Open Source and Proprietary Software: The Search for a Profitable Middle-Ground

Abstract

The open source software development model has been hailed as the most significant change in computing since Apple played David to IBM's Goliath. Yet, enterprises dedicated to bringing open source into the mainstream of the information economy have had a rough time finding ways to stay afloat financially. While traditional software companies can generate revenue from the sale of their intellectual property, this is hard to do with open source software because the developers retain only limited rights in the products. The approach adopted by some open source companies is to honor open source in spirit while inching toward fees for the use of intellectual property. These firms have created hybrid business models that combine elements of free code with code that is licensed for cash. Ironically, in the wake of the dot-com bust even firms licensing software in traditional ways have been struggling to cope. Many of these proprietary software makers have found they can better satisfy their customers, and generate more profit, by adopting aspects of the open-source development process.

We take a closer look at both kinds of companies to illustrate how very different sorts of developers are moving towards a fruitful convergence. We conclude that open source companies are more likely to succeed if they can use open-source products as entree into domains protected by traditional intellectual property, and that proprietary companies can benefit from open-source software development without abandoning revenues from intellectual property. Open source and proprietary development models remain distinct, but we predict that less software will be licensed at either extreme in the future.

Keywords: Open source, intellectual property, software

JEL Classification: O34, L86