An Economic Perspective on Software Licenses – Incentives in Open Source Software

1. An Economic Perspective on Software Licenses – Incentives in Open Source Software Kasper Edwards Department of Manufacturing Engineering and Management Technical University of Denmark

2. Outline • Point of Departure • Properties of Software • Three Licenses • Two Types of Agents • Roles and Desired Use-Products • A Model

3. Point of Departure • Motivation • Why is open source software being developed? • Raymond • Geeks bearing gifts • Ego, social status and reputation • Lerner & Tirole • Leadership • Reputation effects and spillover • Problems • Explained incentives for individuals - not mechanisms and dynamics • Too much emphasis on social status

4. Point of Departure • Interest • The development process • Economics • There is special dynamic within the development process • Hypothesis • Properties of software + Type of agent => A certain behaviour (incentives and mechanisms) • Goal • To develop a model of software development and consumption

5. Properties of Software • Two properties • Technical properties • License properties • Technical Properties • Software can be reproduced without loss of quality • The cost of copying is non-prohibitive • The cost distribution is non-prohibitive • License Properties • The license set boundaries for possible behaviour • Focus on the economic issues rather than the political

6. Three Licenses • Three extremes • Microsoft EULA • GNU GPL • BSD • Microsoft End User License Agreement • The licensee may use in the intended way • The licensee may sell the program once • The license may NOT copy, distribute, modify, use on more than one computer etc. etc. • It the program eats your data the program may be refunded • - - - A capitalists dream come true

7. Three Licenses • GNU General Public License (GPL) • The Licensee may copy, distribute and modify • Source code for modifications distributed must be available • Distributed copies carry same license • The viral effect… • - - - Protect the users • BSD License • The Licensee may copy, distribute and modify • Modifications and derived works may be distributed as closed source • - - - The liberal alternative

8. Two Types of Agents • Firms • Command resources • Pay salaries • Profit maximizing • Individuals • Only command personal time • Also driven by leisure • Utility maximizing

9. Roles and Desired Use-Products • Two Roles • Developers • User-developers • Use-Products • An agent’s particular use of a combination of features in a program

10. A Model – Microsoft EULA License Private use Agents who use U-U assistance Maintainer User- developer Program is developed Distribute

11. Dynamics – Microsoft EULA License • Basic market situation • Profit incentive for developing • Main dynamic is outside the model • Competition between maintainers • User-maintainer • Feedback if desired use-product is not present • User-to-user assistance • Cost effective way of obtaining information • Infoproviders derive a personal benefit i.e. reputation effect

12. A Model – GPL License Private use Keep modifications Agents who use U-U assistance Maintainer User- developer Program is developed Modify the program Distribute Discuss modifications Agents who modify Distribute modifications

13. Dynamics – GPL License • Why GPL? • Personal beliefs • Evolutionary perspective: In beginning profit prospects are low • Why Make modifications? • Desired use-product missing • Maintenance costs • Maintaining a separate patch is costly • Lack of information • User-developers cannot know if other user-developer are creating a similar use-product • The cost of being too late • No reputation effect • Maintenance costs

14. A Model – BSD License Private use Keep modifications Agents who use U-U assistance Maintainer User- developer Program is developed Modify the program Closed source distribution Distribute Discuss modifications Agents who modify Distribute modifications

15. A Model – BSD License

16. Dynamics – BSD License • Identical to GPL • But • Firms have a greater incentive to adopt BSD • Greater chance that modifications are kept private • Free riding becomes a significant problem • Effect limited at this level of focus • Standards and compatibility issues are missing

17. Conclusion • A model based in economics • Seems to offer a reasonable explanation for the phenomenon • The license shapes possible behaviour • The three licenses exemplify different types of behavior • Licenses not only restrict behavior but also create incentives • Limitations • Project as object of analysis • Consequences from standards and compatibility not included • Obvious implications for policy • P-makers must consider which license is best for the economy

18. The End

19. Incentives and Costs • Incentives for individuals • Ego – “LOOK What I have created!” • Peer reputation • Signaling effects – may spill into the real world • A desired use-product can be obtained at little cost • Incentives for firms • A desired use-product can be obtained at little cost • Homemade modifications • Possible to create services without maintaining the software • Costs • Time (adoption, programming, integration, etc.) • Firms: Wages • Individuals: Opportunity cost

20. Dynamics • Uncertainty • Difficult to predict development path => Lowered free riding • The “Keep Private” Penalty • Keep private => High maintenance costs • Always a work in progress • Low initial commercial value => license lock-in (GPL) • The cost of being too late • Development becomes a sunk cost • Risk of the “Keep Private” penalty • Aggregated benefit • One agents small contribution result in large aggregated benefits

21. Does the Model Hold Up? • Henrik • Individual, limited spare time • High opportunity cost • The modification was a one time investment • Paul • Consultant, working for a firm • Obvious incentive for keeping private • Small firm, Paul charged extra for keeping private • No in-house programmers – no wish for extra maintenance • Number 1 to market the new product more important

22. The Model MS EULA GPL License Private use Keep modifications Agents who use U-U assistance Maintainer User- developer Program is developed Modify the program Closed source distribution Distribute Discuss modifications Agents who modify Distribute modifications BSD License

23. Two examples of OSS development • Henrik – Need feature • Programmer and Linux enthusiast • Interested in kernel development • Had to use windows for work • Linux was unable to read Windows’ file system • Gordon had a patch, which he maintained  • The patch was troublesome to obtain  • In frustration Henrik decides to fix the patch for integration • The patch is integrated and future versions of Linux can now read Windows’ file system

24. Two examples of OSS development • Poul – Paid modifications • FreeBSD core developer, consulent • Small American ISP wanted to market a new product • The product: Individual hosting • Each customer was to obtain full control • The ISP already used FreeBSD, however functionality was needed • Poul was hired for the job • To prices: 1) Private 2) Open source • Added benefit: General increase in FreeBSD security