Small Business Services

I was on the train from New York late one night, tapping away at some code on my laptop, when the woman next to me noticed that my interface had a feature she was looking for: White text on a black background. You are probably now thinking "Wow. Some feature.", but it was apparently very important to this person's husband, who suffers from severe eyestrain. Black text surrounded by a sea of white hurts his eyes, but he wasn't sure how to change that. I told her I was sure it could be done in Windows through the Display control panel, but that I hadn't used Windows in a while and couldn't tell her exactly. When she asked what I used if I didn't use Windows, we started talking about Linux and the economics of Free Software.

The part about Free Software that really blew her mind was the fact that it was free. How can anything worthwhile be free? Why would people work at it, build it up, and make it better if there was no money to be made from it? I've always tried to partially explain this by using the adage of giving away the razor and selling blades, but I never had a word for it that really summed it up. Thanks to this Slashdot article, I finally have that word: cross-subsidy.

The idea is the same as the razor blades: give one thing away, hoping someone will want to buy something else which you actually sell. You use the funds from the latter to fund the former. But why does this work so astonishingly well?

I said it before, and this article mostly reiterates it: the market price of commodity software is plummeting because of competition from multiple providers. Because there is almost zero marginal cost to distributing copies, the guy who will win is the guy who can sell the commodity at the lowest possible price and still make money. F/OSS software sells for zero dollars, makes tons of money, and has forced huge players like IBM, Sun, and Microsoft to come up with ways to incorporate Open Source into their strategies. Some companies come at it from different angles, but the effect is that they have no choice but to develop a strategy to monetize or otherwise benefit from Open Source.

Software companies are particularly worried, because, as economic drivers push the adoption of Linux, the quality of Free is increasing substantially. The release of Windows Vista was the first time that a significant number of people have looked at Windows, decided it wasn't worth the cost and hassle, and gone elsewhere. I've been surprised at the number of people who are now willing to give Ubuntu a shot on their desktops, and they're almost always very happy with the results. That spells trouble for Microsoft, because they have not been working on the problem of how to give away the razor and still make money. Instead they've turned to fighting the market and trying to keep the costs of software artificially high -- usually several hundreds of dollars per box -- through marketing campaigns and spreading false and misleading statements about Linux, and Open Source in general.

In the meantime, you have publicly traded companies like Red Hat and Novell making huge profits by providing and funding the development of free software. Red Hat in particular, and more recently Canonical have literally built their entire business models around giving away the software for free.

So if the software is the razor, what is the blade? The simple answer is "services." The idea is that you now have a wonderfully capable, stable platform on which to develop code and run your production and desktop alike. Eventually you're going to want some help in some form. Did it break on you? We sell support services! Do you need something custom written for your business? We sell programming services! Do you need someone to make sure it's always running at the peak of its ability? We sell system administration services! Service and support contracts, ad-hoc support, programming services... just name it and it's out there. The only overhead is the cost of keeping your real estate running and paying your people. There are no materials, no production of goods to speak of, so the Open Source service industry, like other service industries, is extremely high margin.

What's so great about this model is that it is completely open to competition. Techs who know Red Hat's Linux platform do not need to work for Red Hat to sell support services. They can go out and start their own company, get their own customers, and work totally, completely independently of Red Hat. What's better is that they don't need to focus solely on Red Hat. They can also support Suse (Novell), and Ubuntu (Canonical) as well, and still be completely independent, owing these companies nothing.

The moral of the story is that free does pay, you just need to think differently. Software isn't a product that you sell, it's a hook to pull people into buying software services. That sounds like there'd be a conflict of interest if the developers of the software are trying to sell consulting services, but that's too big a discussion to have here. Rest assured, though, that no such conflict exists, and the upshot is that it is in everyone's best interest to make the software as great as possible. It really is an everyone-wins economy, and we'll talk about that next time.

I would be remiss if I didn't add that cross-subsidy is by far not the only reason that Linux is continually developed. Other major reasons are academic research, paying for software with time instead of money, improving software built on that platform by improving the platform itself, hobbyists, and those otherwise with a vested interest to see Open Source succeed in the marketplace. These drivers came before and enabled the idea of cross-subsidy. They were the "bootstrap" of the Linux economy, and we'll talk about that more next time.

Until then!