Open source and the commoditization of software

What’s at stake?

Red Hat’s new business model may be helping its revenues in the short term, but is it in Red Hat’s best long term interest, not to mention the best interest of the Linux ecosystem as a whole, if Linux is owned by a single company, or if Linux fragments like UNIX did as Red Hat’s competitors follow it down the proprietary Linux path?

If Red Hat’s business model is wrong, then what is the right business model for Linux distribution vendors? In my view, the Dell model can be taken a step further than any of the Linux distributors have thought to take it. After all, what are open-source technologies but commodity software components, and what are Linux distributions but assemblers of those components into products the end customer finds useful?

Indeed, such an “assembler of commodity software components” business model might fully realize many of the benefits of Linux that the traditional, product-oriented business models of Linux distribution companies have failed to capture: flexibility and choice, without the substantial expertise and financial investment required to adapt a Linux distribution for its own purposes. What if a Linux distribution was a collection of piece-parts that could be mixed and matched to suit the needs of the company buying it rather than a one-size-fits-all, monolithic product like the Linux distributions of today?

As with new business models that have come before it, such an approach would open Linux to new markets, markets that are already using Linux but for whom today’s product-oriented business models are ill-suited: server appliance vendors, set-top box makers, and others to whom Linux is an invisible vehicle for driving their own products. In their world, Linux is a piece of infrastructure, not a product to be owned by Red Hat or otherwise.

Indeed, this is the model being employed by my company, Progeny. Our approach is to embrace the commoditizing effect Linux and open-source software have on the software industry rather than to fight it. Since every company needs a proprietary advantage of some kind, we’ve chosen to focus on building advantage through our processes, not technology, much as Dell did—in other words, how we leverage our expertise in distribution building to help other companies assemble commodity software components from disparate places into cohesive wholes, and to do so in a scalable and flexible way.

Beyond building a better business model around Linux, what’s at stake? I contend far more is at stake, for one simple reason: Linux needs to remain a commodity, as it is now a core piece of infrastructural technology at the heart of the computer industry. Indeed, Linux was enabled by the commodity nature of the last infrastructural technology to redefine the IT industry: the Internet.

In “IT Doesn’t Matter,” which appeared in the May 2003 edition of the Harvard Business Review, Nicholas Carr points out that infrastructural technologies “[offer] far more value when shared than when used in isolation.” What happens if Linux is decommoditized, and ends up being the proprietary product of a single company to serve its own purposes? What if the PC or the Internet had been decommoditized? Where would we be today?

Carr’s essay provides hope that there is money to be made in infrastructural technologies that have been fully commoditized, and that there’s no need to try to own those infrastructural technologies all to oneself:

… the picture may not be as bleak as it seems for vendors, at least those with the foresight and skill to adapt to the new environment. The importance of infrastructural technologies to the day-to-day operations of business means that they continue to absorb large amounts of corporate cash long after they have become commodities—indefinitely, in many cases. Virtually all companies today continue to spend heavily on electricity and phone service, for example, and many manufacturers continue to spend a lot on rail transport. Moreover, the standardized nature of infrastructural technologies often leads to the establishment of lucrative monopolies and oligopolies.

Carr’s essay also provides historical perspective on the commoditization process:

… infrastructural technologies often lead to broader market changes. […] A company that sees what’s coming can gain a step on myopic rivals. In the mid-1800s, when America started to lay down rail lines in earnest, it was already possible to transport goods over long distances—hundreds of steamships plied the country’s rivers. Businessmen probably assumed that rail transport would essentially follow the steamship model, with some incremental enhancements. In fact, the greater speed, capacity, and reach of the railroads fundamentally changed the structure of American industry.

In a commodity world, technologists need to think about innovating in their business models as much as (if not more than) innovating in their technology. Of course, it’s a natural trap for the technologist to think about technology alone, but technology is but a small part of the technology business. Look for your competition’s Achilles’ Heel, which more often than not is an outdated business model in a changing world, not technology. To attack your competition with technology alone is to charge the giants head on, and this approach is doomed to failure the vast majority of the time.

Businesses operating in a commodity world also need to build business models with the larger ecosystem in mind. It is tempting, once the incumbents have been overthrown through the powers of commoditization, to lapse into the same old proprietary lock-in strategies that served the former incumbents so well. In effect, though, this is decommoditizing the industry, “poisoning the well.” It is possible to build a successful business in a commodity market, as Dell and many others before it have shown, and in the long run, it is far better to ride the forces of commoditization than to fight them.