Monopoly Power and Open Source

In a recent discussion on Open Source, one party argued that there is a disconnect in IT innovation and development – Open Source is removing the concept of “paying for what you get” in many IT market segments. I would like to follow up on this idea of “paying for what you get”.

This phenomenon is largely independent of Open Source as computing “matures” new companies have to go way down the cost curve right at start up – taking things at a loss or giving away for free to even establish a position in the market. This is the so called first player or dominant players advantage in any economic market. New entrants win over customers by adding features and/or lowering prices. Economists will tell you that low price competition is prevalent. But lowering prices to zero ?

Well actually, its the dominant players who use this tactic much more often as they invade new market segments. For example, Microsoft has taken this tactic to the brink and over the bounds of restraint in countless markets – giving away for free in various bundled market segments where MS seek to establish “presence”, “mindshare” or a new position while raising prices in dominated segments such as desktop OS or Office Suites. Think of Internet Explorer and IIS Web Server in the Web market where it had no presence. Or the huge giveaways of OLAP Server, Analytic Server, and Reporting Services bundled free with SQL Server where Redmond needs to boost sales against very good competition.

The result of these trends is that innovation is controlled by dominant players like Cisco, Intel, Microsoft who act as gatekeepers for technology in what they consider their domains – all internetworking devices, all processor chips, all software respectively. So start ups and
new ventures in established firms must run an ever tighter gauntlet –
-avoid the gorilla domains and seek very small, insignificant niches
-or price so far up or down the cost curve that other economic factors come into play
-or give away their product for free trying to make revenues through
secondary sources such as advertising, support, consulting and other services.

So it is the maturity of the IT market with some very “pugnacious if not downright pit bull in ferocity” dominant players that is a significant determining factor in the creation of Open Source. Open Sourcers say why bother to go down the learning curve, price at zero and get the idea out blossoming/flourishing then worry about “making a killing/getting along” elsewhere. Now this is not attempting to discount other Open Source influences such as need to establish open standards, opening up code to drive for better reliability and providing a spark for customization in a product category that inherently has many variations. But the bottom line is that by being so monopolistically ruthless, dominant IT players like Microsoft have stimulated the very Open Source phenomena that may prove to be the monopolys undoing in various markets.