Maybe Not Free as in Beer, but Awfully Cheap

by Tim Lee on September 7, 2006 · Comments

Forbes has a profile of Mark Shuttleworth and Ubuntu. What I found most interesting about it is the financials:

Ubuntu now has 4 million users, half of which are governments, universities and a smattering of businesses. It adds new ones at a rate of 8% per month. After its public release in October 2004, Ubuntu quickly deposed Red Hat’s Fedora as the most popular version of Linux on DistroWatch, a Web site that caters to Linux users. Ubuntu works in 22 languages, and Canonical, the company Shuttleworth set up to distribute his software, will send a free Ubuntu CD anywhere in the world. New users rave about the simple user interface, which has gained recent converts in a couple of well-known bloggers who switched from Apple Computer’s OS X.

In May, Sun Microsystems announced plans to offer Ubuntu on Sun’s Niagara chips, which power its newer Sparc servers. While Sparc servers aren’t a particularly big market, the stunt made clear that Shuttleworth aims beyond home hobbyists.

Canonical has burned through $15 million of Shuttleworth’s money in two and a half years. He says that it will take him at least another two years to even know whether it has a chance to become profitable, and that it may never return his investment. But that doesn’t matter. He’s paying all the bills either way, along with setting up a $10 million endowment for the Ubuntu Foundation that’s earning interest for a day when his attentions may drift elsewhere.

I mean no disrespect to Mr. Shuttleworth when I say this, but $15 million is a shockingly small amount of money with which to build a full-featured desktop operating system. Microsoft’s advertising budget for each version of Windows is an order of magnitude larger than that. Apple pulls in hundreds of millions of dollars with every release of Mac OS X, while Microsoft makes billions of Windows.


If Shuttleworth can build a viable alternative to desktop Windows for $15 million, or even $50 million, he’ll only need to capture a small fraction of the value of the product to make his money back. Indeed, Google is reputed to have paid Firefox millions of dollars just for having it search engine as the default in the Firefox search bar. If you can build a product that’s integral to the lives of millions of people, it’s not that difficult to generate a few million dollars in revenue from it.

Shuttleworth may or may not succeed (as I’ve written before, it needs a lot of work), but even if he fails, it’s easy to imagine others trying the same trick. As the Linux codebase grows, the investment required to add the remaining features necessary for a user-friendly desktop OS will continue to shrink.

Actually, in a sense it’s already happened: Mac OS X is built mostly on open source software, with just a thin layer of proprietary software on top. Mac OS X cost a lot more than $15 million to develop, but it’s a safe bet that it cost a lot less than Microsoft’s approach of building the whole thing from the ground up.

Comments Posted in: Open Source, Open Standards & Peer Production

  • Doug Lay
    I agree with MikeT on this, and I built my first Linux desktop machine back in 1996, and. Linux has been a success pretty much everywhere BUT the desktop - servers, supercomputing, appliances/gadgets, network gear. But success on the desktop has not been forthcoming - the relatively high quality of Ubuntu notwithstanding. I would definitely NOT hold my breath waiting for things to change either.

    I'd also point out to MikeT that Linux already received a good-sized kick in the cajones on the desktop a few years back. It's called OSX.
  • enigma_factory, the only problem with your point is that someone had to put $1.9B worth of effort into making it in the first place. Then someone would have to put a lot more effort to build a unique OS off of it. Personally, I don't consider Linux to be a great desktop success. It's so fractured that it's a nightmare for ordinary users. I'm posting this from Vista RC1. Linux is about to get kicked squarely in the cajones on the desktop if things don't change.
  • I'm always happy about lower prices. What I'm concerned about is lower quality. So your FOSS pals can do their thing, and then I'll invest. Right? Isn't that how markets work? Remember the market?


    Well, getting back to the example from my design studio, I would say that the way creative destruction works is that sometimes entire market segments or industrial sectors are eliminated. Like scriveners have been. Or Drafting equipment manufacturers. Or the manufacturers of chemical film are about to become. So the whole point of creative destruction can be: there will not be anything to invest in. The sector will be eliminated.


    The whole economy will benefit because, the entire economy from Pharmacuetical Manufacturers to Animation Studios to Auto Manufacturers will have to pay less for software. FOSS adoption will decrease thoroughout the entire economy the cost of producing knowledge-based products with computers.


    So, FOSS will increase to value of the entire economy, but certain players, for example shrink wrap software publishers, will become much less capitalized.


    $15M was not the cost to him for making an OS. It was the integration cost of existing components. The real cost is more sobering:


    No, the $15 million was what it cost the Ubuntu Foundation. The fact that there is $1.9 billion dollars worth of IP issued under the GPL made that $1.9 billion dollars worth of "IP" available to Ubuntu. That's the whole point of FOSS.


    Note the critical reference by Schumpeter to "new type of organization" FOSS is a new type of organization for so-called "IP"


    But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)-competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.

  • $15M was not the cost to him for making an OS. It was the integration cost of existing components. The real cost is more sobering:



    In a later study, Counting potatoes: the size of Debian 2.2, the same analysis was performed for Debian GNU/Linux version 2.2. This distribution contained over fifty-five million source lines of code, and would have cost 1.9 billion dollars (year 2000 dollars) to develop by conventional proprietary means.

