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How to compete against something that’s free? On the face of it, you can’t. But that’s what companies and people find sometimes find themselves trying to do when the rules change around them. To a large extent, we are defined by the way we react when the world changes.

When this happens to companies, they sometimes end up with a business model that is under legal pressure, like cigarette manufacturers. As citizens have increasingly pressured Western governments into controlling tobacco because of its health effects, the companies that produce tobacco have had to find new ways to maximise shareholder value. They’ve done that through several routes: lobbying to slow the effect of tobacco control legislation on their profits; diversifying into other products; and seeking new markets for tobacco in countries where governments have yet to try to control it so firmly.

Rule changes are aren’t only driven by governments. Sometimes they are environmental. Sometimes they are technological. The Corona Typewriter company and the Polaroid Camera company both disappeared in the last few years. Digital cameras are better, cheaper and faster than Polaroid cameras – in fact, digitals are just so much better that there’s no comparison. The same is true of low end laptops and portable typewriters. So, the typewriter manufacturers take their place in history along with steam engine companies and ice distributors.

It’s hard to run a business built on assumptions about the world that are no longer true. You have to fight to preserve your market, and that’s not something you can do for ever. IBM tried to defy gravity in the 1980s by making it hard or impossible for IBM customers to join IBM machines to newer, smaller and cheaper machines produced by IBM’s competition. IBM made all its profit from its own machinery and its own software that was needed to use its machines, and IBM didn’t see why it should make it easy for people to use other computers.

IBM’s customers responded by organising the open systems movement, which defined standards that computers had to observe to interconnect. IBM’s customers started digging their heels in and refusing to buy things that wouldn’t observe the standards. Governments got involved and did the same thing. And the once-mighty IBM almost died in the mid-90s as a result.

To IBM’s eternal credit, it had the courage to radically change direction, embrace openness and give away the super profits it was making on its hardware. That was tough for IBM. It had to abandon its long-held “job for life” policy, and many of its former staff went through serious financial pain as a result. But now, IBM sells hardware and services in equal measure, and uses and contributes to open source software to make it all work for its customers. And IBM has survived a technology shift – from giant mainframe computers to ubiquitous smaller ones, something for which its remaining staff and its shareholders are grateful.

And that brings me to today’s software market. We are seeing a technology shift similar to the one that so changed IBM. I’m talking about the model of software production.

Consider how commercial mass-market software is developed. Most is produced by large companies as a result of a very big upfront investment. The marginal cost of a copy of software is zero, but the work required to write that first copy can be very high. The result has been that commercial software development has become risky but very profitable for those that succeed. And to protect their investment, many software companies regard the details of their software as intellectual property to be preserved through whatever legal routes are available.

The shift is towards a community-based model of software development made possible by the Internet. Self-organising teams of thousands of people are cooperating across the Internet to produce software that is the equal of – or often significantly better than – commercial offerings in the same space. The Linux operating system kernel and the GNU tools which make it usable are prime examples. So are the Firefox web browser, the Apache web server, and the Ruby on Rails web development framework. All these programs are produced by people working incrementally and in public, and their workings are available for all to see instead of being locked up by restrictive intellectual property arrangements. But, the real problem for commercial software developers, is that community-developed software is typically free to use.

And to the average customer, that is the overwhelming improvement that free software offers – freedom from licensing costs and restrictions. Commercial software costs have risen over the years as software development companies seek to pay back their investments in writing more and more complex software, and as shareholders demand an economic return. Home users understand this well and many home PC users now use the free OpenOffice.org program instead of commercial word processor and spreadsheet programs. For corporate software users, licensing arrangements have become more complicated, and to some extent arbitrary, as software manufacturers seek to maximise their revenue from large corporate customers who have thousands of computers in complex IT environments. Free software offers freedom not only from the direct costs of licensing but also from the costs of negotiations, the costs of licence administration and the fear of licence auditing.

So, commercial software manufacturers face a problem: how to compete with free? At first blush, this looks impossible. These companies face some stark choices. Do they go through a radical business model change, as IBM did, or do they march grimly to oblivion? Or do they continue to levitate in mid-air by fighting the rules that say they must fall to earth?

This last is the course being followed by Microsoft as it fights to achieve standardised status for its own file formats. Governments around the world have been threatening to install free community-developed software instead of Microsoft Office – and in some cases actually installing it. Governments and schools are profitable customers, but they are also highly visible and have high status in their communities. Every government that moves to free software represents not just a financial loss but an endorsement of the community software model and a counter-example to the arguments of commercial software vendors that free software is not suitable as a replacement for their offerings. So, commercial software developers are pushing for rules that work against governments’ opportunities to change to free software.

But this is not a sustainable situation. People will not continue paying indefinitely for something they can get for nothing. Commercial mass-market software will ultimately prove to be a historical curiosity. How history will judge the commercial software developers depends on the grace with which they accept it.

Links:

Computerworld on the similarities between IBM’s challenge two decade ago and Microsoft’s today.

According an industry researcher, free and open source software is already costing commercial developers $60 billion. That number’s only going to keep growing.