Free Software, Real Profits

Socially responsible investing begs the question: Is it financially viable? The same question arises with regard to free, or open source, software. Free software is clearly beneficial to society, but is it good for business?

Software is a lucrative, high-margin industry. Individuals and companies pay up when it comes to buying or upgrading software. Yet most people have never looked at the code for the programs they use. So when terms like "open source" and "free software" start getting thrown around, we should take a step back and make sure we know just what these terms mean.

Would you pay for a closed recipe?
A cooking recipe is a set of instructions -- something you can change at will, copy as many times as you want and distribute to friends with the changes you made. Imagine you have a machine that takes a recipe and ingredients, and the food is ready an hour later without any help from you.

Suppose this really exists: You could write your own recipes, but they wouldn't come close to Grandma's famous orange cake recipe or any of Jamie Oliver's. Alternatively, you could buy "closed" recipes, to which you have no access; you couldn't see the steps, but you'd still get stunning results -- unless you don't like cilantro and it's a major ingredient.

Software as a recipe
That's how it works with software. We have a computer to "cook" for us, but we usually don't write the "recipes" – the software. We get it from various sources, either for free or for cash -- ranging from a dollar or so for your cool mobile app up to millions for high-quality corporate software.

Either way, we don't know what the code looks like -- we only see the output. That's why it's called closed software. We can't learn from it, we hope it does what we want, but it might have bugs, or do something differently than we expected. We're largely stuck with what we have.

Free as in beer, free as in freedom
When software is given away for free, like those free apps, that's fun -- like free beer. However, the software is still closed, and you can't see how it does what it does, or how to change it. But when you have access to the code, and you're allowed to change it and redistribute it, then it is called free software -- free as in freedom.

The Free Software Foundation calls for the use of free software, "mak[ing] a political and ethical choice asserting the right to learn, and share what we learn with others." This allows knowledge to be shared more cheaply, easily and faster. It makes software accessible to everyone, lowering the economic barrier of entry for users and small corporations.

Open source: the shift to business
In the late '90s, some software developers decided to rebrand free software as "open source," emphasizig the business potential of the sharing of source code. Many software companies rejected the open-source premise, due to fears of lost revenues and shrinking margins. But others saw a business opportunity to reach ever-growing markets, licensing the code in a different way. This new licensing scheme enabled repackaging of the open-source software with additional, closed code components for which companies could still charge high sums.

Making and saving money with open source
IBM (NYSE: IBM  ) , Google (Nasdaq: GOOG  ) , and Red Hat (NYSE: RHT  ) are among the major players that have adopted the open-source paradigm. IBM makes gobs of money by selling high-end closed components packaged with open-source code, such as the Eclipse project. The closed, top-secret search engine gets Google's cash flowing, while web development components and the Android operating system increase Google's popularity. Anyone can download Red Hat's distribution of the Linux operating system -- the company makes its revenue from corporations that subscribe to Red Hat services, in order to receive full support.

Many companies, NGOs, and governmental agencies find Red Hat's model more beneficial than paying for every individual license of a closed operating system, such as Microsoft's (Nasdaq: MSFT  ) Windows. Similarly, organizations have been shown to save money by switching to free software. A recent study showed that companies can save up to 20% of their IT budgets by switching to the OpenOffice suite, sponsored by Sun (now Oracle (Nasdaq: ORCL  ) ).

The Foolish bottom line
IBM, Google and Red Hat are not alone. Companies of all sizes and trades are adopting free software and enjoying its economic benefits. As Robert Frost said, "Freedom lies in being bold." Will you be bold? Tell us what you think in the comment box below.

Some related Foolishness:

Shiri Dori-Hacohen owns a single share of Google, but no other companies discussed here. Google and Microsoft are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Google and Oracle. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy would like to take you out for coffee.


Read/Post Comments (4) | Recommend This Article (31)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 21, 2010, at 5:10 PM, JeanDavid wrote:

    I have been running "free" software all my life. People used to give away the programs they wrote. Then corporations started to keep secret what they did. This was a pain for most people. Luckily, for me, I worked for a major corporation that produced software. Such as the UNIX Operating System. So I could get the source for that pretty easily. My employer even gave it away to universities. If a private user wanted it for a personal computer, they would license it for $25,000 and up. I doubt they sold many licenses for it to run on $2,500 computers. Now some people are providing free software again.

    In the last go-around, I paid $35 for a copy or Red Hat Linux 5.0. I got 5.2 free with a computer I bought. I paid for RHL 6, and I ran RHL 7.3 for quite a few years. I paid something for the disks, because I had dial-up at the time and downloading them was a drag.

    I skipped RHL 8, and bought RHL 9 to use on my new machine in 2004. But by the time I finished building it, I went with Red Hat Enterprise Linux 3.

    I tried using RHL9 on my other machine, but the printing system was incompatable with RHEL3, so I put CentOS 4 (free, but I believe I sent them $25), I now run RHEL 5 on my new machine and will probably not upgrade it until RHEL 7 comes out. I will probably put CentOS 6 on my old machine to practice on.

    I pay for all the Red Hat stuff because they pretty much take care of it for me. I pay something to CentOS to keep them going.

  • Report this Comment On August 21, 2010, at 5:20 PM, xuincherguixe wrote:

    I'm skeptical about Free Software's ability to generate money, but what I don't question is it's value. Frankly we should pay more for our Free Software.

    While most people won't ever even bother looking at the source code let alone modify it, the fact remains that this is possible. If I feel that my PostgreSQL database has some poor sorting algorithms I could go in and change them.

    Now that I think PostgreSQL is probably a good example to bring up in a discussion about Free Software. That's because maintained to a large part by the companies who use it. In other words even though they aren't making money off the product they are helping to provide, they believe there is enough value to justify paying people to maintain it.

    Also, this article completely neglects to offer a distinction between Open Source Software and Free Software. That strikes me as a tremendous disservice.

    An explanation of what Free Software is can be found at http://www.gnu.org/philosophy/free-sw.html

  • Report this Comment On August 22, 2010, at 12:39 PM, XMFShirKi wrote:

    xuincherguixe,

    Thanks for your comments and the Free Software link. Due to space constraints, I decided to leave the OSS/FS distinction out the picture for this article. But I might write a future article elaborating on this point.

    Best,

    -Shiri (TMFShirKi)

  • Report this Comment On August 23, 2010, at 7:59 PM, ChrisBern wrote:

    The biggest challenge to both corporate and personal adoption of open source software is the learning curve. Most average computers would need to be trained on Linux, whereas they already know Windows. This training cost (and possible lack of productivity) would typically eclipse the software license cost. Same goes with Microsoft Office versus Open Office.

    Where open source does really well is in the back office and middleware segments, where experienced IT professionals can put them to work, saving tons of licensing costs while not increasing employee's learning curves. Also open source is great in embedded systems, e.g. the operating system of an ATM or netbook.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1277092, ~/Articles/ArticleHandler.aspx, 8/29/2014 8:30:58 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement