Free Software is a pricing innovation
I am fifty years behind the rest of the world, but I have finally discovered the joys of Peter Drucker’s books. The first book I read is “Innovation and Entrepreneurship”, from which I have been mulling on this insight from page 247 about Xerox and its invention of the photocopier:
One reason why patents on a copying machine ended up at a small, obscure company in Rochester, New York, then known as the Haloyd Company, rather than one of the big printing-machine manufacturers, was that none of the large established manufacturers saw any possibility of selling a copying machine. Their calculations showed that such a machine would have to sell for at least $4000. Nobody was going to pay such a sum for a copying machine when carbon paper cost practically nothing. Also, of course, to spend $4000 on a machine meant a capital-appropriations request, which had to go all the way up to the board of directors, accompanied by a calculation showing the return on investment, both of which seemed unimaginable for a gadget designed to help the secretary. The Haloid Company — the present Xerox — did a good deal of technical work to design the final machine. But its major contribution was in pricing. It did not sell the machine; it sold what the machine produced, copies. At five or ten cents a copy, there is no need for a capital-appropriations request. This is “petty-cash”, which the secretary can disburse without going upstairs. Pricing the Xerox machine at five cents a copy was the tru innovation.
It is wonderful to have something you have always felt be so beautifully expressed. The reason I liked handheld computers, and the reason I like open source software even more, is that these technologies are cheap enough at the start not to need a decision from upper management. While working as a doctor setting up a handheld computer project was easy – I just had to convince my clinical colleagues to buy their own machines, and we would work together. They were quick to agree because the cost of a device was low, and the benefit obvious. Rightly or wrongly, as doctors we were the equivalent of the secretaries, and saving their labours with handheld computers was not something management had interest nor ability to consider.
Open source software pushes the bar even lower. With any team that I work, I suggest that open source software may be useful, the direct beneficieries agree to give their time for the experiment, and we just get started. No appropriations request, no management deliberations, we just start. If things go well, we let management know of the early success and ask for institutional support. If not, we move on to the next experiment.
It is because of this decision-making process that proprietary software companies are caught off-guard by companies with open source software at the centre of their business model. Before they could concentrate their marketing efforts on convincing upper management that the expenditure is useful – the software did not have to be useful to the employees who ended up using it every day, but it had to have the right buzzwords that management would think it was a good solution. With open source software the end users are making the decision – and theirs is a much more intelligent and accountable process – and the marketing departments’ ovetures to upper management become expensive overheads rather than powerful assets.
We all benefit from this change is decision-making.