The Magic Cauldron

Eric Steven Raymond

This is version 3.0


Permission is granted to copy, distribute and/or modify this document under the terms of the Open Publication License, version 2.0.

$Date: 2002/08/02 09:02:15 $

Revision History
Revision esr
Observations on the price of ERPs and other very large products. The underprovision problem. Effects of asymmetric information. More on the sawmill case.
Revision 1.1925 Aug 2000esr
Added link to Kipling's "The Mary Gloster". Observed that the service-cost-exhaustion model still works when we move from constant dollars to discounted present value.
Revision 1.1825 Aug 2000esr
DocBook conversion. Minor updates for Summer 2000.
Revision 1.1722 Oct 1999esr
This version went into the first printed edition.
Revision 1.168 Aug 1999esr
New section, ``Future-Proofing, Market Pressures, and Strategic Business Risk''
Revision 1.159 Jul 1999esr
New appendix on hardware drivers, and a better explanation of rivalrous goods due to Rich Morin.
Revision 1.1425 Jun 1999esr
Added e-smith, inc.
Revision 1.1325 Jun 1999esr
Corrected 13% claim about Netscape revenues; added better treatment of free-rider effects, corrected list of closed protocols.
Revision 1.1024 Jun 1999esr
A better name for the `Razor Blades' model.
Revision 1.924 Jun 1999esr
New material on `future-proofing', the `Free the Future' model, and a new section on exclusion payoffs.
Revision 1.724 Jun 1999esr
Minor update; clarify criterion (e) in payoff analysis.
Revision 1.524 Jun 1999esr
Minor update; point at definition of `hacker'.
Revision 1.323 Jun 1999esr
First public release.
Revision 1.218 Jun 1999esr
First private review version.
Revision 1.120 May 1999esr
Initial draft.


This essay analyzes the evolving economic substrate of the open-source phenomenon. I first explode some prevalent myths about the funding of program development and the price structure of software. I then present a game-theory analysis of the stability of open-source cooperation. I present nine models for sustainable funding of open-source development; two non-profit, seven for-profit. I then continue to develop a qualitative theory of when it is economically rational for software to be closed. I then examine some novel additional mechanisms the market is now inventing to fund for-profit open-source development, including the reinvention of the patronage system and task markets. I conclude with some tentative predictions of the future.

Table of Contents

Indistinguishable From Magic
Beyond Geeks Bearing Gifts
The Manufacturing Delusion
The ``Information Wants to be Free'' Myth
The Inverse Commons
Reasons for Closing Source
Use-Value Funding Models
The Apache Case: Cost-Sharing
The Cisco Case: Risk-Spreading
Why Sale Value is Problematic
Indirect Sale-Value Models
Loss-Leader/Market Positioner
Widget Frosting
Give Away the Recipe, Open a Restaurant
Free the Future, Sell the Present
Free the Software, Sell the Brand
Free the Software, Sell the Content
When to be Open, When to be Closed
What Are the Payoffs?
How Do They Interact?
Doom: A Case Study
Knowing When to Let Go
Open Source as a Strategic Weapon
Cost-sharing as a competitive weapon
Resetting the competition
Growing the pond
Preventing a choke hold
Open Source and Strategic Business Risk
The Business Ecology of Open Source
Coping with Success
Open R&D and the Reinvention of Patronage
Getting There From Here
Conclusion: Life after the Revolution
Afterword: Why Closing a Driver Loses Its Vendor Money

In Welsh myth, the goddess Ceridwen owned a great cauldron that would magically produce nourishing food—when commanded by a spell known only to the goddess. In modern science, Buckminster Fuller gave us the concept of `ephemeralization', technology becoming both more effective and less expensive as the physical resources invested in early designs are replaced by more and more information content. Arthur C. Clarke connected the two by observing that ``Any sufficiently advanced technology is indistinguishable from magic''.

To many people, the successes of the open-source community seem like an implausible form of magic. High-quality software materializes ``for free'', which is nice while it lasts but hardly seems sustainable in the real world of competition and scarce resources. What's the catch? Is Ceridwen's cauldron just a conjuring trick? And if not, how does ephemeralization work in this context—what spell is the goddess speaking?