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Author Topic: Open Source Proves Elusive as a Business Model  (Read 7952 times)

mouser

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Open Source Proves Elusive as a Business Model
« on: December 01, 2009, 06:25:56 AM »
I fret about the business models i see succeeding on the internet.  The internet was supposed to let the masses compete with the big guys.. But when I look around it seems to me like just another example where the super giants are getting rich and everyone else is scrambling to get some attention without the slightest intention of coming up with a business model for profitability, and instead is just hoping to get enough press to get them a ticket to the lottery of being bought out by one of the big guys.

There has to be a better, more widely applicable model for open source developers to survive financially..

Quote
..To Ms. Kroes’s point, there is an open-source alternative, and usually a pretty good one, to just about every major commercial software product. In the last decade, these open-source wares have put tremendous pricing pressure on their proprietary rivals. Governments and corporations have welcomed this competition... Whether open-source firms are practical as long-term businesses, however, is a much murkier question... in the last decade, open-source software has become more of a corporate affair than a people’s revolution... The larger technology companies have tended to buy these one-trick ponies for strategic purposes.


Note that the article itself is your typical useless business article that seems of interest only to wall street people trying to decide which firms to invest in -- but i think any article that sparks discussion of how open source can become a more viable thriving model is worth noting.



from http://www.gadgetopia.com/post/7002
« Last Edit: December 01, 2009, 06:29:38 AM by mouser »

40hz

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Re: Open Source Proves Elusive as a Business Model
« Reply #1 on: December 01, 2009, 10:32:42 AM »
There might be better alternative business models if there were something even remotely resembling a level playing field. Unfortunately, that's not the case.

One of the biggest myths of western capitalism is the myth of the 'free market.' Free markets no longer exist. And many economists would argue that they never really did. All of the world's economic systems and marketplaces are regulated. Some may be regulated less formally, or to a greater or lesser degree, but all of them are regulated.

In a regulated marketplace, the most established businesses with deepest pockets* have a significant advantage since much of the regulatory system is designed to protect their interests. In such an environment, innovation is often viewed as a threat rather than an opportunity, unless the innovation is minor - or is being brought to market by a big company.

So here's the problem in a nutshell: Any real advantage a small company might have can almost always be trumped by greater capital resources, litigation, or regulation.

Most successful small tech developers know (as do their investors) that no matter how breakthrough their product or service is, it will only be a matter of time before someone with deeper pockets:

  • Buys out one or more of the developer's partners or investors.
     
  • Files IP or patent infringement charges against the developer regardless of merit.
     
  • Steals the developer's product/service outright and defies them to successfully sue to get it back -or-
     
  • Attempts to get legislation passed to effectively outlaw the developer's product or service.
     

Small companies don't have the resources to fight against these tactics for any length of time. And the bigger kids on the block know it.

So from a purely business perspective, becoming a nuisance and then selling out to the highest bidder is probably the current most effective business model - if you look at it from the viewpoint of profitability, investor return, and capital preservation.

From a societal and technical perspective, we're all made poorer by this approach. But for the people putting in the time and money to develop a new product or service, this may be the only way they can reasonably expect to make something for their efforts.

And for an individual or small company, 10% of something is a better return than 100% of nothing.

 :(

-----

*Note: having 'deep pockets' applies to individuals as well as businesses.

That's why it's so important to get your net worth up (just above $1 million in the USA) to the economic tipping point. Once you get there, you'll discover "the system" starts working for you in the form of more favorable interest rates, better investment opportunities (courtesy of 'qualified investor' rules), and access to various legitimate tax strategies.

The old adage "The best way to make serious money is to have serious money to begin with!" was never truer than it is in the USA. The USA may occasionally forgive failure - but it always rewards economic success..



« Last Edit: December 01, 2009, 10:48:50 AM by 40hz »

mouser

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Re: Open Source Proves Elusive as a Business Model
« Reply #2 on: December 01, 2009, 12:51:14 PM »
From Kevin Kelly's site today:

http://www.kk.org/ne...market-is-the-ma.php
Quote
The software is free, but the manual is $10,000. That's no joke. Cygnus Solutions, based in Sunnyvale, California, rakes in $20 million per year in revenues selling support for free Unix-like software. Apache is free but you can buy support and upgrades from C2Net. Although Novell, the network provider, does sell network software, that's not what they are really selling, says Esther Dyson: "What Novell Inc. really is selling is its certified NetWare engineers, instructors, and administrators, and the next release of NetWare." One educational software exec admitted that his company's help line was actually an important profit center. Their main market was the ancillary products they sold for their flagship software, which they had a chance to do while helping customers.