    I like Ubuntu, but let's not get all fanboiish about it. It required a lot of effort to write those components, and a lot of money was put into improving Linux on big hardware.

  • Woah, when did I call anything a "niche" product. Perhaps limited in potential, with a low caliber profit cap, even a product with no potential. But I never called anything a niche product.

    I'm always happy about lower prices. What I'm concerned about is lower quality. So your FOSS pals can do their thing, and then I'll invest. Right? Isn't that how markets work? Remember the market?

    Yes, thanks Enigma for putting words into my mouth. I know you are questioning the foundations of your creative destruction at this moment. I would recommend Dostoyevysky's Notes From the Underground. Duhh.
  • OK so you commoditized (or are trying to) the op system and server markets.

    It is the hallmark of creative destruction that many previously monetized products (or even entire industrial sectors) are made obsolete. In this case that's exactly what open source is in fact doing to shrink wrapped software.

    The market niches served by Apache and MySQL aren't financially attractive to capitalist entities; mostly we're talking about hobbyists who, if they ran commercial code at all, would most likely have stolen it.

    Noel, this argumant is not coherent. Apache a niche product? Yes, Toyota is a niche car.

    Tim:
    Excellent post. I like especially how it exposes the anti-FOSS camp as essentially anti-market.
  • Doug Lay
    >> None of the really high-traffic web sites uses Apache, unless they're heavily modified it.

    Part of the appeal of open-source software is that you CAN heavily modify it. How much Apache code is in the custom Web servers that Google, Amazon and Yahoo run? I suspect quite a bit.

    >> The market niches served by Apache and MySQL aren't financially attractive to capitalist entities; mostly we're talking about hobbyists who, if they ran commercial code at all, would most likely have stolen it.

    This is utterly ridiculous, and I can't believe I'm hearing it from a tech-savvy individual in 2006. Tons of companies run both Apache and MySQL. Why not? They're both free, and they work. Also, in the case of MySQL, the software is produced by a capitalist entity, and has been since its inception.
  • Noel Le
    OK so you commoditized (or are trying to) the op system and server markets. So some companies might have to make money elsewhere (not likely). What about the rest of the tech market. I agree w MikeT that some things should be "open" but they have to accomodate "closed" technologies and apps. Or the FOSS movement will stand in its own way by resting on ideologies that got it out of the cave.
  • OK whats the market cap in dollars. Who got wealthy and is going to make the next cutting edge product before the next stone and ice age. Why doesnt FOSS come up with another winner.


    Noel you are missing the whole point of creative destruction. I don't think you really understand the process. It was underlined for me in a first year design studio, when the assignment was given to design a can opener. Everybody worked pretty hard and built very elegant can openers. Some of them even worked really well. The professor than took out a can with a pull tab, and showed how all of our designs had been made obsolete.


    Or said very simply by Saudi Arabia's OPEC rep: The Stone Age did not end because they ran out of stones.


    The same point I had made re: OS space in Tim's Post ("Open Source as a Perpetual Motion Machine").


    Compare two Companies: Microsoft and SuSE. (I understand that SuSE is now a division of Novell, but that's a tangent here to my point) SuSE (Or the SuSE divison of Novell, if you prefer) has about 400 employees that produce SLED and SLES, their workstation and server Operating Systems.


    Microsoft however has about 61,000 employees, and reportedly about 41,000 are involved on the development of Windows Workstation and Server.


    When a company can compete in an R&D; intensive field, dramatically lowering the barriers to entry, and produce a better product with about 1% of the work force of its competitor, I have to ask:

    If that isn't Creative Destruction than what is?


    " ...the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff."


    Yes, made of other stuff..



    So, Noel, still waiting for an answer to the above point...
  • The market niches served by Apache and MySQL aren't financially attractive to capitalist entities; mostly we're talking about hobbyists who, if they ran commercial code at all, would most likely have stolen it. None of the really high-traffic web sites uses Apache, unless they're heavily modified it.
  • Noel Le
    OK whats the market cap in dollars. Who got wealthy and is going to make the next cutting edge product before the next stone and ice age. Why doesnt FOSS come up with another winner. I`m skeptical about most things and want to see FOSS do more given the years its been around. FOSS should focus on some technologies (plats, servers, backend etc) rather others (desktop apps), pull in over $1b in annual sales on an average and let folks like Oreilly rather than Stallman speak for it. Then there might be creative destruction. PS MSFT does use Apache:)
  • Noel, let me introduce you to Apache, which currently has about 60 percent of the web server market. Or perhaps you might check out MySQL, which has about 45 percent of the database market. I'm sure the database executives at Microsoft and Oracle could tell you that the pain of creative destruction is beyond the proof of concept stage.
  • I'm still waiting for the Schumpeterian creative destruction to happen.

    Enigma, you point out evidence of a creative destruction cycle, or one in process, but not one that has fully manifested or proven itself. Too many things are still measured by their potential or proof of concept (lower margins in Linux development), but not by market share or revenue (the actual impact on the market).
  • Enigma, now that you mention it, I do remember you making a similar point. Thanks.
  • Yes, that was exactly my comment to an earlier post, in which I compared SuSE and Microoft, as evidence of Schumpeterian creative destruction process at work in the OS space. Noel Le really never made a responsive reply to my comment, and I think that you are really making the same point.


    Good Job.

blog comments powered by Disqus

Previous post:

Next post: