Study on the Economic Impact of Open Source software on Innovation and the Competitiveness in Europe

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Report: Study on the Economic impact of open source software on innovation and the competitiveness of the Information and Communication Technologies (ICT) sector in the EU

URL = http://ec.europa.eu/enterprise/ict/policy/ict/2006-11-20-flossimpact.pdf

Executive Summary

FLOSS role in the economy: market share and geography

  • FLOSS applications are first, second or third-rung products in terms

of market share in several markets, including web servers, server operating systems, desktop operating systems, web browsers, databases, e-mail and other ICT infrastructure systems. FLOSS market share higher in Europe than in the US for operating systems and PCs, followed by Asia. These market shares have seen considerable growth in the past five years.


  • FLOSS market penetration is also high - a large share of private and

public organisations report some use of FLOSS in most application domains. In the public sector, Europe has particularly high penetration, perhaps soon to be overtaken by Asia and Latin America. In the private sector, FLOSS adoption is driven by medium- and large-sized firms.


  • Almost two-thirds of FLOSS software is still written by individuals

[sic!]; firms contribute about 15% and other institutions another 20%.


  • Europe is the leading region in terms of globally collaborating

FLOSS software developers, and leads in terms of global project leaders, followed closely by North America (interestingly, more in the East Coast than the West). Asia and Latin America face disadvantages at least partly due to language barriers, but may have an increasing share of developers active in local communities.


  • Weighted by regional PC penetration, central Europe and Scandinavia

provide disproportionately high numbers of developers; weighted by average income, India is the leading provider of FLOSS developers by far, followed by China.


  • While the U.S. has the edge in terms of large FLOSS-related

businesses, the greater individual contribution from Europe has led to an increasing number of globally successful European FLOSS small- and medium-sized enterprises (SMEs).


Direct economic impact of FLOSS

  • The existing base of quality FLOSS applications with reasonable

quality control and distribution would cost firms almost Euro 12 billion to reproduce internally [sic! I.e. this is the amount of de-monetizing which already took place]. This code base has been doubling every 18-24 months over the past eight years, and this growth is projected to continue for several more years.


  • This existing base of FLOSS software represents a lower bound of

about 131 000 real person-years of effort that has been devoted exclusively by programmers. As this is mostly by individuals not directly paid for development, it represents a significant gap in national accounts of productivity. Annualised and adjusted for growth this represents at least Euro 800 million in voluntary contribution from programmers alone each year, of which nearly half are based in Europe.


  • Firms have invested an estimated Euro 1.2 billion in developing

FLOSS software that is made freely available. Such firms represent in total at least 565 000 jobs and Euro 263 billion in annual revenue. Contributing firms are from several non-IT (but often ICT intensive) sectors, and tend to have much higher revenues than non-contributing firms.


  • Defined broadly, FLOSS-related services could reach a 32% share of

all IT services by 2010, and the FLOSS-related share of the economy could reach 4% of European GDP by 2010. FLOSS directly supports the 29% share of software that is developed in-house in the EU (43% in the U.S.), and provides the natural model for software development for the secondary software sector.


  • Proprietary packaged software firms account for well below 10% of

employment of software developers in the U.S., and "IT user" firms account for over 70% of software developers employed with a similar salary (and thus skill) level. This suggests a relatively low potential for cannibalisation of proprietary software jobs by FLOSS, and suggests a relatively high potential for software developer jobs to become increasingly FLOSS- related. FLOSS and proprietary software show a ratio of 30:70 (overlapping) in recent job postings indicating significant demand for FLOSS-related skills.


  • By providing a skills development environment valued by employers

and retaining a greater share of value addition locally, FLOSS can encourage the creation of SMEs and jobs. Given Europe's historically lower ability to create new software businesses compared to the US, due to restricted venture capital and risk tolerance, the high share of European FLOSS developers provides a unique opportunity to create new software businesses and reach towards the Lisbon goals of making Europe the most competitive knowledge economy by 2010.


Indirect economic impact: FLOSS, innovation and growth

  • Strong network effects in ICT, the related capitalization for

installed dominant players, and some new forms of IPR scope extension risk leading to innovation resources being excessively allocated to defensive innovation. There is a case for a rebalancing of innovation incentives as to create a more equitable environment for innovation that targets publicly available technology for new functionality.


  • FLOSS potentially saves industry over 36% in software R&D investment

that can result in increased profits or be more usefully spent in further innovation.


  • ICT infrastructure has a 10% share of European GDP, providing a

basis for a further 2.5% share of GDP in the form of the non-ICT information content industry. However, a large and increasing share of user-generated content is not accounted for and needs to be addressed by policy makers; FLOSS increases the value of the ICT infrastructure, supporting this wider information ecosystem.


  • Increased FLOSS use may provide a way for Europe to compensate for a

low GDP share of ICT investment relative to the US. A growth and innovation simulation model shows that increasing the FLOSS share of software investment from 20% to 40% would lead to a 0.1% increase in annual EU GDP growth excluding benefits within the ICT industry itself - i.e. over Euro 10 billion annually.


Trends, scenarios and policy strategies

  • Equitably valuing the use of FLOSS, the "true" share of software

investment rises from 1.7% to 2.3% of GDP in the US by 2010, and from 1% to 1.4% of GDP in Europe. Doubling the rate of FLOSS take-up in Europe would result in a software share of investment at 1.5% of GDP, reducing but not closing this investment gap with the US.


  • The notional value of Europe's investment in FLOSS software today is

Euro 22 billion (36 billion in the US) representing 20.5% of total software investment (20% in the US).


  • Europe's strengths regarding FLOSS are its strong community of

active developers, small firms and secondary software industry; weaknesses include Europe's generally low level of ICT investment and low rate of FLOSS adoption by large industry compared to the US

  • FLOSS provides opportunities in Europe for new businesses, a greater

role in the wider information society and a business model that suits European SMEs; FLOSS in Europe is threatened by increasing moves in some policy circles to support regulation entrenching previous business models for creative industries at the cost of allowing for new businesses and new business models.


  • Europe faces three scenarios: CLOSED, where existing business models

are entrenched through legal and technical regulation, favouring a passive consumer model over new businesses supporting active participation in an information society of "prosumers"; GENERIC, where current mixed policies lead to a gradual growth of FLOSS while many of the opportunities it presents are missed; VOLUNTARY, where policies and the market develop to recognise and utilise the potential of FLOSS and similar collaborative models of creativity to harness the full power of active citizens in the information society.


  • Policy strategies focus mainly on correcting current policies and

practices that implicitly or explicitly favour proprietary software:


  • Avoid penalising FLOSS in innovation and R&D incentives, public

R&D funding and public software procurement that is currently often anti-competitive


  • Support FLOSS in pre-competitive research and standardisation


  • Avoid lifelong vendor lock-in in educational systems by teaching

students skills, not specific applications; encourage participation in FLOSS-like communities


  • Encourage partnerships between large firms, SMEs and the FLOSS community


  • Provide equitable tax treatment for FLOSS creators: FLOSS software

contributions can be treated as charitable donations for tax purposes. Where this is already possible, spread awareness among firms, contributors and authorities.


  • Explore how unbundling between hardware and software can lead to a

more competitive market and ease forms of innovation that are not favoured by vertical integration.