Writings on technology and society from Wellington, New Zealand

Tuesday, April 22, 2008

Competing with free

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 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.


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.

posted by colin at 11:20 am  


  1. Links rather nicely to your earlier post on the flawed ISO vote, doesn’t it. Incidentally, as a publisher, we have required our authors to deliver their mss in Word (or Word-compatible) format over the years. Now we have an ‘interesting’ situation: Microsoft has released Word 2007, which cannot be opened by earlier versions of Word, but our university’s IT department has yet to implement this upgrade. Result? Increasingly, we are receiving .docx documents that we cannot open. And, even when we do eventually upgrade, we’ll face the problem of having file recipients unable to open our documents. The solution seems to be to migrate to other (open source) software capable of opening/being opened by all formats. In short, Microsoft seems to have just written its second suicide note in as many years.

    Comment by Gerald Jackson — 22 April 2008 @ 5:41 pm

  2. @Gerald

    If you’re currently running Microsoft Office 2000, Office XP, or Office 2003 there is no need to upgrade your software. What you need is the “Microsoft Office Compatibility Pack for Word, Excel, and PowerPoint 2007 File Formats” which is freely available for download from:

    Once installed the compatibility pack will enable you to open, edit, and save files using the Word, Excel, and PowerPoint 2007 formats

    Comment by Brett Roberts — 23 April 2008 @ 7:40 am

  3. Kevin Kelly has a great essay about ways that people can differentiate their products when they are Free.

    “Better Than Free:”

    Comment by Francois Marier — 23 April 2008 @ 9:33 pm

  4. @Brett Roberts (National Technology officer at Microsoft NZ),

    Thanks for the pointer to the compatibility pack. It’s like tits on a bull for me, though.

    What about those running platforms for which Microsoft doesn’t produce a version of MS Office? The growing Linux segment of the market cannot interoperate with MS Office formats (new or old) unless it uses one of the various productivity packages (KOffice, OpenOffice, Abiword, etc.) which have painstakingly reverse engineered the Microsoft file formats because that’s the only way to offer compatibility with MS products.

    An interesting insight into MS’s strategic thinking came out of the “Comes vs. Microsoft” class action lawsuit (which MS lost) in Iowa not long ago. Part of the evidence was an internal email in which Bill Gates said, letting others access MS file formats without MS software is “suicide for our platform”… (PDF). It saddens me to think that MS doesn’t feel it can compete based on the capabilities of its software, and instead uses the graft of exclusive file formats to maintain customer “loyalty” (“dependence” would probably be more accurate).

    It’s also very unfortunate that MS Office 2007 supports neither the office document ISO standard ODF, nor does it support Microsoft’s own newly minted ISO standard-in-absentia, OOXML, which is still just a hypothetical standard given that no one’s actually implemented it yet.



    Comment by Dave Lane — 28 April 2008 @ 9:26 am

  5. @Brett Roberts

    I have to agree with Dave.

    Where is my ‘Microsoft Office Compatibility Pack’ for and KOffice (the two Office systems I currently use)?

    I also fail to understand why MSOffice can’t at least natively import ODF files. I’d have at least expected it to be able to open these. How else is MSOffice going to compete with FOSS offerings if it can’t even import these very open standards?

    Comment by Gold — 28 April 2008 @ 5:19 pm

  6. […] blogged about this before, but this radio programme has some different angles. Read on for my speaker notes, or pull […]

    Pingback by » Paying for software when there are free alternatives — 22 May 2008 @ 7:13 am

  7. You are only talking about commerical “office” software here. How does the free model work with games ? Do you believe we would get games of the quality of Half-Life 2, or Mass Effect, or Civilizasiotn 4 in the free model ?
    I know a couple of people who work in CGI, and there is no way they would do what they do unless they were well paid for it (stress is the main concern).

    Comment by Tama — 4 August 2008 @ 4:52 pm

  8. Tama

    I’ve no idea whether we could get stunning 3d games from a free model. I’m not really part of the gaming community – my idea of fun is things like Nethack or Adventure which are a million miles from what you are talking about., so I’m just not qualified to tell.

    However, I am not arguing that commercial software is somehow wrong, just that in many areas of software endeavour there are free alternatives, and that this gives a problem for commercial vendors in those areas.



    Comment by colin — 4 August 2008 @ 6:56 pm

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