This is what i keep seeing -- people are finding a way to make money off of open source software.. but the way there doing it looks something like this:
  • Let open source mostly hobbyist coders write software in their free time; because it's a hobby, they tend not to spent much time writing documentation, manning support forums etc.
  • Now the businesses come in and sell 3rd party support and documentation materials for the open source software.

It's kind of a vicious cycle isn't it?  The coders aren't getting paid, and the people who are getting paid depend on the software to be hard to use and without a good support system in order to make money..

JavaJones

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Re: Open Source Proves Elusive as a Business Model
« Reply #3 on: December 01, 2009, 02:53:45 PM »
Yes and no. The coders choose to make their work available for free. Many of those same developers are part of larger companies paying them - at least in part - contribute. And even though the larger company may make most or all of its money off of support or other services, and not the software itself, some of the devs still benefit. But the real trick of it is, if support is where all the money is, devs are not barred from providing it... they just don't *like* it. So maybe it sucks that support is where the money is, but that's really because support is needed *and* the software is made freely available. If either one of those things weren't true, things would be different. If devs spent more time making more intuitive software or built-in help; or if they chose to charge for their apps; or if they were willing to spend part of their time investment on support...

- Oshyan

40hz

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Re: Open Source Proves Elusive as a Business Model
« Reply #4 on: December 01, 2009, 04:13:29 PM »
Just because the NY Times and Wall Street got it wrong doesn't mean we have to.

The "FOSS Business Model" remains elusive because FOSS is not - and never was - meant to be a business model. The whole concept behind FOSS is as far from business as you can possibly get. If a viable business can arise out of a FOSS project, that's all well and fine. But it's purely a side-effect. It plays no integral role in FOSS philosophy.

FOSS is not a business model. It's a social movement. Or maybe a philosophy, if you prefer. For people like Richard Stallman, it could even be considered a religion.

But whatever FOSS is, in and of itself - it is not a 'business.'

So there's no vicious circle. Nobody's getting ripped off. You can't really steal something that's being given away. You can't burn the developers by charging for installation or technical support services because the governing licenses not only permit doing that - they encourage it. And the people who are involved in FOSS projects understand and agree with that.

You also have to be careful not to lump things together too much when you're talking about FOSS. Not all FOSS projects are created equal. And a large number of FOSS coders are also professional coders so it's not completely accurate to characterize all FOSS development as being a hobbyist effort.

And I also don't think the "business plan" is to deliberately release excessively complex and poorly documented code in order to force people into paying for tech support. I think it's more a natural outcome of the FOSS development process.

Most coders get into FOSS in order to do what they love on something they care about. And many are professionals who want to avoid the whole code review and approval process they live with at work. Unfortunately, one big side effect of going that route is that the code tends to get a little sloppy and exhibit some sprawl.

The same goes for the relative absence of quality documentation. Most coders HATE to write documentation - and FOSS projects are dominated by coders. So if serious documentation does get written, it's often because somebody (usually a satisfied user with a technical writing background) nominated themselves to do it and put the time in.

What I think many professional (as in compensated) coders don't get is that the bulk of the people involved in FOSS development really don't care if somebody decides to make money off tech support (or anything else) as long as the terms of the license governing their codebase is honored. Money is not what motivates them to get involved. They're doing it because they have the time and talent; want to do it; and believe in it.

Those that don't quit the FOSS world and go on to other things.

So to the point about there being a "vicious circle," I really don't think the FOSS developers would see it that way.

I know it comes as a jolt to a many that there are talented folks who are willing to generously provide their personal time and effort to produce something that will be given away. But that's the way it is with FOSS. Considering the amount of rage FOSS seems to induce in some people, I'm sure there are more than a few professional coders who can't (or simply won't) believe that's what's going on.

