantially the economics of moving from/to
  a different platform, reducing the transition
  cost → requires a move away from “pure
  substitution” to “reengineering for the future”


SfsConf 2012
From: "The future of computing: indispensable or unsustainable?"
     Royal Academy of Engineering, 2011
SfsConf 2012
SfsConf 2012
●   Innovation from end-users:




SfsConf 2012
● Non-code contributions: value deriving from
  anything that is not directly compilable
● “[non-code]      outside     contributions  are
  signicant. Open Cascade estimates that they
  represent about 20 % of the value of the
  software. Matra Datavision had to inject
  approximately 2M€ per year to continue to
  develop its tools. In 2000, the company limited
  the costs to 1.2 million.” (Jullien, Clement-
  Fontaine, Dalle “New Economic Models, New
  Software Industry Economy”)


SfsConf 2012
Economic value of open source
Thanks!

                    Carlo Daffara

                    cdaffara@conecta.it
               http://carlodaffara.conecta.it
                     Twitter: @cdaffara




SfsConf 2012
SfsConf 2012
“A study carried out between January and
June 2010 shows that despite the desired
affirmative action for open source products, in
almos t half (47.5%) of the tenders
there is s till a preference for closed
source vendors or products. This
preference inevitably results in not giving
vendors of FLOSS a fair chance to win the bid.
(Mathieu Paapst, Center for Law and IT,
University of Groningen, the Netherlands)



SfsConf 2012
● The vendor must employ MS certified
  employees.
● Asking for an operating system to be used

  together with the Microsoft Campus
  Agreement.
● If your bid is open source you should give extra

  guarantees concerning the stability of the open
  source community.
● Not allowing “zero-price” licenses.

● Demanding that offered applications must be

  certified by Microsoft, are Oracle 10 compliant
  and using the official Microsoft style guide as
  much as possible.
SfsConf 2012
SfsConf 2012
SfsConf 2012

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Economic value of open source

