Linux Will Never Displace Windows of its Leadership Position
By Priya George
Can the Open Source Software (OSS) movement defeat or cripple Microsoft in the marketplace? is a question doing the rounds. With little academic attention focused on the question, Harvard Business School professors Pankaj Ghemawat and Ramon Casadesus-Masanell decided to dive in. Most research to date into the OSS movement has focused on the organisation and management issues surrounding OSS. Ghemawat and Casadesus-Masanell chose to explore the fundamental competitive dynamics question in their study, 'Will OSS ever displace traditional software from its market leadership position?'
"We believe that there is still a great deal of confusion and puzzlement on how this competitive battle will develop," say the authors of the academic paper Dynamic Mixed Duopoly: A Model Motivated by Linux vs. Windows. Ultimately, the authors believe, neither side is likely to be forced from the battlefield—Microsoft has too much market share and OSS offers too many benefits for users. But there are strategies each can use successfully against the other.
When Sean Silverthorne asked Ramon Casadesus-Masanell and Pankaj Ghemawat, 'Why should OSS ever displace traditional software?’ they said that the one main advantage of OSS is that because users can modify the code directly (as they encounter problems or have new ideas on how to improve it), the development cycle is significantly shorter. Proponents of OSS claim that if this demand-side learning is sufficiently strong, OSS will oust traditional software. In addition, software engineers claim that the better architecture of most OSS projects make them a potentially superior product, adding to the probability of success.
However, OSS has disadvantages too. Most importantly, it comes from behind in terms of market share (installed base). Because the value of an operating system depends critically on the number of users, traditional software has an advantage. Clearly, a larger installed base implies that there will be stronger direct and indirect network effects, and this will enhance the value of the operating system to current and potential users. In addition, a larger installed base also implies that there will be more feedback on bugs and more suggestions for new features.
Their paper introduces a dynamic mixed duopoly model in which a profit-maximising competitor (Microsoft) interacts with a competitor that prices at zero (Linux), with the installed base affecting their relative values over time. The authors use a formal model to ask what conditions are needed for Linux to take over Windows. The questions that they addressed are:
Is Linux's superior demand-side learning sufficient to win out?
What is the effect of forced procurement by governments and some large corporations on the long-run equilibrium?
How do cost asymmetries play out?
Can Microsoft use piracy strategically to improve its market position?
From a managerial perspective, these are significant questions. If it turns out that OSS will incontestably displace traditional software, software firms need to adapt as quickly as possible to the new competitive landscape by, for example, incorporating some aspects of the open source development model, or else be ready to exit. In fact, the model suggests ways in which the likelihood of OSS winning out can be minimised. If, to the contrary, OSS turns out not to be a threat to the traditional model, firms should not waste time and attention trying to figure out ways to fight this battle.
Result Summary
Masanell and Ghemawat say that their methodology is formal economic modelling. What this means is that you construct a stylised mathematical model of the relationship. The model captures what we believe are the most important features of the Linux-Windows competitive battle (faster demand-side learning on the part of Linux and an initial installed base advantage for Windows), but makes important assumptions regarding other aspects. Without these simplifications, the model would not be tractable and it would not be possible to obtain results. After having analysed the base model, you relax some of these assumptions.
The main result is that in the absence of cost asymmetries and as long as Windows has a first-mover advantage (a larger installed base at time zero), Linux never displaces Windows of its leadership position. This result holds true regardless of the strength of Linux's demand-side learning. Furthermore, the result persists regardless of the intrinsically better design and potential differential value of Linux. In other words, harnessing demand-side learning more efficiently is not sufficient for Linux to win the competitive battle against Windows.
Having obtained the basic result, Masanell and Ghemawat investigated the conditions, which will warrant that Linux ends up forcing Windows out. They did this by modifying the model in two ways. First, they looked at the effect of having buyers such as governments and some large corporations committed to deployment of Linux in their organisations. They called such buyers strategic. In addition to cost-related reasons, governments back Linux because having access to the source code allows them to verify that sensitive data is treated securely. Binary code makes it hard to figure out who has access to information flowing in a network. Companies such as IBM, in contrast, back Linux because they see in OSS one-way to diminish Microsoft's dominance. They found that the presence of strategic buyers together with Linux's sufficiently strong demand-side learning results in Windows being driven out of the market. This may be one main reason why Microsoft has been providing chunks of Windows' source code to governments.
Second, they looked at the role of cost asymmetries. In the base model Masanell and Ghemawat assumed that the cost structures of Windows and Linux for the development, distribution, and support of software coincide. A natural question is then whether the central result that Windows survives in the long-run equilibrium regardless of the speed of Linux's demand-side learning persists if there are cost asymmetries. They found that because OSS implies lower profits for Microsoft, the larger the cost differences are between Linux and Windows, the less able Microsoft is to guarantee the survival of Windows.
Masanell and Ghemawat also showed that it is not all bad news to Microsoft. They analysed the effect of having forward-looking buyers and the presence of piracy, and concluded that both benefit Microsoft.
Masanell and Ghemawat questioned the effectiveness of influencing forward-looking buyers' perceptions on the value of an operating system. The model suggests that the more forward-looking buyers are, the more advantageous it is to use fear, uncertainty, and doubt (FUD) tactics to drive the competing system out. Consider SCO, a small Swiss-based 'vulture' firm that had bought the Intellectual Property (IP) rights to a particular version of Unix and threatened Linux users with lawsuits over infringement of those rights unless they agree to pay substantial licensing fees. IBM, which was one of the prime corporate sponsors of Linux as well as the target of a lawsuit by SCO that sought USD 1 billion in damages, alleged in mid-2003 that SCO was in cahoots with Microsoft. The professors’ model indicates that if buyers are sufficiently forward-looking, such actions may jeopardise the ability of Linux to continue as an effective competitor in the operating system space.
