After 10 years spent studying open source, for ZDNet and now Seeking Alpha, I have finally come up with a comprehensible analogy for it.
Open source is an iceberg.
The benefits of open source do not primarily go to "open source companies." Even Red Hat (NYSE:RHT) CEO Jim Whitehurst freely admits that, comparing open source to the standardized nuts, bolts and screws of 200 years ago. Those standards enabled the real glories of the Industrial Revolution - trains, planes, automobiles - to be created. The whole age of mass-market invention flowed from it.
That is the case with open source as well. The bulk of the benefits go to its knowledgeable users, including its corporate users. Facebook (NASDAQ:FB) was built on open source software. So is Satya Nadella's Microsoft (NASDAQ:MSFT). Netflix (NASDAQ:NFLX) created its own open source project for connecting networks. Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) is banking on open source to get itself back into the cloud services game.
Open source puts a firm floor under software innovation, and under corporate choices. You can build on it because there are lots of eyes on it, far more eyes than any proprietary platform can deliver.
This doesn't just matter to big companies. It also puts a floor under the innovation at small companies, which is why start-ups have grown at ludicrous speed this decade. Uber (Private:UBER) and all the other unicorns in the "gig" economy are built on open source. Open source is why the Internet of Systems will explode out of the gate, benefiting Honeywell (NYSE:HON) and General Electric (NYSE:GE). They will benefit from the rise of start-ups in the space because they will be using the same platform.
Back in the PC era, software companies had few choices when it came time to sell out. They could go with a bigger software vendor in the same business or go with the company whose platform gave them life. This is what enabled Oracle (NASDAQ:ORCL) to roll up its database space in the last decade - companies that had reached the end of their growth curves had no choice.
This won't be the case when tools and services built with open source mature. Open source platforms can be adapted by anyone. You're not dependent on a platform "owner." There are thus more potential buyers for new software-based services, and the prices those companies get will be based on how much business they are doing, or might do, rather than any dependencies in the code.
Ignore the problems of the toolmakers in either making a profit or getting venture capital investment. Tool costs can be shared, and once customers stop buying support, they become contributors. This benefits the tools, and it's the tools that count. The code lives on, which is why the foundation model - OpenStack, Apache or Linux - works well for open source toolmakers.
Keeping the tool alive means getting users on board with sharing enhancements, and everyone shares in those benefits equally. The fact that this business model smacks of socialism should not matter to investors - is the NFL a bad business because its business model is based on revenue sharing?
The point is that the next explosion of innovation is going to occur from a very high base, thanks to open source. It could explode out of the gate even faster than social or shared services, and it will be those companies that best leverage the "free" tools out there that will deserve your investment in the future.
Oh, and buy Red Hat.
Disclosure: I am/we are long GE, MSFT, GOOGL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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