And maybe that's why these coders aren't involved in FOSS projects. :)


mouser

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Re: Open Source Proves Elusive as a Business Model
« Reply #5 on: December 01, 2009, 04:30:33 PM »
All good points.

I'm sorry if i fell into the trap of presenting this as a view of FOSS as a business model -- nothing makes me more ill than reading all of these people talking always about ways of "monetizing" the web.  That term "monetizing" makes me want to stick knives into my ears.

I don't come at this from a "business model" perspective.. I come at from the perspective of someone who would dearly wish i could just spend my time coding on projects I thought were useful without worrying the slightest about money or revenue, and did so right up until i slammed head first into the very harsh reality of having to earn enough money to pay for rent and food.

So i come at this stuff from an admittedly biased position of wanting to find a way for open source / freeware coders (and musicians and artists) to be able to find a way to support themselves, even if only just barely, while doing the work they love.  What breaks my heart is that it feels to me the open source revolution is leading once again to the big corporations getting rich off the backs of the authors/artists/workers, who must by necessity only do this work as a hobby instead of their real work, because their is no money for them to do this stuff full time.

Again, you are quite right when you say that many (most?) of the people involved in open source are doing it because they love to do it, and because at the time they are working on it, they have alternate sources of financial support -- real jobs so to speak, or they are in academia where they have free time to work on this stuff.  That's wonderful.. However I've seen enough examples of coders posting how they have to stop working on a project because they no longer have the time to work on it with their real jobs demanding their time, or how they can't afford to spend the time providing support because of the need to work at a real job. I just wish we could get to a place where there is just a little more financial support for those who would like to transition from doing this stuff as a hobby to doing this stuff full time.

This gets back in many ways to my views about donationware.  If people think of software in two categories: Commercial Software that they are happy to pay through the nose for, and Freeware/OpenSource software which they refuse to donate a dime for regardless of it's quality or value to them, then we are doomed into living with this situation where the commercial entities are the only ones who can afford to spend real time on this stuff.  If the culture shifted to donating more to open source developers, than we might see a real flourishing of coders who don't care about getting rich, and suddenly have a path that let's them focus on programming (creating music, etc.) full time.   And the result would be more high quality free (donation supported) software, and less evil-giant-corporation dominance.
« Last Edit: December 01, 2009, 04:36:59 PM by mouser »

Dormouse

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Re: Open Source Proves Elusive as a Business Model
« Reply #6 on: December 01, 2009, 06:09:09 PM »
Most coders get into FOSS in order to do what they love on something they care about. And many are professionals who want to avoid the whole code review and approval process they live with at work. Unfortunately, one big side effect of going that route is that the code tends to get a little sloppy and exhibit some sprawl.

The same goes for the relative absence of quality documentation. Most coders HATE to write documentation - and FOSS projects are dominated by coders. So if serious documentation does get written, it's often because somebody (usually a satisfied user with a technical writing background) nominated themselves to do it and put the time in.

I think there are a lot of issues in this topic, but the freedom of coders in FOSS (especially their own projects is one of them). Firstly, it's what provides the incentive for them to do it in the first place. But, secondly, as 40hz says, it gives the freedom not to do lots of things that have to be done on successful commercial projects: review, quality control, internal documentation, user documentation, making the product easy to use, making it pretty, support, website maintenance, responding to user requests, sustaining a long-term approach to marketing and developing the product.

Many developers are good at some of these, but very few at all. Users are mostly looking for a mostly complete package with maybe only a few areas of significant weakness. That is true for free as well as commercial products, but it is mostly the commercial entities that enforce a discipline to try to do the lot.

By and large coders take inspiration from within themselves (and seem to just want to code). The people who are just wanting to make money take inspiration from those who might pay them the money (and try to give them what they want and will pay most for, at least cost to themselves).

If you want to make enough money to live off from donations, you do have to take a commercial perspective in terms of giving customers what they want. And that is on top of having a good idea and implementing it well. And shareware authors are (nearly?) as likely not to do all the above as freeware authors.

One other thing I would mention. People like to know what the price/donation should be. They also like a discount. Trying to decide how much to donate, even if they're able to come to the point of deciding that they want to, is just too much; no-one wants to seem a skinflint, but no-one wants to overpay either.

