Software, the Hold Up Problem, and the Cloud

Why is “the web development world… dominated by open source”? Michael Schwarz & Yuri Takhteyev, writing at GigaOm, answer the question as follows.

The reason is based on what economists call “the hold up problem.” When a business relies on assets owned by another party, it may become dependent on that party’s cooperation in the future. In this situation, the party with ownership of a key resource may gain the ability to “hold up” its partner, demanding an unreasonably high price…

The hold up problem is particularly severe in the IT sector. Building an Internet company on a foundation consisting of proprietary software owned by others is akin to building a house without owning the land under it. When software is sold in binary form, the buyer is subject to hold up by the vendor; if the software needs to be changed in the future, such changes can only be done with the cooperation of the original vendor at the price that the original vendor demands. By relying on open source, a company can invest in developing its product without fear of being held up down the road. Therefore, open source is an economically powerful solution to the hold up problem.

There are of course limits to this analysis. One is the proprietary anomaly, Flash. Indeed, explaining this anomaly is a primary purpose of the quoted post. Another limit, found in the comments, is that source code is not the only asset that may allow holdup.

I’m posting to advance another limit to the argument that open source software solves the hold up problem. It is “the web as platform.” That may be familiar to older readers as one of the definitions of Web 2.0. Cloud computing is an increase in the extent to which the web is used as a platform.

Cloud computing is a trap, warned Free Software Foundation founder Richard Stallman a couple of years ago. Cloud computing allows software derived from free/open source software to run without the source code being made available.

So, while free/open source software is a solution to software hold up, it also gives life to a new monster: hold up in the cloud.

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