  • 1. The Economic value of Free/Libre Open Source Software Carlo Daffara European Working Group on Libre Software CloudWeavers SfsConf 2012
  • 2. The Economic value of Free/Libre Open Source Software (for Europe) Carlo Daffara European Working Group on Libre Software Conecta Research SfsConf 2012
  • 3. “The GPL effectively prevents profit- making firms from using any of the code since all derivative products must also be distributed under the GPL license” (Evans, D., in “Government policy toward open source software”, R.W.Hahn, editor, AEI-Brookings JCRS) SfsConf 2012
  • 4. “[..] the aim of free software is not to enable a healthy business on software but rather to make it even impossible to make any income on software as a commercial produc t.” (Thomas Lutz, Microsoft representative at Tunis WSIS, 2005) SfsConf 2012
  • 5. “Open-source software is deliberately developed outside of market mechanisms... the nonmarket coordination mechanism fails to contribute to the creation of value in development, as opposed to the commercial software market. [It] does not generate profit, income, jobs or taxes … In the end, the developed software cannot be used to generate profit.” (Kooths S., Lagenfurth M. “Open Source-Software: An Economic Assessment” University of Muenster, Muenster Institute for Computational Economics) SfsConf 2012
  • 6. “[Open Source] ... suppresses quality competition between OS firms and restricts their output much as an agreement to suppress competition on quality would. .. We find that the first-best solution in our model is to tax OS firms and grant tax breaks to [proprietar y sw] firms .” (Engelhardt, Maurer, 2010 Goldman School of Public Policy) SfsConf 2012
  • 7. “Rail travel at high speed is not possible because passengers, unable to breathe, would die of asphyxia.” Dr. Dionysus Lardner (1793-1859), Professor of Natural Philosophy and Astronomy at University College, London. “Heavier-than-air flying machines are impossible.” Lord Kelvin (1824-1907), ca. 1895, British mathematician and physicist SfsConf 2012
  • 8. Measuring value is complex. A bad way of doing it: “...First we listed the major open source products. Then we looked at the commercial equivalents. Next we looked at the average cost of both the open source products and the commercial products, giving us a net commercial cost. We then multiplied the net cost of the commercial product by our open source shipping estimates.” (Jim Johnson, Standish group) SfsConf 2012
  • 9. Some groups measured the total revenues of FLOSS firms; so Pierre Audoin Consultants found a total market of 8B€ in 2008. Unfortunately, HP alone made 2.5B$ in Linux- related consulting in 2003, while IBM made 4.5B$ in OSS-related revenues in 2005 (as an example, the OSS PBX market alone is 1.2B$ alone.) In fact, the majority of FLOSS-related revenues are not made by FLOSS companies at all. And the software market is not that easy to define as well. SfsConf 2012
  • 12. This provides us with an overall IT spending estimate for Europe: 492B€ approximately 24% is hardware software and services market: 374B€ software market alone: 244B€ SfsConf 2012
  • 13. How much FLOSS is inside the average codebase? SfsConf 2012
  • 15. How much FLOSS is inside the average codebase? ● On average, 30% of implemented functionalities is based on reused OSS code (Sojer M., Henkel J. “Code reuse in Open Source Software Development”) ● Gartner reported that among the surveyed customers, 26% of the code deployed was Open Source ● The Koders survey in 2010 found that 44% of all code was Open Source SfsConf 2012
  • 16. ● Black Duck analysis of large code projects (avg. 700MB of code): 22% is FLOSS, up to 80% of new development is avoided through FLOSS ● “sampling continues to find that between 30% and 70% of code submitted is .. in the form of OSS components and commercial libraries” (Veracode, “State of Software Security Report volume 3”, 2011) ● Sampling shows that FLOSS use increases with time → average usage for last 5 years: 35% SfsConf 2012
  • 18. What value does FLOSS reuse brings in? (Abts, Boehm, Bailey Clark “Empirical observations on COTS software integration effort based on the initial COCOTS calibration database”) SfsConf 2012
  • 19. 35% of code reuse provide a reduction in actual costs of 31%: 75B€/year SfsConf 2012
  • 20. “Figures suppor t the idea that FOSS solu tions are more innovative than proprietar y ones: indeed, in all the three dimensions, experts’ evaluations are higher for FOSS than for proprietary software. … FOSS software not only show different levels of innovativity, but, as far as, new to the world products are concerned, they are also shaped by different innovation processes: radical innovation in the FOSS vs. incremental innovation in proprietary field.” (Rossi, Lorenzi, “Innovativeness of Free/Open Source solutions”) SfsConf 2012
  • 21. "The growing rate, or the number of functions added, was greater in the open source projects than in the closed source projects. This indicates that the OSS approach may be able to provide more features over time than by using the closed source approach. (Paulson, Succi, Eberlein “An Empirical Study of Open Source and Closed Source Software Products”) SfsConf 2012
  • 22. "Findings indicate that community Open Source applications show a slower growth of maintenance effort over time.” (Capra, Francalanci, Merlo “The Economics of Community Open Source Software Projects: An Empirical Analysis of Maintenance Effort”) “The fourth law of software evolution, implying constant incremental effort, might be violated (Koch “Evolution of Open Source Software Systems – A Large-Scale Investigation”) SfsConf 2012
  • 23. (Mohagheghi, Conradi, Killi and Schwarz “An Empirical Study of Software Reuse vs. Defect- Density and Stability”) SfsConf 2012
  • 24. Project failure data: ● Jones :“the cancellation rate for applications in the 10,000 function point size range is about 31%. The average cost for these cancelled projects is about $35,000,000” ● Standish group, 2009: 24% of projects are canceled before deployment ● Sauer & Cuthbertson, in an Oxford university survey of 2003: 10% ● Dynamic Markets Limited: 25%+ of all software and services projects are canceled before completion SfsConf 2012