I have vast amounts of free software. Most of it I never use, or use extremely rarely. I'm more likely to persist with software I have paid for (or donated to) and less likely to chase around all the alternatives (though there's a fair bit of commercial software I don't use as much as I expected too) - and this initial commitment is as important to freeware as it is to commercial.

mouser

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Re: Open Source Proves Elusive as a Business Model
« Reply #7 on: December 01, 2009, 06:24:26 PM »
Dormouse, some very good points.
And I think after several years of being involved in DonationCoder, I can confirm your comment here:
Quote
Trying to decide how much to donate, even if they're able to come to the point of deciding that they want to, is just too much; no-one wants to seem a skinflint, but no-one wants to overpay either.

The best i've done to address this is to make a joke chart, so i haven't come up with a solution -- but i do think it bears saying that i think you are right, that this causes people no small amount of discomfort, and turns off some potential donors.

[Actually it's not quite true that there isn't another solution on DC -- having a DEFAULT DONATION AMOUNT goes a long way to ameliorating this problem, though since we hit this economic crisis, the default donation amount is mostly ignored by a wide margin].

phillfri

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Re: Open Source Proves Elusive as a Business Model
« Reply #8 on: December 10, 2009, 04:11:54 PM »
Think out of the box for a moment on this one. The real driver of the internet is NOT the profit margin on web activity - its the cost of alternative means to accomplish the same levels of communication, exposure, distribution, etc. The internet is by its nature a not-for-profit model, where the goal is not defined as maximizing profits, but rather maximizing benefit for a fixed amount of grant or contribution (dollars). How does everyone think we keep increasing economic productivity on a world wide level in the middle of a recession and super high un/under-employment? Its all about maximizing certain outputs for a set amount of dollar cost. The internet  is a mechanism for doing a LOT of things a lot cheaper than doing them any other way (without the internet).

40hz

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Re: Open Source Proves Elusive as a Business Model
« Reply #9 on: December 10, 2009, 06:41:26 PM »
The internet is by its nature a not-for-profit model, where the goal is not defined as maximizing profits, but rather maximizing benefit for a fixed amount of grant or contribution (dollars).


I think that might have been true in the early stages of Internet deployment, but I don't think that's the case any longer. Espeically in the United states where the government has pretty much stepped out of everything except security and regulation as far as the web is concerned.

But even if that were true, it would still primarily apply only to the electronic 'plumbing' and not the content found on the web. Most content providers are actively looking for ways to charge for their words and images, and have been since the web moved out of its enthusiast/hobbyist phase several years ago.

Actually, when you get right down to it, The Internet itself isn't really a business anything. It's a communications infrastructure built around set of technologies and standards. So in many respects it is closer to what's traditionally considered to be a public utility rather than a business service. But while commercial applications were not a part of the concept that eventually became the Internet, the business community soon found uses for what it could provide. Just like it found uses for electricity back in the late 1800s.

How does everyone think we keep increasing economic productivity on a world wide level in the middle of a recession and super high un/under-employment? Its all about maximizing certain outputs for a set amount of dollar cost.

Well...the most common practice currently employed to increase productivity and lower costs is to farm out manufacturing and service support to countries where labor comes cheap and there's little in the way of civil rights, environmental protection, or fair labor practices. It's also a major contributor to unemployment levels in countries that do have fair labor laws and stricter controls on environmental pollution.

And now that international shipping has become so cheap, it often costs less to ship from Asia to Europe or North America than it does to move the products from the receiving port to the local store shelves. So geographic distance is no longer a major consideration when it comes to picking a manufacturing site.

One very dirty side effect of all this web technology is that it has made exploitative outsourcing a viable business strategy. So not all is roses worldwide. None of our problems really went away. They just got palmed off on other people.

Outsource.jpg
« Last Edit: December 10, 2009, 07:15:31 PM by 40hz »

Jimdoria

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Re: Open Source Proves Elusive as a Business Model
« Reply #10 on: December 11, 2009, 04:06:09 PM »
Mouser said:
Quote
I come at from the perspective of someone who would dearly wish i could just spend my time coding on projects I thought were useful without worrying the slightest about money or revenue...

