What `open source' software means to India

On 11/Dec/98, Narendar Pani wrote an op-ed piece in Economic Times about how `open source' software would matter to India. Pani highlights the benefits of open source software -- primarily the access to cutting edge technology for Indian programmers -- but warns of the loss of revenues to Indian programmers from distribution of software at zero cost. I see the picture in somewhat different terms.

The idea of open source. Open source software has two properties : (a) the ``source code'' (the programs themselves) is freely distributed, and (b) it is generally illegal to convert this into a proprietary version. While the rules of the game require that the program itself should be distributed at zero cost, traditional commercial contracts govern consulting, customisation and support.

When the source code of a program is available (e.g. the C or C++ files which make up the program), many subtle consequences follow:

Open source sounds idealistic and impractical to many. However, there is ample evidence to suggest that such efforts, building on the pride and technical egos of good programmers, have succeeded in building some of the best software in the world.

The Internet is the poster child of open source - every piece of technology going into the Internet was built by the Unix community over the last 20 years in open source. Today, open source programs such as Apache (web server), Linux (operating system), Netscape (web browser), and sendmail (mail transport) are the dominant products in their categories with over 10 million copies in use for each. This demonstrates that open source is a viable strategy for obtaining high quality, high volume solutions to complex problems.

Open source and economic growth in India. From an economist's perspective, what can we say about the impact upon India's economy of open source software? Hardware and software are capital goods. When the price of software drops to zero, it means that information technology is available at a lower cost. This improves the speed at which India's economy can grow.

If IT implementations (today) in India primarily rely on stolen software, then the appeal of free software as a device for cost--reduction is limited. However, most larger companies are increasingly unwilling to take the risk of using pirated software. It is all too easy for disgruntled employees to make anonymous phone calls revealing the use of pirated software; hence every non--trivial firm would need to exercise caution in piracy. Under international pressure, India is going to have to increasingly stringent in enforcement against piracy. Finally, there is the moral argument against theft, and the new perspective upon intellectual property that is increasingly dawning in India with the rise of local production of cerebral goods. To the extent that piracy is unacceptable, open source yields capital goods at a lower price for capital formation in India.

The savings involved are quite non--trivial. It is well--known that hardware costs have been dropping sharply for many decades. Today, software costs of many IT implementations exceed the hardware costs. To the extent that free software can be used, it leads to major cost savings. For example, consider NSE's network, of 2000 VSAT terminals, each going into an office with a few computers. If these 2000 offices replaced Microsoft Windows with an open source alternative, it would generate cost savings of atleast Rs.60 million (spread amongst all NSE brokers). Similarly, the typical cost of computerisation for a five--man office goes down by 25% if free software is used.

Open source and India's software industry. How would open source impact upon India's software industry? One issue was noted by Pani: physical distance would be less of a barrier to technical excellence. Ideas and knowledge which were once only accessible in coffee shops in Silicon Valley are available in Kolhapur and Darjeeling through open source. Indian software companies which cultivate teams which work with open source will gain superior knowledge as compared with firms which rely on ``cars which have their bonnets welded shut''.

But open source has more profound consequences for India's software companies. Traditionally, the software industry has been dominated by commercial products, such as Oracle, and India's software companies have been persistently unable to compete with them. Software production suffers from high fixed costs and near--zero marginal cost, hence it is very hard for entrants to break in. In this environment, firms like Oracle and Microsoft (who have entrenched products) ``skim the cream'' and obtain enormously higher profit margins than Indian firms.

Open source produces a level playing field among software companies. Apache is the world's number one web server software, and it is open source. Hence there is no monopoly (located in some OECD country) which derives juicy profits from it. The revenues associated with Apache are precisely in the area where India is strong: services. Access to source code opens up a wealth of customisation possibilities that are inconceivable in conventional products. Every corporate adoption of Apache would go along with a service contract, and possibly some associated project work. This fits the outlook of Indian software companies. In such competition, Indian software companies could become as large and as profitable as the best in the world.

The enduring puzzle of India's software companies is their persistent inability to grow from projects to products. Open source is a powerful answer to this problem. Open source reduces the importance of products and raising the importance of services. This will be painful for firms like Microsoft, who are used to extracting profits from monopolies in products. But it is is well suited to India's software companies, who haven't based their business strategies on the cash-flow from established products.

In summary, open source is a profound idea. It is likely to generate major benefits for India. By dropping the cost of IT implementations, it will speed up economic growth in India. By breaking down the unique advantages which existing international software firms possess through control of products, it provides a path to profits for service--oriented Indian software firms who are unable to break into existing oligopolistic product markets.

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