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Open Source and Dowward Price Pressures

Downward price pressure from open source on the general software market hasn’t been as significant as expected. You don’t see Oracle dropping the price on their applications, or IBM lowering the price of DB2, due to open source. At least not yet. Outside of a few small areas, pricing in the commercial markets has been relatively stable.

One reason is that there is a lot more to many technologies than just the product alone. There’s a broader software ecosystem to be addressed. To have price pressure implies that you can exchange one product for another (relatively) easily. Until you have that, the impact is more likely to be limited to new development projects. An example of this is databases behind web sites.

You are far more likely to see open source databases in this area than in other areas of IT for several reasons. You have (typically) new projects starting from scratch where the alternative is an open source database or a hefty commercial license. While database vendors may lower their prices, there is little chance of dropping far enough to be significant, so you are unlikely to see a big drop in commercial database pricing. This may change over time as open source database technology improves, in much the same way that Linux has slowly replaced vendor Unix distributions. In the near term, price pressure on that market is not that big a factor.

The price factor with open source shows up where the software is more mature, typically in a market segment that is headed towards commoditization already. With maturity comes relatively stable software boundaries, and standardization at the boundaries. Standardization allows for easier switching of components, which invariably leads to substitutability and downward price pressure. Open source can accelerate this process, since open source projects usually work with open standards rather than proprietary standards.

Open source affects the commercial market n more subtle ways, for example by enabling more experimentation, something I’ll discuss in a later post.

  Posted by mmadsen on November 29, 2007 9:11 AM |

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