  • 25. Project success data: Size People Time success rate < 750K$ 6 6 55% 750K to 1.5M 12 9 33% 1.5M to 3M 25 12 25% 3 to 6 40 18 15% 6 to 10 250+ 24+ 8% >10M 500+ 36+ 0% SfsConf 2012
  • 26. By reducing effort, staffing and duration the 35% code reuse introduces a reduction on these parameters of 10% → a reduction in the failure rate of 2% → 4.9B€/year SfsConf 2012
  • 27. “While IBM initially contributed software that was valued at 40M$, external contributors to the project created software representing a value of roughly 1.7B$ over the examined period.” (Spaeth, Stuermer, von Krogh “Enabling knowledge creation through outsiders: towards a push model of open innovation”) SfsConf 2012
  • 28. ● OSS maintenance effort is substantially lower than the average (Capra E., Francalanci C., Merlo F., “The Economics of Community Open Source Software Projects: An Empirical Analysis of Maintenance Effort”) ● Using a model by Jones and Bonsignour, traditional code does have a cost of 2000$ per function point, while code shared or developed using best practices costs 1200$ per FP ● the shared code in a reused OSS project introduces an additional reduction in maintenance and dev. effort of 14% SfsConf 2012
  • 29. 14% reduction in maintenance and development costs → 34B€/year SfsConf 2012
  • 30. Deshpande, Riehle “The Total Growth of Open Source” SfsConf 2012
  • 31. Source: Dirk Riehle, “The open source big bang” SfsConf 2012
  • 32. Total value of OSS reuse per year: 114B€ SfsConf 2012
  • 33. ● What is the second order effect? ● We know that most of these savings are reinvested: SfsConf 2012
  • 35. “The principal results from this econometric analysis are: 1) the measured output contribution of computerization in the short- run are approximately equal to computer capital costs, 2) the measured long-run contributions of computerization are significantly above computer capital costs (a factor of five or more in point estimates), and 3) that the estimated contributions steadily increase as we move from short to long differences. (“Computing productivity: firm-level evidence”, Erik Brynjolfsson, Lorin M. Hitt; Review of Economics and Statistics, November, 2003 ) SfsConf 2012
  • 36. With a 3 years investment discount period, model based on linear growth in efficiency due to reinvestment → 342B€/year SfsConf 2012
  • 37. Revenue per employee rating (FLOSS firms vs. Industry average) Computer Equipment 182% Software consultancy and supply 427% Services (excl. software cons. and supply) 211% Manufacturing (excl. computer equip.) 136% Other 204% ALL: 221% Source: MERIT SfsConf 2012
  • 38. Revenue ratio: FLOSS firms vs. Industry average (FLOSS firms vs. Industry average) Computer Equipment 1115% Software consultancy and supply 262% Services (excl. software cons. and supply) 177% Manufacturing (excl. computer equip.) 4501% Other 1045% ALL: 758% Source: MERIT SfsConf 2012
  • 40. Source: Venice International University TEDIS study SfsConf 2012
  • 42. ● Does the increase in efficiency reduces local revenues for incumbents? ● For commercial products (that is, proprietary products that embed OSS): the producer reduces its production costs with no other impact on the business itself, so it can either increase its margins or pass some of the savings to the customer. ● For internally developed products, the savings are direct, with no other effects on the external market ● OSS reinvestment are mainly local SfsConf 2012
  • 43. With proprietary software, 86% of SW spending goes outside of Europe-and reduces local company margins Ecosystem Revenues compared with MS revenues by partner type Product- Services- Retail Logistics Logistics-Oriented Oriented Oriented Value-Added Partner Partner (e.g., Large Microsoft Partner (e.g., Large Partner (e.g., Partner (e.g., (e.g., VAR) Retail Electronics Account Reseller) ISV, IHV) SI, Hoster) Store) $1 $4.09 $2.44 $2.30 $2.70 $2.93 1 24% 40.9% 43.5% 37% 34% Source: Partner Opportunity in the Microsoft Ecosystem, IDC 2011; analysis by Daffara SfsConf 2012
  • 44. ● Still missing in the model: “pull” adoption ● More difficult to assess – huge variability in outcomes ● In desktops, with successful migrations, TCO reduction ranges from 10% to 25% (typical) up to 50% (for high-uniformity environments) ● Movement towards web-apps is changing substantially the economics of moving from/to a different platform, reducing the transition cost → requires a move away from “pure substitution” to “reengineering for the future” SfsConf 2012
  • 45. From: "The future of computing: indispensable or unsustainable?" Royal Academy of Engineering, 2011 SfsConf 2012
  • 47. Innovation from end-users: SfsConf 2012
  • 48. ● Non-code contributions: value deriving from anything that is not directly compilable ● “[non-code] outside contributions are signicant. Open Cascade estimates that they represent about 20 % of the value of the software. Matra Datavision had to inject approximately 2M€ per year to continue to develop its tools. In 2000, the company limited the costs to 1.2 million.” (Jullien, Clement- Fontaine, Dalle “New Economic Models, New Software Industry Economy”) SfsConf 2012
  • 50. Thanks! Carlo Daffara cdaffara@conecta.it http://carlodaffara.conecta.it Twitter: @cdaffara SfsConf 2012
  • 52. “A study carried out between January and June 2010 shows that despite the desired affirmative action for open source products, in almos t half (47.5%) of the tenders there is s till a preference for closed source vendors or products. This preference inevitably results in not giving vendors of FLOSS a fair chance to win the bid. (Mathieu Paapst, Center for Law and IT, University of Groningen, the Netherlands) SfsConf 2012
  • 53. ● The vendor must employ MS certified employees. ● Asking for an operating system to be used together with the Microsoft Campus Agreement. ● If your bid is open source you should give extra guarantees concerning the stability of the open source community. ● Not allowing “zero-price” licenses. ● Demanding that offered applications must be certified by Microsoft, are Oracle 10 compliant and using the official Microsoft style guide as much as possible. SfsConf 2012