I certainly understand this wish. I sometimes wish I could just spend my time drinking beers I thought were delicious without having to worry about money or revenue.  :D

Sadly, our system is not set up to serve you, Mouser. Or the writers, or the poets. Or even the beer drinkers. It's set up to serve the money-lovers - capitalists.

Capitalism is extremely competitive, and will not suffer alternative systems of value to exist alongside of it. If an alternative system to capitalism produces anything of value, capitalism will consume that value until the alternative system is either destroyed or has transformed itself fully into a part of the capitalist system. Depressing as that sounds, I think this is probably what will become of the FOSS ecosystem eventually.
- Jimdoria ~@>@

There are two kinds of people in the world: Those who divide everybody into two kinds of people, and those who don't.

40hz

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Re: Open Source Proves Elusive as a Business Model
« Reply #11 on: December 11, 2009, 07:07:19 PM »
Sadly, our system is not set up to serve you, Mouser. Or the writers, or the poets. Or even the beer drinkers. It's set up to serve the money-lovers - capitalists.

Capitalism is extremely competitive, and will not suffer alternative systems of value to exist alongside of it. If an alternative system to capitalism produces anything of value, capitalism will consume that value until the alternative system is either destroyed or has transformed itself fully into a part of the capitalist system.

I think it's just a teeny bit more complex than that.  ;D

Especially since you won't find any country running its economy under a 'pure' capitalist system. Then too, there's the the very real question of which form of 'capitalism' you're referring to. There are numerous variants. (And the basic definition has changed over the years.)

You have to be careful not to take something as complex as capitalist economic theory and try simplify it to the point of absurdity. The only time you might have a reason for doing so is if your only intent is to turn it into a poster child for everything that's wrong with the world.

Capitalism is far from being an ideal system. But it is a 'middling-decent' one that stacks up pretty well against communism, socialism, mercantilism, colonialism - or any other socio-economic system that's actually been tried. About the only thing it has going for it is that it has historically worked better and longer than any other economic system - and benefited larger numbers of people - even if it did so unintentionally.

There are no perfect capitalists. Nor are there any perfect socialists, communists, or any other 'ists' you can create a label for.

People create economic systems and principles. If they're not perfect, its because we aren't.  

So until we decide to become better human beings, we shouldn't expect the systems we create and live under to be much better.

Just my 2 economic units. 8)





« Last Edit: December 11, 2009, 07:08:59 PM by 40hz »

zridling

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Re: Open Source Proves Elusive as a Business Model
« Reply #12 on: December 12, 2009, 04:12:00 AM »
Some related reading on these topics:

What Does a User Cost?
http://ostatic.com/b...hat-does-a-user-cost

What should we do with Free Software users who don't contribute to it in any way?
http://stop.zona-m.net/node/58

Whither open source in the land of leeches?
http://news.cnet.com...5_3-10120006-16.html

Free as in Freedom, Not Free as in Freeloader
http://www.linuxplan...net/opinions/6596/1/

rxantos

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Re: Open Source Proves Elusive as a Business Model
« Reply #13 on: December 27, 2009, 11:53:01 AM »
I always tough of GPL as a way to make people work for free.

- Make them create software and give support for it. While giving you the right to put in on a CD.

- Make it so that anyone that create software based on the original must give you also the right to put it on a CD.

- You then put them into CDs, market them, charge for the CDs and get all the money without needing to pay the developers. Making sure that Instead of saying you are making all this money from the software, you are getting the money for support :).

It worked for Red Had, Mandriva, IBM, etc. People working for free while making companies richer. A sort of willing slavery, only we don't call it that.

Is interesting that in a capitalistic world, people expect software to be free. I wonder if you can say that to your landlord, to give free rent. Or how about at the store, free food. Get my meaning, software takes effort and time, and thus on a capitalistic world is not possible to expect software to be free.

One model that I think might work better is the model that Blender (a 3d editor) used to raise money. I  started close source, but free charging only for the manual.

Then when they needed to raise capital they put a thermometer like applet in their website, accepting donations until a mark of 100,000 was reach (to cover their debts with investors). After the mark was reach they made it open source.

