>> Kamal Jain: It's my pleasure to introduce Mike Schwarz he's going to be at
Yahoo Research. I think he had been to many of [inaudible] institutions also.
Besides Yahoo, he had been a professor at the Harvard University, then he went
to Stanford and then Berkeley and then finally to Yahoo. And today he'll present
us about something about open source.
>> Michael Schwarz: Thank you. So let me start with a bunch of disclaimers.
So disclaimer number one, the title of this paper is misleading. It probably should
have been called Open Source, a Solution to Hold-Up Problems, Half a Century
of Public Software Institutions and not the other way around. And this is the way
we'll present this paper, so start with the second line and then I will continue with
the first line and start talking about the history that actually illustrates how open
source solves hold-up problem. But first I will have to explain about the hold-up
problem. So rationally I anticipate that even though I serve the second part, the
history part is something like 70 percent of the paper and it's really interesting
history. I real recommend reading it, because it's something like 15 pages and
it's a hot of fun. Nevertheless, I anticipate that I will probably spend 80 percent of
my time on this part and I will probably end up completely running out of time and
spending about three minutes on this part. But hopefully the first part will be
sufficiently treating that they will actually want to read about the history of open
source.
So the other disclaimer is that I am normally not a nervous presenter, but this
time I am because I'm talking about something I know virtually nothing about to a
group of people who know about this something tremendously more than I do.
So I'm an economist, I'm an economic theorist, I prove theorems about auctions,
about matching, about market design and I also design markets where hundreds
of millions and billions of dollars actually transact. So that's my day job studying
markets and actually designing them on practice.
My job has nothing to do with software, and I know very little about it. So this
paper is very much kind of whole bit, kind of an exercise out of curiosity and here
I'm talking about something I don't know much about. So the disclaimers. As an
author this paper is very unusual paper for me, it has no formulas, no theorems,
none of that nature. So I'm just not sure -- so finally another important
disclaimer, so obviously you probably know that Yahoo uses open source quite
heavily and also contributes to open source quite heavily. And none of the views
expressed in this paper have absolutely anything to do with the views of my
employer and also I don't have any inside scoop on the Yahoo strategy vis-a-vis
open source, so all the opinions are entirely my own and those of my coauthor,
Yuri Patev [phonetic], who is a PhD student in the school for information at
Berkeley. He is primarily a sociologist. He is also an occasional open source
programmer.
So with all those disclaimers, let me move on to first slide, completely irrelevant
slide for this audience where I'm trying to explain what open source is. I don't
have to explain this to this audience I believe. I suspect that everybody knows
that there are two basic types of open source licenses, permissive and copyleft.
Does the everybody know the difference? No? Who knows the difference
between permissive licenses and copyleft licenses? I should talk about it,
because it's fascinating.
So generally speaking open source software is understood as a software where
when you get the software you also get the source code. Together with the
source code you get a license that allows you to modify those source code.
That's what open source is. But then there's a second issue. And you're also
allowed to share whatever you did. You modified it, you created the new
program, perhaps you take this one. You can share it. That's also part of being
open source. You can modify it, you can share. But then there's a question
when you do share this software -- by the way, sharing didn't mean you share it
for free. You're perfectly in your right to take an open source software, maybe
modify it a little bit, and then sell it to someone. That's allowed. That's fine.
That's allowed by any type of open source license.
So the restriction that comes, however there's a licensing issue with permissive
license you can do whatever you want. You can take the software product and
then you can modify it, you can sell it to someone else and you can sell it to
someone else with whatever license you please. That's why it's permissive. Do
as you wish. Do as you please.
The other type of license is copyleft. Copyleft is quite different and quite
different, I have to say. Again, you're allowed to modify and share and sharing
doesn't mean sharing for free, you can sell it to someone. But as you share or
sell that software, you have to give it to the new person, to the person who whom
you are selling it, with exactly the same license with which you received it. You
couldn't -- you are not allowed to change the license. And that means that that
person who will get your software, that software from you, that that person would
have a legal right to sell that software or to give it away to free to everybody in
the world.
So as you can see, there's a tremendous difference because basically you can
take an open source product with a permissive license, build the commercial
product based on that and profit from that commercial product. If you take
software with a copyleft license, you can build a product based on that, but once
you start selling that product, you have to allow your users to give away that
product for free or to sell that product to everybody in the universe, which
basically makes it impossible to make -- to sell it for a high price, right, so -because if your price is at all high, people would start undercutting you or even
giving it away for free to everybody in the world.
>>: [inaudible] I have a hypothetical question. [inaudible]. Let's say somebody
takes the open source code and put -- I mean they hide things in the code which
are advertising based, then would it [inaudible].
>> Michael Schwarz: That's an excellent question. And selling is not important
here. Share -- you are still allowed to sell it for money. It's fine. So it would be
considered sharing. And when you share, you have to preserve the license.
That's all. So you are more than welcome to take an open source product, to put
a bunch of advertising into it and to start giving it away to people or selling it, as
you please. But you have to preserve the license. So once I got it, you have to
give it to me and I have to have a right to A, modify it, and, B, give it away to the
whole world for free.
