Taxation for the Advancement of Open Source

Looking from my admittedly narrow vantage point over European public IT procurement, I see today a structural and very fundamental incompatibility between how enterprise IT is expected to be transacted and how open source lends itself to commercial activity.

The symptoms are easy to spot. Take the recent example of the Hungarian government allocating over €40 million to open source. Part of the reason they were forced to such a drastic gesture was that the value of the contract they were putting out to tender was above the threshold set forth in the European directives (in Denmark, I think this is roughly around DKK 1,400,000 or roughly €200,000). Think about that, two hundred thousand euros. With proprietary licensing models, it isn't too difficult to hit that kind of threshold. The threshold is in fact set that high because it has been geared to traditional software procurement, which has been proprietary and expensive enough to suggest a threshold of €200,000.

The market isn't built to understand open source

With a proprietary software package, costs of procurement may include costs of: licensing, support, adaptation to procuring body, deployment, hosting maybe, etc. In open source, the traditional concept of a proprietary license (and the associated fee) does not really exist in practice; where an open source vendor uses the expression license fee this usually refers to a package cost for support and warranty. Lacking the usually very significant pricing element of a license fee, this €200,000 threshold is therefore very high for an open source competitor (product or vendor). Think about it: if the Danish Foreign Ministry needs a new CMS do you really need a half million euros to get them using Drupal? Probably not, but you'll need to get in that neighborhood with your pricing so you'll either mark your engineers up so high they make Paul Wolfowitz look cheap or you'll put so many hours into your estimates it might look like you're building the system from scratch. You can't undercut the average of other bids by 80% and win. You just can't, sad as it is for tax payers.

fooropa: (http://www.flickr.com/photos/leucippus/)
To bid at this level, a vendor usually needs to be able to demonstrate that their company is of a certain size and economic scale. This is logical enough; the procuring body doesn't want to get involved with ephemeral minnows. But again this ends up constituting a clear (and probably quite unintentional) structural bias against the type of commercial outfit which can spring out of open source. Remember, one of the big selling points of open source is that it guards against source code monopoly; vendors cannot profit from excluding competitors by withholding the source. Therefore, open source as an industry will inherently tend to generate industries composed of more smaller companies rather than fewer larger ones as is the case with proprietary software. The end result is that the majority of companies who can be considered open source IT vendors are effectively excluded from the bulk of public IT spending. To prove that this is a structural bias and not just an easily remedied recurring oversight on the behalf of public administrations, look at Hungary. When they haphazardly acknowledged oversight in addressing the open source companies by throwing that huge amount of money at them, all they got were puzzled looks.

Nothing commercially wrong with open source

I think this is why people are still arguing over open source business models; what are they, are they inherently less conducive to growth and profit, can one make money on libre IP, and so on. Open source bakshish mister?: (http://www.flickr.com/photos/spiderpop/)business models are clear enough and the resulting business can generate profit and growth to match any proprietary industry, but the way the software acquisition market is structured is acting as a breakwater. This isn't just true for public enterprises which need to adhere to European directives; large private enterprises will often procure using similar mechanisms such as invitation to bid and reverse auctions. Again, for the largest enterprises the selection criteria will be geared to the large players. This isn't doing much other than perpetuating the state of the market.

In a sense it all comes back to the common fallacy of "if it's cheap it can't be very good." There's no reason a Danish ministry's IT department can't issue a tender for an online collaboration suite for €50,000 instead of €500,000. The challenge is cultural though. If a €50,000 system results in dissatisfaction, it's the IT guy who under-budgeted. If the €500,000 system isn't up to expectations, it's the vendor's fault and anyhow fixes are coming in the next release apart from the incremental improvements the new specialist hire is making to the system. Paradoxically, it's tougher to defend cheaper mistakes.

When open source vendors internalize failure too far

The unfortunate fallout of this situation is the advent of what is often given the euphemism "open core". A system with an open source core and a varying amount of proprietary components which are needed to make it run so it looks like the product sheet promises. It might be proprietary documentation, extensions, reporting interfaces, you name it. Shiny! Expensive! Ooh!: (http://www.flickr.com/photos/clspeace/)The difficulty of reaching the large enterprise market is undoubtedly a prime motivator for otherwise sensible people to start advocating partially free software (I think "free" is binary, but let's give the benefit of the doubt here). Open source vendors experience pressure to match proprietary companies' growth and profitability, and lacking the advantage of a market biased to their model they then resort to mimicry of the proprietary companies. Mimicry of proprietary software isn't what a lot of people hoped for out of open source business.

Handicapping to ensure a more efficient market

It's a norm thing; norm things are cultural things. We're good at tweaking culture through legislation in Europe. There are probably an endless number of clever ways open source and proprietary (cheap and expensive) software could be set on equal foot in the way we think about software procurement, but one way is to equalize the relative ease with which open source and proprietary software gets paraded in front of the large enterprises' procurement offices.

equalize: (http://www.flickr.com/photos/aussiegall/)Equalize can go two ways: it can become easier for open source or the bars can be raised for proprietary software. The first case smacks of affirmative action. This isn't the first time I've touched on affirmative action in a free software context and it's still a very iffy proposition; in any case, it's more of an American thing, isn't it. More interesting is the latter proposition: raising the bar for proprietary software. If we agree that proprietary software enjoys an artificial advantage in the way markets are structured and have matured to the norms of proprietary software, then it makes sense to even out this advantage by making the hill as steep for proprietary vendors. If there's one thing we're good at as Europeans it's taxation and there are arguments (good or bad arguments, we'll leave that for the bar-room brawls) for taxing proprietary contracts, at the very least public ones.

That's right, I said tax proprietary public contracts

A non-open source vendor by definition withholds at least some of the four basic kinds of freedom from clients upon entering a contract to deliver systems. By disallowing the client to modify and share the systems they paid for, they are entering an agreement to single-source maintenance and continued development for the foreseeable future with this vendor, and that type of favorable contractual arrangement - it might be argued - can and ought to carry a price for the vendor to bear. If a client forgoes open competition by allowing a source-level monopoly, the beneficiary of such an arrangement - here the proprietary software vendor - would typically in the course of negotiations reciprocate with concessions of some form. This doesn't happen today with proprietary software but that's just because the market is so used to rolling over to standard proprietary software legal and licensing norms. It's just the way it's always been done.

tax exile: (http://www.flickr.com/photos/jsarcadia/)The targeted taxation of proprietary revenue streams derived from European public contracts would institutionalize this reciprocation. It would standardize and mandate the practice of paying for the privilege of asserting monopoly over source code. Open source does not enjoy this advantage and would not be subject to this form of taxation. Reverse affirmative action.

If this proposition sounds like it is punishing proprietary software for not being open, know that it isn't. It is nothing more than a device intended to ensure that a market player (the proprietary vendor ecosystem) cannot translate an existing market cultural bias into artificially high revenue, thus perpetuating the bias.

Vendors could of course just pass the cost on to clients, but in an open competition for tender the proprietary vendors would hopefully drive each others' prices down to a level where their anticipated profit stream (profit, not revenue; open source bids would still be significantly cheaper) matched the open source competition.

Sure, taxes fund government but they serve the higher purpose of stewarding social change. When a market is structured in an inefficient way, it's fair game to the tax man after due consultation with the peoples' chosen policy makers.