Why not make something similar? That way, the developer gets paid, and the community have the source, to do as they see fit.

40hz

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Re: Open Source Proves Elusive as a Business Model
« Reply #14 on: December 27, 2009, 02:09:19 PM »
I always tough of GPL as a way to make people work for free.

- Make them create software and give support for it. While giving you the right to put in on a CD.

- Make it so that anyone that create software based on the original must give you also the right to put it on a CD.

- You then put them into CDs, market them, charge for the CDs and get all the money without needing to pay the developers. Making sure that Instead of saying you are making all this money from the software, you are getting the money for support :).

It worked for Red Had, Mandriva, IBM, etc. People working for free while making companies richer. A sort of willing slavery, only we don't call it that.


I think the main reason nobody calls it "voluntary slavery" is because that characterization is simply not true. 8)

You might want to look a little more carefully into how FOSS development works, and also what the various "open" licenses actually say, before you finalize your opinions about it.

I suggest you read some of the information available on the Free Software Foundation website ( www.fsf.org ).

I especially recommend reading the Selling Free Software essay to get a better understanding of where the free software world stands on this topic.

Quote
Selling Free Software

Many people believe that the spirit of the GNU Project is that you should not charge money for distributing copies of software, or that you should charge as little as possible — just enough to cover the cost. This is a misunderstanding.

Actually, we encourage people who redistribute free software to charge as much as they wish or can. If this seems surprising to you, please read on.

The word “free” has two legitimate general meanings; it can refer either to freedom or to price. When we speak of “free software”, we're talking about freedom, not price. (Think of “free speech”, not “free beer”.) Specifically, it means that a user is free to run the program, change the program, and redistribute the program with or without changes.

Free programs are sometimes distributed gratis, and sometimes for a substantial price. Often the same program is available in both ways from different places. The program is free regardless of the price, because users have freedom in using it.

Nonfree programs are usually sold for a high price, but sometimes a store will give you a copy at no charge. That doesn't make it free software, though. Price or no price, the program is nonfree because users don't have freedom.

Since free software is not a matter of price, a low price doesn't make the software free, or even closer to free. So if you are redistributing copies of free software, you might as well charge a substantial fee and make some money. Redistributing free software is a good and legitimate activity; if you do it, you might as well make a profit from it.

Link to full article: www.gnu.org/philosophy/selling.html

Other articles about free software philosophy can be found here:

www.gnu.org/philosophy/philosophy.html

Good reading! :Thmbsup:




« Last Edit: December 27, 2009, 03:59:43 PM by 40hz »

f0dder

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Re: Open Source Proves Elusive as a Business Model
« Reply #15 on: December 27, 2009, 04:13:33 PM »
Good reading! :Thmbsup
Some of us would call it perverse.

I'm not against software being open, but I loathe the GPL license and how the FSF crowd have taken the word "free" hostage. GPL isn't about freedom, it's about not liking the current regime and wanting a new world order... about letting redistributors profit from your work, and degenerating programmers into support monkeys if they want to make a living (oh, there's exceptions, but they are that - exceptions). GPL is viral and pretty hostile towards other licenses.
- carpe noctem

Paul Keith

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Re: Open Source Proves Elusive as a Business Model
« Reply #16 on: December 27, 2009, 04:21:25 PM »
[P.S. - Sorry, I don't really know what I'm talking about. I just got caught up in a rant while reading the last few replies.]

Of course the irony of gratis in the FSF philosophy is that it failed to account the social stigma associated with freedom (a clue they could have found when observing libertarianism) and thus they inadvertedly created a communist/socialist-analogical community who consider such GPL products as welfare as opposed to a free market-analogical community who understands the power of humanity to build small markets up instead of being a slave to their consumerism.

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Is interesting that in a capitalistic world, people expect software to be free. I wonder if you can say that to your landlord, to give free rent. Or how about at the store, free food. Get my meaning, software takes effort and time, and thus on a capitalistic world is not possible to expect software to be free.

We aren't in a capitalistic world. We are in a capitalist-associating world.

It's like the technological upgrade to religion where people think they're following the teachings of their religion but is in reality blindly following the teachings of their religion authorities.

Still, the examples are poor.