>>: [inaudible] I mean makes [inaudible] so that it's [inaudible] the same but it
looks different.
>> Michael Schwarz: That's always true with copyleft license. You can even sell
it on those conditions. That's fine. But you have to allow people to distribute and
modify it. And ->>: [inaudible].
>> Michael Schwarz: Huh?
>>: [inaudible].
>> Michael Schwarz: Not with permissive ones, with copyleft ones. So by the
way, if you will wait, assuming we will get to the history part, the copyleft license
was a truly brilliant invention that played a very important role in development of
open source software.
So let me give you a little bit of summary of how incredibly important open source
software is today and sort of given this audience I probably don't have to kind of
[inaudible] open source is very important, on the other hand, given that I am in
the Microsoft right now, maybe I do have to convince you that open source is in
fact very commercially important today.
So the staggering quantity of open source software. So for example, one can do
absolutely fine relying exclusively on open source products, from operating
system to browser, to office, to statistical software, to development tools; and in
fact, my coauthor happen to be one of those people who over the last three years
used only one known open source program, and that happened to be Adobe
Flash that is free. Everything else that he used is open source, and he doesn't
seem deprived. So that's kind of interesting because ->>: [inaudible] getting around in the wheelchair and do everything.
>> Michael Schwarz: That is true, that is true. But there's a difference because
he and many other people like him don't feel particularly deprived, right? So for
example if you were to limit yourself to say open source music while there is not
that much around, not that much of open source music around us and what is
there is very amateurish, right? So all this sort of best stuff is not really open
source.
So in fact, what's interesting is that free software is high quality. So oftentimes
we think of free stuff as kind of this is stuff for poor people, right? So people who
couldn't afford -- so people who couldn't afford the real deal, they go with free
alternatives. And that might be the case in many instances. Open source is not
it.
So in fact, open source software is quite high quality. The competition of open
source and proprietary software is larger and not on price. This is what's quite
interesting. When I starting writing this paper, I thought that this was about price,
about money. But it's not at all the case.
So, for example, many users of Linux not only made the decision -- are not only
quite often and could easily afford Windows, in fact they paid for Windows and
they deleted it and installed Linux operating system. Also Mozilla Firefox and
Internet Explorer are completely with each other. Mozilla is open source, Internet
Explorer is not. And both of them are free, and the other Mozilla is doing very
well. So again, the this is clearly not an instance of price competition.
So in fact, also an interesting observation is that the most use of open source by
individuals is in fact the tip of the iceberg compared to use of open source by
corporations. As you will see two bullet points later, it is really the corporation's,
the very wealthy corporations and not the individual users who are relying most
heavily on open source and that again suggests that it is really not about price, it
is about something else. So for example, let me give you just couple of
examples that illustrate how incredibly important open source is.
The world's largest supercomputer, IBM Roadrunner, and the world's largest
database, our own, are based on open source software.
>>: [inaudible]. So what software on IBM Roadrunner is open source?
>> Michael Schwarz: That is an excellent question. And to that question I have
to confess. I don't know the answer. I have a source that we quote in the paper,
and my coauthor, who is much more programmer than I am, could give you a
much more precise answer to that. So if you want to know the precise answer,
drop me in the mail, and I will get you a precise answer. But I believe it goes
beyond the operating system. I think sort of the whole sort of -- so I presume this
-- I'm guessing that Roadrunner is probably not a single CPU but huge, huge,
huge collection of boxes. So I would be guessing that basically the programs
that allows those boxes to work together than that part must be open source.
That would be my guess. But I couldn't name the -- and I premium the operating
system would also probably be Linux. But I could -- given that it's IBM, I'm sure
the operating system would be Linux.
>>: [inaudible].
>> Michael Schwarz: Huh?
>>: If you modify it and you don't distribute it, you still call it open source?
>> Michael Schwarz: So that's a very good question. No. If you are -- so the
different types of open source licenses are but generally speaking with sort of
Internet created sort of new type of usage of open source software because now
a lot of software is used by creating value for the user without actually giving the
software to the user, by providing a service. And that's the business that Yahoo
is in, the business is Facebook in, My Space, Google, we are all in the business
where they are not software companies in the sense that we are not selling any
software to the user, user doesn't see any of our software. But we are providing
services.
>>: [inaudible] or these companies found a way to circumvent the copyleft
license by kind of not really giving the software but in a sense getting around this.
>> Michael Schwarz: Well, I -- so actually I don't think that those companies
circumvented copyleft license. I think that was actually original intent of copyleft
license. Because the original intent of open source licenses was that you take
open source software and then you use it for a business, for purposes for doing
whatever you want to accomplish, and in the process you modify it in a way that
are useful for you for doing the job that you want to get done, and then you're not
required to make it available to others. So this is not a part of open source
license to make it available for us. And that was the intent. That was not -- that's
a feature, not a bug.
However, you may choose to make it available to others and in fact if you would
look at sort of Yahoo and Google and My Space strategy in this space, some My
Space is still a baby in this space, but if you look at Yahoo and Google, Yahoo is
-- and Google and many other Internet -- and IBM for sure are very heavy users
of open source, and a lot of things that are done by those companies with open
source stayed with those companies. [inaudible] you don't share it with the
public. But a lot of this is shared.