Masanell and Ghemawat also looked at the effect of piracy and whether piracy can ever be beneficial to Microsoft. This extension was motivated by analysing data on a cross-section of countries on Linux penetration and piracy rates. They found that in countries where piracy is highest, Linux has the lowest penetration rate. The model shows that Microsoft can use piracy as an effective tool to price discriminate, and that piracy may even result in higher profits to Microsoft.
Finally, the professors investigated the societal welfare consequences of OSS availability by comparing different industry structures (monopoly and duopoly). Masanell and Ghemawat found that while a monopoly of Linux is always preferable (from the point of view of societal welfare) to a Windows monopoly, it is ambiguous whether a duopoly Linux-Windows is better than a Windows monopoly.
The basic trade-off is; with a duopoly, more individuals and organisations use PCs because prices are lower, and this raises welfare. However, with a duopoly, no operating system ends up exploiting fully its potential because developers' efforts wind up divided between the two systems. However, with a monopoly, the efforts to develop new software and improve the platform are directed towards one system only and this may turn out to be better from a social welfare perspective.
Why Linux has Enjoyed Success Against Microsoft?
Linux's success against Microsoft is still relative. In the client space, Windows is the leader, and in the server space, Linux and Windows have both been gaining positions for the past ten years.
Despite this, Microsoft is visibly concerned about Linux's upsurge. The Halloween memoradums are an obvious testimony of this concern, "OSS poses a direct, short-term revenue and platform threat to Microsoft, particularly in server space. Additionally, the intrinsic parallelism and free idea exchange in OSS has benefits that are not replicable with our current licensing model and therefore present a long-term developer mindshare threat."
Microsoft has a great deal to lose if Linux wins the operating systems battle. Microsoft is a software company, and a defeat in operating systems would point to the vulnerability of its entire business portfolio. In addition, the operating systems group is one of Microsoft's biggest revenue generators. Moreover, to a large extent Microsoft's sustained success over time in such a dreadfully rugged landscape has been due to its dominant position in operating systems. It is well known that Microsoft won the browser wars leveraging its dominant position in client operating systems. And the same will happen in the media player space unless the American or European antitrust authorities prevent it. We expect Microsoft to put all its ammunition to fight this battle.
Part of the reason why Linux has made significant inroads is the determination of Richard Stallman and the Free Software Foundation to have a 'free' operating system. According to Stallman, application software will never be truly free unless there is a free operating system that supports it. Thus, since the moment Linus Torvalds and Richard Stallman joined forces, a big chunk of the foundation's efforts have been directed at building a free operating system.
Then there are some large corporations and governments backing the development of Linux. These players use Linux as a way to curb Microsoft's dominance. This support is important because there are tedious portions of the code that would rarely be developed spontaneously by members of the Linux-developer community.
What Can Microsoft do to Remain Competitive Against a Product that is Argued to be of Better Quality and Is Free?
A few actions that the model suggests Microsoft could do to remain competitive are:
Increase its demand-side learning
Feed its direct and indirect network effects
Minimise the number of strategic buyers
Reduce costs to be able to sustain long periods of time with low prices
Decrease Linux's demand-side learning
Lessen Linux's direct and indirect network effects
Infuse fear, uncertainty, and doubt into the Linux user community
Can Linux Be Kicked Out of the Market by Microsoft?
Strictly speaking, within the model the only way in which Microsoft can get rid of Linux is by setting the price at zero. But, even if Microsoft did that, the company would still be selling MS Office for a positive price. Thus, Masanell and Ghemawat conjecture that even in this case, there would be people developing and using Linux.
The more important question is, what motivates developers to contribute to open source projects in the first place? As long as the drivers are there, Linux will persist. Given that Linux was born in 1992 in an industry already dominated by Microsoft, and given that the financial motive is secondary, it will be very hard for anyone to oust Linux.
The organisational stream of research on OSS has identified several drivers of motivation to contribute to open source projects. For Microsoft to have a chance to kick Linux out of the market, it needs to successfully fight them.
First, some developers see software as scientific knowledge to be shared 'like the sharing of recipes among cooks'. In fact, some describe software developers more like artists seeking fun, challenge, and beauty in their work than like calculative, square-minded engineers. Second, some individuals find it fun to go against Microsoft. As the OSS/free software movement gains momentum and developers foresee that victory is within reach, they increase their effort to accomplish this. Third, because most OSS projects have a log file listing all contributors to the code, some developers find it desirable to participate in OSS projects to signal their ability and to enhance their chances of promotion and professional advancement. Finally, user-developers sometimes fix bugs that they find and then release the improved code so that everybody can benefit.
To the motivations of independent developers to contribute to Linux, we have to add the important support that the free operating system receives from companies and governments. As long as the motives that induce these organisations to back Linux persist, Linux will not go away.
Finally, and as mentioned earlier, having a free operating system is central to the mission of the Free Software Foundation, Richard Stallman, and Linus Torvalds. It is thus hard to see how Microsoft can "persuade" Stallman or Torvalds to cave. And even if it did… Linux is no longer Stallman's or Torvalds' property. The project is dispersed and there is no "owner" of the code. Thus, someone else can take the lead.
On the other hand, Albert Sandberg believes that when the Linux community hits a larger portion of user base, say 10% of desktop market, Linux is going to be well known, and he does not mean just by the name, but people will actually from time to time use a computer that has Linux installed. According to him, people will think, 'why do I need this windows for anyway?' and might try Linux out on the home computer. Then the kids start getting used to it (from home, school and most important, friends) and the adoption to Linux hits, because no household will pay for an operating system if they know one that's usable for free. Not to mention the applications.
