The Impact of Open Source Software on Competition on Software Markets Jens Mundhenke Kiel Institute for World Economics Baltic IT&T 2005 Forum Seminar “Open Source Software: Are You Prepared?” Riga, April 7, 2005

Baltic IT&T 2005 Forum 7 April 2005, Riga 2 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Outline  The Empirical Picture  Economic Properties of Software  Characteristics of Open Source Software and Implications for Competition and Innovation  Supply- and Demand-Side Challenges  Legal Aspects  Conclusion

Baltic IT&T 2005 Forum 7 April 2005, Riga 3 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Worldwide and European ICT Markets 2002, Million € Source: European Information Technology Observatory 2003, Tables 7, 11. Total: 2,153,072

Baltic IT&T 2005 Forum 7 April 2005, Riga 4 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition IT Services in Germany: Distribution of Firms and Revenue According to Firm Size Source: German Federal Statistical Office (2004), Annual Services Statistics 2002.

Baltic IT&T 2005 Forum 7 April 2005, Riga 5 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition “Market” Shares in High-Technology Industries (1999/ 2000) Source: Evans and Schmalensee, in Jaffe/ Lerner/ Scott, Innovation Policy and the Economy 2, NBER 2002, Table 1.3, p. 19.

Baltic IT&T 2005 Forum 7 April 2005, Riga 6 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Software is a Special Good  High first copy costs, low marginal costs – Supply-side economies of scale – Instant scalability – Non-rivalry in consumption  Network effects – Economies of scale in consumption – Path dependencies  No technical deterioration

Baltic IT&T 2005 Forum 7 April 2005, Riga 7 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Characteristics of Software Markets  Basic requirement: Excludability of consumers  Market structure: – Tendency towards concentration – Advantages for established firms  Market dynamics: Innovation is imperative

Baltic IT&T 2005 Forum 7 April 2005, Riga 8 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition What is Open Source Software?  Access to the source code and  A free license: – Unrestricted usage – Modifications are allowed – Software can be copied and distributed without license fees

Baltic IT&T 2005 Forum 7 April 2005, Riga 9 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Implications for Innovation and Competition  Low market barriers: – Code can be re-used – Competition is intensified – Technical platform for new products  Accumulation of human capital  Open interfaces – Use of existing networks – No supplier-specific lock-in

Baltic IT&T 2005 Forum 7 April 2005, Riga 10 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Challenges for OSS: Supply  Is there a broad choice of software?  Individual contributors – Motivation? – Preferences of work areas?  Firms’ activities – Balance: Community — Business – Viability of business models

Baltic IT&T 2005 Forum 7 April 2005, Riga 11 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Preferences of Work Areas Source: Ghosh et al. (2002) FLOSS-Study, Part IV, Figure 19, p. 28.

Baltic IT&T 2005 Forum 7 April 2005, Riga 12 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition The Use of Open Source Software  Open Source Software is regarded as a realistic option  Application areas: Server, Internet services, development, data bases  Economic criteria: Stability, security, costs

Baltic IT&T 2005 Forum 7 April 2005, Riga 13 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Challenges for OSS: Demand  Low market penetration: Missing applications, no end-user orientation, compatibility with established standards  Scepticism on decentralized development: Support, market fragmentation, binding roadmaps  Lack of knowledge, uncertainty: Legal implications of OS-licenses, reference implementations, user acceptance

Baltic IT&T 2005 Forum 7 April 2005, Riga 14 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Recommendations  Increase market transparency, promote dissemination of information  Non-discriminatory use of Open Source Software in the public sector  Support interoperability, promote open standards  Adapt the legal framework

Baltic IT&T 2005 Forum 7 April 2005, Riga 15 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition The Legal Framework  Conformity with existing laws? – Copyright – Contract law  Software Patents – EU-“Directive on the Patentability of Computer-Implemented Inventions”

Baltic IT&T 2005 Forum 7 April 2005, Riga 16 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Problems of Software Patents  Monopolization of Ideas  High transaction costs  Specific disadvantages for Open Source Software  Strategic use of patents  Availability of alternative mechanisms of protection

Baltic IT&T 2005 Forum 7 April 2005, Riga 17 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Recommendations on Patents  Strong and clearly defined requirements needed  Increase efficiency of patent system  Attenuate negative effects of patents  Specific rules for software?

Baltic IT&T 2005 Forum 7 April 2005, Riga 18 Jens Mundhenke Kiel Institute for World Economics The Impact of Open Source Software on Competition Conclusion  Open Source Software increases (potential) competition.  However: – Successful business models? – Availability of information? – Fair competition? – Adequate laws ?

Thank you! Jens Mundhenke Kiel Institute for World Economics Düsternbrooker Weg Kiel, Germany