So if you look at the least of contributors to open source you would also see IBM
and Google and Yahoo and Red Hat. It didn't mean that everything is shared,
but a lot is. And some isn't. And I don't know the quantities. Right? And that's
how it was intended -- intended, I believe.
>>: [inaudible] where one could be featured that [inaudible] I took an open
source, modified it and created the binary. One situation is I put binary on let's
say [inaudible] computers for him to use and other way to use binaries, I use
[inaudible] use my own computer remotely to use the same binary. Why one
would be allowed and one would be a feature? Why would one be allowed and
other not?
>>: So the point is I think we disagree with [inaudible] inventors of copyleft didn't
envision the scenario where people could use the software without having it, and
so I think it is a bug.
>> Michael Schwarz: So I think ->>: [inaudible].
[brief talking over].
>> Michael Schwarz: So I think to some extent this is a bit of a philosophical
question. But there is an answer to this question, and the answer is a new
copyleft license. The new license that basically says well, not only you have to
share the source code, in case you share the software, even if you provide the
service over the net using that software, you still have to share the code. That
license have been developed, I believe. And it's very unpopular. It is not being
widely used. And part of the reason is obvious. Google, for example, and Yahoo
are very active contributors to open source. And as far as I know, none of the
Internet companies wish to either use or contribute to software on those terms,
and yet they're perfectly willing to see -- to both use and contribute open source
software with a different license. So that simply suggests that in some very
fundamental level given that we see sort of open source is really flourishing on
those terms but not with other license.
That seems to suggest that -- I'm not saying that that other license is somehow
wrong or evil, I'm just saying that both have room in the universe and at least for
now the current one is succeeding quite nicely.
>>: [inaudible] so that's why [inaudible] like I don't understand what meaning of
given by [inaudible] if I take a binary and burn it on a hardware and sell that
hardware [inaudible].
>> Michael Schwarz: This is an excellent question. And I have an answer for
that. The answer is -- and in fact, I -- so the short answer is you could not do it.
If you take a binary and burn it on a hardware, together with that piece of
hardware, you've got to give the source. How do I know that? Well, I know that
because one of the most common Internet phones called Linksys, that's I think
one pretty much one of the dominant players in this space, and of course there's
ones the way of the future, I have one of those in my office and ten years from
now or even five years from now probably every corporate office will only have
Internet phones, right? So this is very kind of everyday technology.
So that company build that Internet phone, and I think it's dominant player in this
space. They build that form using Linux operating system. And the other
operating system happened to be -- happened to be copyleft, Linux's copyleft.
So then they started distributing those phones, very prosperous company as far
as I can tell, and they were brought to court. They said look, you are distributing
the software, you're distributing the binary, but without the source code. You are
if violation of Linux license.
And the court said, well, that is correct. And the argument was software is often
distributed together with hardware. For example, I -- so you see, now I know that
I should be right now at the daily marketplace sync up, but I am not. So, yeah,
Outlook respects my privacy.
So the reasoning of the court was, well, let's say I take a piece of hardware
floppy drive and I put a binary in there, I give you that software and the floppy
surely, it's very well established precedent that if I give you a software on the
floppy in a binary form now you have to also give me a source code upon
request. So.
>>: [inaudible] but if I find it on the phone and I don't make it easy to read binary
then I'm not actually giving you binary.
>> Michael Schwarz: That was the other side was arguing. They lost. Perfectly
good argument. But it's subtle. They lost. So learning from this lesson when
Apple decided to develop the iPhone, they also didn't go out writing an operating
system from scratch. But they went with standard distribution UNIX, which
happened to have permissive license. Because I believe it was developed
before copyleft was invented I'm guessing. So -- well copyleft was also in that.
But I believe that that was the timing.
So iPhone has a proprietary operating system that is based on open source
software with permissive license. On the other hand, Android, the Google phone,
is action open source operating system based on Linux. In fact, I think as far as I
can tell received wisdom that Linux is superior to standard distribution UNIX
which is by now a bit outdated. And I would be guessing that the only reason
why Apple opted for that is they want to keep the operating system proprietary.
But I'm not sure. Maybe there were other considered technical considerations.
So this slide is taking tremendously longer than I expected, by the way. So ->>: [inaudible].
>> Michael Schwarz: I know. The time slows down, it speeds up, depends how
you look at it. So a couple of other kind of data points. Most computer
languages are open source. And that includes some of the most popular
languages. So Java and Python and -- Java is probably the most popular
computer language in the world the compilers are open source. So interestingly
enough, they started very differently. I think Java was originally from proprietary
language, it was not open source. And then Sun opened it up, completely
opened it up. And they were gradually opening it up more and more and more
and then they opened it up, completely opened it up. And they opened it up
while they were still the most popular language in the world.
And I think they opened it up because they were sort of feel the pressure, they
were afraid that python or some or language would come from behind and
overtake that -- overtake their standard, and they thought that sort of making it
open source would make it more appealing. So it was a defensive move as far
as I can tell. I'm guessing, right. God knows.
