The recent acquisition of Sun by Oracle reignited a thought that had been going through my mind for a long time. It simply boils down to whether a large corporate can make money off open source or open platforms. Now quite obviously it in itself is not a truism. But the point remains that large corporates which have become large in the conventional economy do find the going a little difficult when trying to make money off open software.

The way I perceived it, Sun was going through similar difficulties. The hardware business was delivering dwindling margins post the dot com bust, and the software business was under threat from upstarts such as Linux which offered a substantially similar software stack at near zero licensing costs. One of the crown jewels asset Sun had in its stable was Java. And while it was (and continues to be) a wonderful asset, it just was incredibly difficult to make money off it. Now java hasn’t been open source exactly for most of its life, but it was a sufficiently open stack nevertheless to cause the same difficulties that open source software would in terms of monetisation.

There’s an excellent blog post written a year and half ago by Michel Bauwens, Can the experience economy be capitalist? which does refer to some of the underlying issues. I suggest you do read it, but would like to quote a few points from it below.

First of all, in the field of the immaterial, we are no longer dealing with scarce goods, but with marginal reproduction costs and non-rival goods. With such goods, sharing does not diminish the enjoyment of the good, since all parties retain their ability to use them. The emergence of peer production shows a new form of creating value, that is in fundamental aspects “outside the market”. Typically, in commons-based production we have a common pool, accessible to everyone (Linux, Wikipedia), around which an ecology of business can form to create and sell scarcities (usually services and experiences). In sharing-oriented production (YouTube, Google documents), we have proprietary platforms that enable and empower the sharing, but at the same time, sell the aggregated attention (a scarcity), to the advertising market. Finally, in the third crowdsourcing mode, companies try to integrate participation in their own value chain and framework.

So the good news is that indeed business is possible. But I would like the readers to entertain the following proposition, nl. That:

1) The creation of non-monetary value is exponential

2) The monetization of such value is linear

In other words, we have a growing discrepancy between the direct creation of use value through social relationships and collective intelligence (open platforms create near infinite value through the operations of the laws of Metcalfe and Reed), but only a fraction of that value can actually be captured by business and money. Innovation is becoming social and diffuse, an emergent property of the networks rather than an internal R & D affair within corporations; capital is becoming an a posteriori intervention in the realization of innovation, rather than a condition for its occurrence; more and more positive externalizations are created from the social field.

Quite eloquently argued here that open platforms create near infinite value which is difficult to be captured by business and money. I still remember companies such as Borland, HP, Sun, IBM making a fair amount of money through selling C/C++ compilers and IDEs (I remember it used to be almost $5000 per seat). However this was in the days when the community capability of creating similar competing software stacks was only in its infancy. No longer so today. Now communities, open standards, open processes and open source are fairly well established sources of delivering asymmetrically significant capabilities at a fraction of the cost, a fraction which is made even smaller when the same is incurred by a small motivated group of individuals or small highly agile companies. There in lies the difficulty. Companies are trained to and built to deliver linear and symmetric capabilities in the context of costs they incur. However they have a relatively poor handle on monetising in scenarios where small teams can deliver exponentially asymmetric capabilities.

The blog post I referred to above, identifies the right area to look at in this context – Identify what is scarce and Monetise the scarcity. So when any software has a sufficiently large utility and can be managed through open processes to be able to satisfy a globally substantial demand at a fraction of the cost (eg. apache httpd), that particular capability (eg. static and dynamic file serving over http) is no longer scarce enough for a commercially focused company to make money out off. Thats why the money shifts where the scarcity is – how to leverage such software and put it to good use. This is where the existing commercial successes around open source are based on eg. RedHat, JBoss, IBM, Oracle etc. They monetise the support, training, services and consulting around such software. In many ways Sun could be argued to be a victim of its own success. It not only went much further than any other large corporate in terms of creating open specifications, it also contributed substantially to sufficient knowledge dissemination and tooling to allow many other individual, SME and large corporates to be able to compete with Sun in these very areas that Sun could’ve monetised. Sun thus created its own competition for monetising the scarcity that got created around Java even as many others cried out hoarsely that Sun simply wasn’t open enough. Will there be an incentive for Oracle to reverse that somewhat ? I suspect that could be a logical option if it focuses on ensuring a good ROI for Sun’s Java investments and assets and more so to be able to make itself more capable in the space around Java than the competition (ie. IBM).

So is a large corporate making money off open source or open standards an oxymoron ? Viewed narrowly yes. Because while it is possible for a small team to make some money with adequate ROI off open source or open standards, it is unlikely to be feasible for large corporates. They really need to figure out what is the new scarcity that gets created off such initiatives, come to a judgment that the opportunity arising from such scarcity is large enough and worthy of their time, attention and investment, ensure that there is no current available capability of anyone else disruptively delivering exponentially asymmetric value in that space, and finally occupy that space before other large corporates do.

It does boil down to the fact that while individuals and small companies may find it easier to monetise open source and open standards, the same is going to be generally tough for large corporates. Or as Michel Bauwens said in the blog post I referred to (in my opinion perhaps a little exaggerated but not entirely off the mark)

For all of this, we will need new policies, major reforms and restructurations in our economy and society.

But one thing is sure: we will have markets, but the core logic of the emerging experience economy, operating as it does in the world of non-rival exchange, is unlikely to have capitalism as its core logic.