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13. Open R&D and the Reinvention of Patronage

There is one other respect in which the infusion of real money into the open-source world is changing it. The community's stars are increasingly finding they can get paid for what they want to do, instead of pursuing open source as a hobby funded by another day job. Corporations like Red Hat, O'Reilly Associates, and VA Linux Systems are building what amount to semi-independent research arms with charters to hire and maintain stables of open-source talent.

This makes economic sense only if the cost per head of maintaining such a lab can easily be paid out of the expected gains it will enable by growing the firm's market faster. O'Reilly can afford to pay the principal authors of Perl and Apache to do their thing because it expects their efforts will enable it to sell more Perl- and Apache-related books. VA Linux Systems can fund its laboratory branch because improving Linux boosts the use value of the workstations and servers it sells. And Red Hat funds Red Hat Advanced Development Labs to increase the value of its Linux offering and attract more customers.

To strategists from more traditional sectors of the software industry, reared in cultures that regard patent- or trade-secret-protected intellectual property as the corporate crown jewels, this behavior may (despite its market-growing effect) seem inexplicable. Why fund research that every one of your competitors is (by definition) free to appropriate at no cost?

There seem to be two controlling reasons. One is that as long as these companies remain dominant players in their market niches, they can expect to capture a proportional lion's share of the returns from the open R&D. Using R&D to buy future profits is hardly a novel idea; what's interesting is the implied calculation that the expected future gains are sufficiently large that these companies can readily tolerate free riders.

While this obvious expected-future-value analysis is a necessary one in a world of hard-nosed capitalists keeping their eyes on ROI, it is not actually the most interesting mode of explanation for star-hiring, because the firms themselves advance a fuzzier one. They will tell you if asked that they are simply doing the right thing by the community they come from. Your humble author is sufficiently well-acquainted with principals at all three of the firms cited above to testify that these protestations cannot be dismissed as humbug. Indeed, I was personally recruited onto the board of VA Linux Systems in late 1998 explicitly so that I would be available to advise them on ``the right thing'', and have found them far from unwilling to listen when I did so.

An economist is entitled to ask what payoff is involved here. If we accept that talk of doing the right thing is not empty posturing, we should next inquire what self-interest of the firm the "right thing" serves. Nor is the answer, in itself, either surprising or difficult to verify by asking the right questions. As with superficially altruistic behavior in other industries, what these firms actually believe they're buying is goodwill.

Working to earn goodwill, and valuing it as an asset predictive of future market gains, is hardly novel either. What's interesting is the extremely high valuation that the behavior of these firms suggest they put on that goodwill. They're demonstrably willing to hire expensive talent for projects that are not direct revenue generators even during the most capital-hungry phases of the runup to IPO. And, at least so far, the market has actually rewarded this behavior.

The principals of these companies themselves are quite clear about the reasons that goodwill is especially valuable to them. They rely heavily on volunteers among their customer base both for product development and as an informal marketing arm. Their relationship with their customer base is intimate, often relying on personal trust bonds between individuals within and outside the firm.

These observations reinforce a lesson we learned earlier from a different line of reasoning. The relationship between Red Hat/VA/O'Reilly and their customers/developers is not one typical of manufacturing firms. Rather, it carries to an interesting extreme patterns that are characteristic of knowledge-intensive service industries. Looking outside the technology industry, we can see these patterns in (for example) law firms, medical practices, and universities.

We may observe, in fact, that open-source firms hire star hackers for much the same reasons that universities hire star academics. In both cases, the practice is similar in mechanism and effect to the system of aristocratic patronage that funded most fine art until after the Industrial Revolution -- a similarity some parties to it are fully aware of.

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