And that's interesting because the story played itself Fortran and COBOL. That's
how IBM was opening Fortran, back when in the '50s. Maybe early '60s.
So the history has a tendency to repeat itself. So it's interesting that if you look at
compilers, computer larges, essentially almost all of them are open source.
There are some exceptions. For example, C has -- it's actually Microsoft has a I
think C -- is it Microsoft? I'm not sure. But C has some proprietary compilers.
But those have plenty of open source initiatives. But essentially almost
everything like nine out of ten top languages are probably open source. You will
get computer games. Nothing is open source.
All the popular computer games are proprietary. So in fact that's not true. There
are thousands of open source computer games. It's just none of them are
successful. So this is quite striking. Pretty much all the successful programming
language, with very few exception, right, are open source. And none of the
games are. So there must be some reason why it is this way. And what this
paper is about, what this paper asks is first of all why is open source so
successful? Because as an economist, I can see all sorts of reasons why it isn't
be successful, so I want to see some reasons why it should be, and second, why
does successful in some places but not in others?
So a couple of other observations about open source. Open source completely
dominates web serving. And I know Microsoft is a player in web serving. But of
course Microsoft have much smaller market spare than Apache servers. So all
the big Internet companies are using open source solution for web serving. But
Microsoft has a still considerable market share there. But certainly much smaller
than open source overall.
And also, infrastructure of Internet companies, Amazon, Facebook, Google,
Yahoo, many, many other smaller ones is incredibly heavily based on open
source, right? So we see that in certain areas open source completely
dominates and in certain areas it's almost nonexistent. Yes?
>>: [inaudible] open source. But Google makes, you know, 95 percent of their
money from search, right?
>> Michael Schwarz: Right.
>>: Their search engine is not open source, right? I mean, I can't get their
proprietary code ->> Michael Schwarz: Well, of course not.
>>: The way they do page ranking.
>> Michael Schwarz: Of course not.
>>: So it's mean, it's nice of them to, you know, have all this open source source
code except what makes 95 percent of their money.
>> Michael Schwarz: So first off, so first off I'm not making ->>: Say Google is 5 percent open source and 95 percent closed source.
>> Michael Schwarz: So first off, I'm not making any value judgments here. I'm
not saying that, you know, Google and Yahoo are nice and some other
companies aren't, but second --
[brief talking over]
>>: [inaudible] is happily ->> Michael Schwarz: No, but, but, second of all, here's the [inaudible].
>>: [inaudible] runs on [inaudible] it didn't let everyone see what their ranking
algorithm precisely is, right.
>> Michael Schwarz: Well, wait.
>>: So it's open source.
>> Michael Schwarz: So you see, you are -[brief talking over]
>> Michael Schwarz: You are thinking of them as a competitor?
>>: No, I'm not thinking of them as a competitor. I'm thinking that to claim the
Google -- to claim that open source is successful because Google uses it I think
is wrong, because where Google makes their money, which is all in search, that's
not open source. So let's look at what the company -- where the company
makes its money and then say that's code that pushes that -- the money maker,
right, in open source.
>> Michael Schwarz: Well, so the key word here, the key word here is
infrastructure, right? So I'm not saying that what they create -- that they're
sharing everything with the world. Of course not. What I'm saying is that sort of
the key enabling input for their technology is open source. I'm not saying -- I'm
not saying that the ->>: I disagree.
>> Michael Schwarz: That it does you any good.
>>: No, it's not -- I don't think -- you know, I think, you know, that their key
technology is their page ranking algorithm, and that's not open source.
>> Michael Schwarz: So I'm thinking at a infrastructure level, right? So the
operating system that ->>: [inaudible].
>> Michael Schwarz: No, no, of course they don't sell it. That's what I'm saying.
As users. So you can think of Google in two ways, right? You can think of
Google as a company that provides service, that creates value. And so let's
forget Google. Let's say we are thinking about Chevron oil -- Shell Oil, right? So
Shell is not in the survey business, they're in the oil business, right? But they
also happen to be computer user. So if you find out that most of the survey that
they use is open source you would say, oh, Shell happened to be a heavy user of
open source, right? That's not where they make their money. They make their
money in oil. But you would agree that if they ran operating system on the
computers, they are writing the databases based on operating system search
and you say Shell clearly is a heavy user of open source. They're also an oil
company.
>>: [inaudible].
>> Michael Schwarz: So all I'm saying here, all I'm saying here, is that all those
guys are very heavy users of open source and that open source is critical for
their success. I'm not saying that they're sharing any of the benefits with ->>: Open source is critical to their success ->>: But that's really ->>: Google could certainly afford to buy Windows licenses and it wouldn't even
affect their bottom line.
>> Michael Schwarz: That's exactly the key point.
>>: Okay.
>> Michael Schwarz: So why don't -- so that's exactly the key point. So not all
those companies are poor. In fact, they are rich are. And usually when you are
sort of in a business that's winner take all, you take the inputs, you know, the cost
kind of, you take the inputs that would make it the best possible product. Right?
That's what you want to be. You want to win in the marketplace. And then you
just need to share it with the supplier about the right price, right?