Tons of addicted MMORPG players pay their rent and most likely tons of those won't pay their rent for FOSS despite their support because they're two different visions: One is often perceived like fire, the other is often perceived as the Playboy Mansion.

How about the store? E-bay, Amazon, Lulu.

More like where's our realization of the value of barter?

Where is our school's elementary education on money so that we wouldn't be influenced by our average adult's limited perception of money?

To quote a Nolan Chart article I once woofed: Where is this in our basic History class?! (P.S. I'm not American though and don't keep up with educational trends so these might not apply)

(You might want to head straight to the article to get a more balanced view by being able to read the comments section)

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Most people seem to treat money as if it were an object. And for most people, money is an object, or to put it better, acquiring money is an objective. But in reality, money should not be viewed as an object, but rather as a tool. Money serves three main purposes: as a medium of exchange, as a unit by which to measure economic value, and as a means by which to store wealth.

Unit to Measure Economic Value

More importantly, money serves as a unit by which to measure the value of all goods and services in an economy. By creating a standard unit of economic measure, we can easily compare the value of different goods and services. Using money as a measurement, we can have a pretty good idea how much our labor or work is worth, and what it will cost us to buy food, clothing, building materials, fuel, and anything else—and it is relatively easy to compare the value of each of these, and manage our budgets accordingly.

Without money, however, we would be stuck with a barter system. For a chicken farmer who wants to build a new barn, he would have to know how many eggs he needs to trade for lumber. And that will be different for different lumbermen according to their need for eggs or who they might know who would want to trade eggs for something else they want. How many eggs is a pound of nails worth? How many pounds of nails would it take to buy a car? How many cars would you need to trade for a house? How many pounds of beef could you buy with your piano? Without money as a standard unit of measurement, the barter system can be rather capricious, and the value of goods and services might vary wildly depending on what each trader needs at that moment, and how perishable the commodities are.

Maybe one board is worth two dozen eggs to the lumber man, and the egg farmer is willing to pay it. But say the farmer needs five-hundred boards; that means he would have to trade a thousand dozen eggs for the lumber to build his barn. Can he get a thousand dozen eggs together all at once? And even if he can, what is a lumber man going to do with a thousand dozen eggs? If he doesn’t need them, he certainly wouldn’t trade for them! And so this touches back on the use of money as a medium of exchange, but it also leads to the third purpose of money:

For most of human history, money has been coined, not printed.

And even when currency was printed, it was not actually money. For instance, most printed currency in the United States was merely a note that was redeemable for gold or silver (called "specie"). The gold and silver was legal tender—that is gold and silver was actually money. Currency was merely a note that was intended to represent the specie. From time to time, governments have issued paper currency without backing it with any commodity. The revolutionary colonies printed "Continentals", and during the American War Between the States, the U.S. printed "Greenbacks." But for most of this country’s history (and indeed the long history of civilization), most legal tender has been in the form of gold, silver, copper or other coin, or measured by metal bullion.

With the creation of the Federal Reserve in 1913,

we started to see a momentous shift by large banking interests to create a system of fiat money. In 1934, when the federal government confiscated all privately-held gold in the United States, the value of the U.S. dollar was defined in terms of gold, being 0.048379... troy ounces of gold per dollar (or $20.67 per troy ounce of gold). Even after this, and up until 1972, the value of the dollar was defined by law in terms of gold. But after a half-century of money-manipulation, the bankers finally got their way, and the value of the U.S. Dollar was allowed to be determined by other means.

Now, let’s back up about 200 years.

The statesmen of the young United States realized the dangers of fiat currency. They saw the value of the "Continentals" printed during the American War for Independence evaporate in short order. For this reason, when they drafted the U.S. Constitution in 1787, they specified that no state shall make anything but gold or silver legal tender. Furthermore, they vested the power to coin money and regulate the value thereof specifically in Congress—and up to 1913, Congress exercised this power without much problem. Then they created the Federal Reserve, and the power to regulate the value of money began to shift from Congress to this banking cartel.

