1. 6/2/2015SIMS1 Linux Adoption in the Public Sector An Economic Analysis Hal R. Varian Carl Shapiro UC Berkeley http://www.sims.berkeley.edu/~hal

2. 6/2/2015SIMS2 Definitions Open source v commercial software –Source code freely available Open interface v proprietary interface –Interface completely documented and freely usable –Programmer interface, user interface, document interface Generally open source software has open interfaces; proprietary software may or may not have open interfaces

3. 6/2/2015SIMS3 Economics of open source Many motivations to write –“Scratching an itch”, demonstrating skill, generosity, “throw it over the fence”, etc. Money to be made by –Consulting, support and related services, creating distributions, providers of complements Biggest danger –Splintering a la Unix –Examples: GNU Emacs, Xemacs

4. 6/2/2015SIMS4 Examples of open source Linux and BSD –18 million Linux users? –4% of desktop for Linux? –Amazon, Google, Yahoo All use Linux or BSD as servers Apache web server –Netcraft: 60% market share

5. 6/2/2015SIMS5 Factors influencing OSS adoption Total cost of ownership –Most studies find 10-15% difference Purchase price + system administrators In LDCs, former may dominate latter Switching costs –Much higher with proprietary interfaces –Vendors will try to exploit switching costs

6. 6/2/2015SIMS6 Switching costs and hold up Vendors always want to promise openness, but then not deliver –Give away version n, charge what market will bear for version n+1 How can a software vendor commit not to exploit customer in future? –Answer: true open interface and/or open source

7. 6/2/2015SIMS7 Microsoft’s dilemma Why should the Chinese government allow users to take the first shot of a very expensive drug? –Now network effects are relatively small, so why not choose the system with low switching costs and build your own network? –How can Microsoft commit to refraining from future exploitation? Possible strategies –Tolerate/encourage piracy –EU mandated open interfaces –Problems: spill over to existing markets

8. 6/2/2015SIMS8 OSS software quality Reliability –“higher stability” is very important Maintainability –Linux: ASCII files v Microsoft registry Usability –User testing is expensive, but interfaces can be copied Security –Hardened Linux Flexibility –Smaller, larger, harder, secure, localized

9. 6/2/2015SIMS9 Open source licenses Many different licenses (BSD, Netscape, etc.) GNU Public License –Copyleft provision –If you modify and distribute open source software outside your organization, you must include the source code –Only applies under these narrow conditions

10. 6/2/2015SIMS10 Economic development Building a network –Watch out for lock-in –Favor open interfaces when possible Educating a workforce –Open source important in education –Imagine trying to train mechanics if they couldn’t see real engines

11. 6/2/2015SIMS11 EFFECT DEFINITION IMPLICATION Complementarity The value of an operating system depends on availability of applications. Consider the entire system of needs before making choice. Switching costs The cost of switching any one component of an IT system can be very high. Make choices that preserve your flexibility in the future. Commitment Vendors may promise flexibility or low prices in the future but not deliver. Look for firm commitments from vendors, such as a commitment to open interfaces. Network effects The value of an application or operating system may depend heavily on how many other users adopt it For a closed network of users, standardization within the network is more important than choosing an industry standard. Licensing terms A perpetual license involves a one- time payment; a subscription involves a yearly payment Licenses can be particularly pernicious when switching costs are high. Bundling Vendors will want to sell software in bundles to make future entry into the market difficult. Purchasing a bundle now may reduce your future costs, but will also limit your flexibility and choices. Economic effects