So if someone has something that works better for you, you will just figure out the
deal hopefully, if possible, and you would use that. So it's striking and interesting
that does all those companies are opting not to go with commercial product,
they're opting to go with open source. If you look at other things that they buy,
you know, they're not that cheap. You know, they buy Aeron chairs. So why is it
that they choose to use open source inputs there? Right? So that is the key
point here. Why open source -- why do they choose to be consumers of open
source? Right?
>>: Started out as ->>: Let him ->>: Okay. That's the point. I mean why does Google use, you know, Linux, they
have to sort of maintain themselves as opposed to buying Windows which we
would maintain for them.
>>: The question is when did they become so successful and rich and whether
it's at that point did it make sense for them to switch their entire infrastructure --
>> Michael Schwarz: [inaudible] it's not a again, because when they are little,
then there's even more reason if you are little, you are trying to succeed. So, you
know, Google doesn't build their own chairs. And when they were little, when
they were a poor startup, they just went out bought a bunch of Aeron chairs for
600 bucks apiece? Why? Because when you try to make great software you
need good chairs for the butts of your programmers, and Aeron does the job and
it's fine.
So you would think that you know certainly in the interest of Microsoft to get
startups hooked on Microsoft technology. So surely there ought to be a possible
deal between a startup and the proprietary vendor ware, you know, you would
use our software, you know, for the first -- until you start making money you don't
have to pay us or something like that. You can figure it out.
But that's not the route they went. So why is that? Nobody is going that route in
the Internet startup field. So why is that? So that's what this paper is about.
So let me sort of flesh out what are the questions that I'm going to try to address
here. So I'm -- economists thought and wrote a lot about open source. So that's
including Microsoft chief economist [inaudible] open source and most of the
issues that economists are concerned about, what are the incentives to
contribute to source? And I wouldn't talk much about this. This is not the
question that we are going to address. And in fact to some -- so this is definitely
not a question why people contribute to open source. There are lots of good
reasons, including just for fun. That's how founder of Linux called his memoir.
And so by the way, if just for fun were the real answer, then you would expect
there would be lots of successful open source computer games and there are
lots of open source computer games not of features successful.
So the real questions with we are trying to address is why is open source
dominate some important sectors of the software and not others? So that's what
we are about here. And the -- so it's not that surprising that people contribute to
open source, right? People do engage in a lot of activities for fun, right? People
create music for fun. But how much, you know, you don't see Paramount
Pictures taking some amateur song that's available copyright free and making it
into sound track of the movie, right? So all that -- but yet you see software
companies doing the Internet companies doing exactly that with the software. So
why is it happening, right?
So bonus questions of Stallman, who is I think Richard Stallman is basically the
founder of open source movement, he talked to his -- so this is a bonus question.
Why did Stallman -- what did Stallman meant when he asked his supporters to
think of free as free speech and not free beer? When thinking about free
software? So assuming that I will not run out of time, and I'm sure I will, I will
give the answer to this question. Otherwise, you'll have to read the paper.
So now let me sort of proceed -- so there is no really model in the paper in the
sense that we don't have formulas or anything of this kind but let me sort of give
you the fundamental assumption that kind of drives a lot of things that are
happening in this paper. So one observation which is kind of obvious is that one
fundamental difference -- so one obvious difference between open source and
the proprietary software is the price. But there's one more difference. Open
source software is very highly modifiable about it definition. You can take it, you
can modify it, if you know how. Binary software is impossible to modify.
So if you take the same program in binary or open source form, in some sense
open source without regard to price is a superior technology. It's superior in the
sense that it gives user, certain users, sophisticated user lots of options that
proprietary software doesn't give that user, and that gives us a key why it so
happen that it is the most sophisticated and wealthiest users that opt for open
source. Those are the guys that really value that flexibility. But that's going to be
only the beginning of their story, not the whole story.
So you can see that sort of intrinsic superiority of having the source. But it didn't
have to be open if you think about it, right? So there's no reason why sharing the
source with the user should mean making that source open in the sense of open
source swear. I can share my source with you but give you a license where
you're not allowed to share it with other people, you have to pay me additional
royalties if you make modifications and blah, blah, blah. Right?
So we could man those kinds of places in agreements. They're very rare. It has
been tried. There are some precedents. There are some companies that do
that. But the reason that there's a very difficult is contractual costs become
extraordinary high for a lot of reasons. It's just too easy to cheat, too hard to
monitor, too hard to agree on things. So as a first order approximation, we can
assume that given the user code, this is technological restriction that once you
shared the code you have to make it free.
Legally it's not quite the case. You can write a contract that says it's not, you're
not allowed to do lots of things with it. But it's so expensive to enforce in court
that the most cases is just not worth it. Also, it expose both sides to a risk. I may
be very hesitant to touch your code if I have to sign a paper that I'm not allowed
to do lots of things because later you can bring me to court accusing me of lots of
things and charging me for all I -- and suing me for all I'm worth. And that
happened in the past.
So there are real concerns there. So I will assume, and that's not true, it's first
order approximation, that giving a user code is isomorphic to just making an open
source product. Which is not entirely true in practice. There are counter
examples, but they are few and far between.