I call the Federal Reserve a banking cartel, because that is what it is. It is a quasi-public entity, chartered by Congress with certain duties and responsibilities, which has been granted a monopoly on managing the money supply in the United States. But it didn’t happen all at once, because at the time it was created, gold and silver were still legal tender, and U.S. treasury notes were still redeemable for specie at a fixed value. It took the crisis of the Great Depression to allow the confiscation of all privately-held gold in the country and replace it with fiat currency, Federal Reserve Notes, which is what we have today. (This is a subject worth a very thick book.)

What is the value of the Federal Reserve Notes in your wallet?

Well, the value now fluctuates daily, hourly, by the second. Money traders and banking houses now manipulate the value of currencies all over the world. Since its inception, the monetary policies of the Federal Reserve have created constant fluctuation. But over time, it results in continual inflation: what $1 buys today would have cost less than 5-cents in 1913. But except for a few periods of rampant inflation, this devaluation of the dollar has been relatively gradual, so maybe it isn’t such a big deal.

Who is Favored by Inflation?

Debtors: If I owe money to someone, and inflation occurs, when I end up paying that money back, it is worth less than when I first borrowed it, and may be easier to get. But then of course, there is interest, and the lender must be assiduous to make sure the interest is enough to ensure a profit after considering inflation. And if dollars are worth less in the future, that means I’ll have to make sure whatever line of work I am or whatever products I produce, my income at least keeps up with inflation, if I am to pay back that loan, the interest, and come out ahead.

IRS: When you buy or sell anything, the IRS makes you determine your capital gains by subtracting the base value from the gross sale price (and perhaps subtracting other associated costs). Let’s use an example: say Mr. and Mrs. Peterson bought a house in 1970 for $35,000 and they sold it in 2000 for $155,000. Their profit, for tax purposes, was $120,000. At a 15% tax rate, they owe $18,000 in capital gains taxes. But what did the value of the dollar do in those 30 years? Well, there are a number of things you might compare: the consumer price index, average annual wages, the value of a commodity like silver or gold, etc. Let’s just use the U.S. Bureau of Labor Statistics’ Consumer Price Index. It says that $35,000 in 1970 dollars would be equivalent to about $155,000 in 2000 Dollars. So, if the dollar lost so much value that it takes $155,000 in 2000 to buy the same amount of goods and services as $35,000 in 1970, what was Mr. and Mrs. Peterson’s actual profit? What they had to sell and work for the buy the house in 1970 is actually equal to what they would have to sell and work for to by the same house in 2000! Realizing the inflation of the Dollar, there was no actual profit! But to the IRS, Mr. and Mrs. Peterson owe $18,000 in taxes (in 2000 Dollars). And so there’s one example of how inflationary policy favors government tax collection at the expense of tax payers.

The people who get to spend the new money first.

When the money supply grows faster than the aggregate of all the goods and services in an economy, the result is inflation. But when new money is printed, the person who spends the money first gets to enjoy the value of that cash before the general value of the currency decreases. And so who is it that usually spends that money first? Banks. Those who borrow new money from banks. Government. Contractors who are paid by the government. These are the folks who realize an advantage by spending the new money before inflation occurs from the increased money supply.

And there is a third class of people who benefit from a monetary policy that allows the value of money to fluctuate: banks and money-traders. As I will explain with an allegory, while over the long-term tendency is for inflation to devalue fiat currency, in the short-term the value of a given currency might go up and down. This allows for clever traders to capitalize on these exchange differences, acquire when the exchange is down, and trade when it goes up, and pocket the difference. Such trading activity does nothing to add value to the money, nor does it create any wealth or contribute in any positive way to economic prosperity. But it is a simple way to make a profit, and a small percentage of this exchanged money is continually skimmed by the banks and other money-changers.


Capitalistic world? Most of us stupid people don't even know we're g. married!

Reference:

There is not a man in the country that can't make a living for himself and family.  But he can't make a living for them *and* his government, too, the way his government is living.  

What the government has got to do is live as cheap as the people.
-- The Best of Will Rogers

Source: PopUp Wisdom
« Last Edit: December 27, 2009, 04:23:35 PM by Paul Keith »

40hz

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Re: Open Source Proves Elusive as a Business Model
« Reply #17 on: December 28, 2009, 07:12:04 AM »
« Last Edit: December 28, 2009, 07:14:30 AM by 40hz »