So that's the key observation that will be driving my story. And I believe in my
heart that if it were possible to write and enforce contracts along those lines
where I can say, look, I'll give you this code, but we have a complete contract
that the totally reasonable that would govern our behavior with regard to this
code for all kinds of future contingencies and you know it's cheaply and easily be
enforced then there wouldn't be open source software. Because then, you know,
we will just agree on the reasonable price and I will get some very nice
proprietary product from you and just pay you a reasonable royalty. And so I
think fundamentally this is the technological restriction, the legal sort of lack of
legal visibility of enforcement that created the open source movement.
And I think this is a fundamental reason why Internet companies do not want to
touch proprietary software. So I'll illustrate that -- so due to the fact that users
can sort of modify software, it creates a lot of additional efficiencies, right, user
doesn't have to communicate his needs to the vendor, right? So if I'm a
sophisticated user, I want to change something. If I couldn't change it but only a
vendor could, then there's this costly process of me communicating those needs
to vendor, hoping the vendor would make a modification then presume the
vendor wouldn't do it for free for me, I have to negotiate the price with the vendor,
and that's the key variable. The vendor may potentially hold me up, right? Even
though modification may be very easy, since I'm already so invested in this the
product and, you know, let's say I'm Google. So it's very important for me to
modify your product in a certain way and it's not that heart to modify it, but you
know, let's say that product happened to come if a vendor who realizes that, hey,
this client makes a lot of money, it desperately needs this modification and I can
make this modification for a million dollars, I will charge you billion because the
client is in such need of this modification. So that's a classic hold-up. A client
has this flourishing business that critically depend on this piece and I could
exploit this client later on and there's no way we can sign a contract before that
that prevent this kind of exploitation. That's what economists called hold-up. So
hold-up arises from lack of contract -- from invisibility of sort of full contracting for
the future contingencies.
So let me give you an example that illustrates -- and this is basically the key
insight of this paper the way I see it. So let me give you sort of a description of
what we mean here again. So let's say a buyer of software product A makes a
complementary specific development by buying complementary software which
is product B. That investment could be training or it could be creating other
software, right? So we have an Internet startup. They take some software,
based on the infrastructure but then around it they write lots of other things.
They create this whole service. So that investment, the product that they created
could be tremendously more valuable than the software that goes into the
foundation of that company.
So however, so basically the value of B, the investment complementary to A
could be much, much more valuable than A itself. However, if -- it may be
necessary to modify product A in order to reap benefit from product B, from the
big investment. So for example you have an Internet startup, they started
something out, it's going well, now suddenly they are growing and in order to
scale their the product, they need to change something in product A. But they
couldn't, because proprietary. Right?
So that would be big problem for them. They would have to go back to the
vendor and so on and so forth. And unless they have signed the contract with
the vendor where vendor says oh, I'll modify everything at a reasonable price,
how do you define reasonable price? It's impossible, right? The vendor would
say, oh, well, you're such a successful company, just pay us an arm and a leg for
those modifications. So that would put that Internet company in the position
where they would be afraid to invest into other software that complementary with
software A, the proprietary software. And that is what driving them to use open
source. That's a reason for hold-up problem.
So in other words, clearly with open source software there would be
underinvestment into developing. Who wants to create open source, right? I
mean, couldn't make money on it. So it is underdeveloped. But this Internet
company may choose an open source solution, even if inferior, even if there's
underinvestment into that product. Because if they choose proprietary software,
they would be afraid to invest in the reasonable technology. And now they can
go all out and invest in complementary technology and in the meantime keep
building that product that sort of open source foundation of the product. They
also may choose to share the modifications they make. And the reason that they
would choose to share modifications that they make is that they may hope that
other people would yet improve that bottom layer of the infrastructure and they
would benefit from other people's modifications, so there may be direct incentive
to share with some of the modification that you make to open source products
that you use.
So in other words because of hold-up buyers of proprietary software
underinvesting in complementary products and if you make big investments in
the complementary products it makes a lot of sense to rely on open source
solutions. So let me give you my favorite example. And I love that example
because it's not software, it's hardware.
So there's a company called -- I think it's called [inaudible] software or hardware
and basically this is an open source hardware product. It's a small company
based in [inaudible], a startup I think the sales are about 50,000 chips. They
make chips. And those chips are all specifications. Everything is open source.
You can download it, you can buy those chips from anybody else, right, you can
just take those specifications, send them to any other vendor and get those chips
from someone else without paying a penny to this company.
So this company makes money by selling those chips. But they make it possible
for anybody else to compete with them. They have essentially no idea. When
they develop an idea, they immediately make it open source. So why are they
doing it? That's crazy. Well, they're clearly not crazy because pretty impressive
for a startup from Italy to actually sell 50,000 units. What are they doing?
So here is my theory of what they are doing. Who buys those chips? Why would
you buy a chip? So they originally developed the chip because it was part of
some -- part of some toy or an art -- some -- I'm actually not sure what they
originally used, but it could be used for toys, it could be used for art projects, it
could be used for gadgets. So it's quite a flexible chip.
So think about it. Let's say you are a designer and you are trying to design
something, maybe a toy, maybe something else, and you are hoping you kind of
strike it rich, right? You are hoping to sell millions of units. You probably
wouldn't. You probably make one unit then just flop. So you are investing a lot
into designing this new thing. So if you are designing something around a
proprietary chip, once you become successful and you start -- and you start
putting orders for like 200,000 chips, the chip vendor first of all, may not even be
able to provide those chips, well, we don't have capacity to build those, or they
could say, we've got plenty of capacity, you know, we are Intel, but, you know,
we can charge you an arm and a leg. So -- and if it's a small company, then you
are particularly afraid that, you know, I'm the first big customer, I'm trying to buy
200,000 chips because I had built a blockbuster toy based on that chip. Well,
they would immediately just take me for a ride, right, to sell 100,000 chips the
price would be very high.
So people would never go with a chip from a small company that is proprietary.
Because they would be afraid that once they invested everything in product
development and design they actually wouldn't be able to get those chips at a
reasonable price. So as soon as those chips are open source this company
pretty much guaranteed that they would never take advantage of people who
developed technology based on the chips because the technology is open
source. So that -- and that's I think pretty much the business model. So also
there's an incentive to share innovations, because once I develop something
based on this chip, I may want to modify this chip. I may choose to share those
-- I may choose to share those modifications with the public. Why? Well,
because maybe I'm hoping that the new version of this chip would be better yet
and there would be not just my modifications but other modifications.
If I'm say a toy maker, I'm not very concerned about competition.
>>: [inaudible] but now when I [inaudible] it looks incomplete in the sense that
consider the [inaudible] developing it could be a client site service, it could be
some software [inaudible] that could be software site service for example search.
And I mean, it's entirely possible for [inaudible] what if I need to make it more
efficient. But the same thing would hold if you writing client type software on
Windows, which you may want to treat Windows to become more efficient. So
the dependency on the underlying layer is the same. I mean Google could pretty
much could have run its entire search service on Windows.
>> Michael Schwarz: So ->>: And it would be about the same.
>>: [inaudible] would be the source.
>>: No, no, but why do they need to do it because do people get source who
writes application on windows in they don't get source.
>>: How [inaudible] is it, how important is it? I mean you got a Citibank, right,
you know, they're very happy with the performance that Windows gives them and
they're interested -- and first of all, they don't have lots of OS and computer
scientists in their building, so they would have to create a whole division.
>>: Yeah, but that's --
>>: To modify Linux, right?
>>: That's a subjective argument because maybe I'm [inaudible] and now it
might be critical for me to access ->>: [inaudible] and you can afford the OS guy, right, if you need to hire an OS
guy?
>>: No, no, but I'm -[brief talking over].
>>: Modify Windows. It might be critical for me to modify Windows to make my
browser the best browser ->>: Right. And his argument is if it is, if it's that critical for you ->>: Then I would like for Linux ->>: Then you would hire an OS guy and get Linux.
>>: Yes, but people like browser for Windows.
>>: Because performance isn't that important to them.
>>: Yes, that's what I'm saying. Why in some cases performance is more
important and other it's not? I mean ->> Michael Schwarz: Well, I think that's -- I think that's exactly the ->>: It's the nature of the -- I mean it's the nature of the application, right?
[brief talking over]
>>: Because they believe performance is important.
>>: Usually just features. It's the features, right? It's the features, it's the
interconnectivity.
[brief talking over].
>>: And one of the things [inaudible] we are fast, we are fast, we are fast. They
are not saying that their features ->>: Well, because they modified Linux.
>>: Are they going to write the browser for Linux? They're writing for Windows.
So it's the same argument, that the dependency, the mathematical --
>> Michael Schwarz: Wait a minute. So I'm not quite -- so remember -- so they
did write the browser -- a browser for Windows, but so remember, I'm not
claiming that the paper that I wrote explains everything under the Sun, right? So
obviously there are Windows computers and there are also applications for
Windows. And I'm not saying that it haven't exist or doesn't exist. Of course it
does.
>>: [inaudible].
>>: [inaudible] their infrastructure. I mean this is like a product.
>> Michael Schwarz: Yeah. I'm not claim -[brief talking over].
>>: But you are making a difference between that infrastructure is -- in both
cases it's not infrastructure which is important, but it is their ability to search
searches. If you have some magical oracle, they would search searches, and
they could have built infrastructure on Windows [inaudible] searches. Same
thing as Adobe [inaudible] is to [inaudible]. And their [inaudible] service could
both potentially.
[brief talking over].
>>: There are some ISP vendors out there performs on Windows not accurate.
>>: Yes.
>>: So then they're stuck. So then they're stuck, right. They either put up with
what they consider to be poor performance or they go out, they use Linux, and
they modify the OS in order to provide the performance they need.
>> Michael Schwarz: So also, I don't think -- so also I think the key issue here is
not that it's just poor performance or good performance, I think part of the issue is
that there's some -- let's say there's some kind of bug, you realize there's a
problem. And you just need to fix something. And if you are super user and you
[inaudible] look, I realize that there's some problem with this operating system,
we have to open the hood, fix it up, and the problem would be gone. So if you
are using Linux -- and that's what you see Google doing, right, they are
massively modifying Linux and contributing to Linux, by the way.
And I would be guessing that what happens is that they are doing something and
they realize that there's one thing that doesn't work quite well and they fix it, and
it's probably a lot of it is just bug fixing. And again, you want to -- if you are a
super user, you want to have that control. If you're a Citibank you don't. Right?
So I have probably what, like two minutes left? Zero minutes left? Minus two.
So give me minus two plus minus two is equal to let's say somewhere around in
the neighborhood of zero. So like two more minutes.
So let me dwell on history for like exactly two minutes. So -- and hopefully it will
be intrigue enough that you go actually go out and read the history part of the
paper. I promise it's actually the most interesting part of the paper. It's really
sharp, it's like before going to sleep.
So open source is much older than open source. So in fact, the practice of -- the
practice of developing software's public good predates proprietary software by
[inaudible] even though the term open source is relatively new, it's like less than
25 years old, in fact less than 20 years old, their practice of public software,
where you get the source and you can do whatever you want to, so true open
source, is actually very, very old and predate proprietary software.
In 1952, IBM entered computer market. They were the second mover. They
were within the year of the first enterer. Less than a year. So at that time, the
word software didn't exist. Obviously the word open source software didn't exist
either. But software did exist. And at that time the software comes for free with
the hardware and it is open sourcing, so whatever you want with it. And
interesting at that time t amount of money -- so there's like this fake belief that
expenditures on hardware exploded in the recent years. That doesn't seem to be
true. So at that time, when first computers were launched in the '50s, the buyers
of those computers would spend as much or more on software as they were
spending on hardware. And IBM was very aware of it. Except that you wouldn't
be buying software, you would be having a staff of programmers who are
creating this software. But there's an expenditure on software which is huge. It
was the same [inaudible] expenditures.
So IBM realized it, and they wanted to increase efficiencies. We need more
software, and it's incredibly expensive to do well. The users at that time were
super users. You know, who should it be? It would be like one of the first five
people in the -- five companies in the world to buy a computer, right? So those
were really super users.
And lowering the cost of programming was of course very important for IBM.
This cheaper software is available software. People would be willing to pay more
for hardware. So IBM wanted to encourage sharing of software. So, guess
what? Within the first year of the launch of IBM first computer they created IBM
share. A community of IBM users at that time the number of users you can sort
of count on two hands for each system there was a separate share, at times
there was only one system.
So it was within the first year they create this IBM share. They get together, they
share software. Before IBM creates share, those guys are already sharing, even
without IBM facilitation. But IBM institutionalize it. And the -- here's what's
interesting. And very insightful, I think. So two dozen organizations from
members of share for IBM [inaudible] and at that time those people, they already
understand the name of the game. They understand that sharing is its own
reward. So you would think as an economist I would think, oh, who would want
to create software, who would want to share, you know, I'll sit on my hands and
try to sell. No, that's not the name of the game.
So the contemporaries write that we shared -- so -- next slide. So the eyewitness
accounts is that the real problem was not who would want to share, the real
problem was everybody was first shoving their software at the throat of the other
guy. And the reason is that those guys, even though the word network effect
wasn't invented yet in 1955, they already understood it very clearly, they
understood that by getting you to use my software, and I already developed a
bunch of infrastructure complementary to this software, right, I was in this game
for six months, if you would start using my software, you would obviously start
improving it for your purposes, because you would like run into lots of problems.
And then you would share it with me, of course. So I would directly benefit from
you using my software. So they were shoving their software into each other's
throats.
And according to Grinwold [phonetic], United Aircraft browbeat share into
accepting their assembler, threatening to leave the group if another proposal is
accepted, right? So that is the early days of open source software. So the
institutions of open source software completely fascinating predates open source
software by several decades, and they evolve in most interesting ways. Thank
you.
>>: [inaudible] trying to shove this papers down everybody else's throat in
[inaudible].
>> Michael Schwarz: Well, so in fact, I think the analogy is quite appropriate. So
for -- quite appropriate, because I think the reason that Stallman felt that sort of
free software as in free speech, rather than free beer, I think that's exactly what
he meant, right? When you write a paper, your paper is in some sense not at all
open source, but in some sense it is, so technology of science is a little different
from technology of programming. But I think the way Stallman saw it, he saw
software as kind of expression of human intellectual activity, an output of that,
and he wanted other people to be able to build on that, to be able to create new
stuff from that, and the price wasn't what worried him, he would have been
probably fine if, you know, there is a reasonable system of payments there. But
he didn't see how it would be possible to have a reasonable system of payments.
But that's exactly what worked. He was like proprietary science versus open
science, the science based on which other people could build, and he felt that it's
imperative for the human endeavor for people to be able to build based on the
software that came before them. And that's why computer programmers feel
very strongly and emotionally about open source, even though, hey, they're not
the ones who are paying the prize of software, they are happy when software is
expensive. And the users like me don't feel passionate about open source at all.
Though don't see moral issue there. Even though the users should be very
happy about open source, hey, isn't it free, but it's the users who don't care and
programmers do. And that's why it's free speech. Because for programs it's free
speech but for users it's free beer. Thank you.
[applause]