chevron-down Created with Sketch Beta.
September 20, 2011

The Economic Incentives of Open-Source Software

Jennifer Vanderhart – September 20, 2011

Why would someone put time and effort into making computer software and then give it away for free? Most of us can probably think of a few reasons, and many of them would apply to any good or service. Today, there are many companies and people who provide access to computer software and receive no money for that access. Examples include freeware and software licensed as open source.

The number of projects that use open-source software has grown exponentially. But to understand how open sourcing developed into a significant business model for providing access to software, we need to explore the relatively recent beginnings of the software industry and the economic nature of software as non-rivalrous and generally non-excludable. The various economic incentives motivating initial and continuing contributions to open-source software, as well as the increasing usage of open-source software options, have allowed for various business models to develop based on what is essentially something that can be obtained for free.

Recent, albeit limited, court decisions, as well as settlements in litigation brought by open-source plaintiffs, have recognized and reinforced certain incentives to contribute to and use open-source software, while the outcome of other cases might have the effect of limiting usage to some extent. Other judicial decisions, while tangential to the actual provision of open-source software, may also affect the provision and licensing of open-source software.

In the Beginning
Economists have examined a number of motivating factors behind the provision of open-source software. In the early 1960s, much of the writing of code was done by either academics in a university setting or researchers in a corporate environment, AT&T in particular. These programmers, or "hackers" as they were sometimes known, often shared ideas with each other. It was the source code that was shared—the actual text written by a computer programmer in a computer programming language. Source code is distinguished from object code, which is the binary language that the computer actually uses. It is the difference between words and equations readable by humans and a series of zeros and ones that can generally only be interpreted by a computer. It is much more difficult, if not impossible, to modify a program if the source code is not made available. Most proprietary programs sold to end users provide only the object code and, moreover, require the user to sign a license that prohibits them from attempting to modify, reverse-engineer, or otherwise tamper with that object code.

Collaboration among different companies and academics became increasingly strained as investments in, and profits from, software increased. However, the movement to open source as it is known today was aided by two events in the early 1980s. The first event was the passage of a 1980 amendment to the Copyright Act that allowed for copyright protection to be extended to object code. Prior to the amendment, software could be protected under copyright; but for that to happen, the source code had to be published and registered. This eliminated any trade-secret protection that the software might have enjoyed up to that point, and the would-be copyright holder did not always view this as favorable. After the amendment, the software owner could obtain a copyright on the object code while simultaneously maintaining the source code as a trade secret.

The second event resulted from an antitrust case brought by the U.S. government against AT&T. The case was settled in 1982 and, as part of the settlement, a restriction that had prevented AT&T from selling software was lifted. Shortly thereafter, AT&T began to threaten litigation over intellectual property rights it believed it owned related to the Unix software platform. A number of researchers from various universities had contributed improvements and additions to the Unix software over time. Although AT&T had been collecting a licensing fee for its contribution, it was a nominal amount. The software had developed into a full operating system, the benefits of which AT&T threatened to capture fully with increasingly higher Unix license fees.

One response to AT&T's actions came from Richard Stallman, of the Artificial Intelligence Lab at the Massachusetts Institute of Technology (MIT), who announced in 1983 that he was going to write a free version of Unix. He started the GNU Project, which eventually developed in the Free Software Foundation (FSF). The very name of the project illustrated the tension between those who wanted to commercialize the software and those who wanted to keep it unfettered—GNU was a recursive acronym (of which there are a number of computer-related contemporaneous examples) that stood for "GNU's Not Unix." One of the most significant contributions the FSF made to the open-source community was the development of the GNU General Public License (GPL), still one of the most widely used open-source software licenses today. There are many other open-source software licenses, some more and some less restrictive in their requirements, as well as some that are considered special-purpose licenses, but for the most part, they are largely based on the GPL's definition of free software. These include Mozilla, Apache, the MIT license, the GNU Library (or Lesser) GPL, the Educational Community License, and the IPA Font License.

From an economic perspective, it is important to understand what exactly was meant by "free" in the open-source licensing context and how that concept was understood when the GPL was implemented. Stallman suggested that "you should think of 'free' as in 'free speech,' not as in 'free beer,'" and he defined free software as that which allowed the following four freedoms (which he counted starting at zero):

  1. The freedom to run the program for any purpose.
  2. The freedom to study how the program works and change it to make it do what you wish.
  3. The freedom to redistribute copies so you can help your neighbor.
  4. The freedom to improve the program and release your improvements (and modified versions in general) to the public so that the whole community benefits.

Free, then, was never intended to necessarily mean "no charge," although realistically, the price of the software itself will generally be driven down to zero for anyone willing to accept the other terms of the GPL license. This is because the four freedoms include the freedom to redistribute copies, and because software is non-rivalrous, meaning one person's benefit is not reduced when another person also uses the software (and the benefit may even be increased), the ease of communication over the Internet reduces transmission costs to virtually zero, such that software code can easily and perfectly be shared. Nonetheless, not only have programmers found it to be in their best interest to contribute to open-source software, but entire companies have been founded on the basis of a product that can essentially be obtained for free.

Economic Incentives Behind Open-Source Usage and Contributions
Clearly, not everyone who uses open-source software contributes to its code. For instance, just because you can download and use the open-source Firefox web browser for free does not mean you have either the skills or the inclination to modify it or write your own add-ons. Nonetheless, many people do devote their time and energy to modifying open-source software, creating their own add-ons and more. Unless one is to assume that these contributors, and others providing code for other open-source software, are acting in an economically irrational manner, these contributors must be deriving positive utility from their contributions.

Especially in the early days of open-source software, many of the programmers contributed voluntarily, motivated by the desire to learn and the satisfaction of having a community of like-minded individuals able to appreciate their contributions. Some also hoped for a reputational effect—that prospective employers might be impressed with their skills. One of the requirements of releasing a modified version of open-source software licensed under the GPL is that the copyright holder writes a copyright notice in his or her own name. The terms of the GPL quite literally require individuals to be recognized as the source of their code. So, while programmers might not have been selling open-source software or services, they were often essentially selling themselves through their contributions to the software.

Different incentives motivate companies such as Red Hat and Novell, which are based on providing consulting, training, and other services for Linux-based systems. Linux is an open-source operating system, referred to as "Unix-like," and it is currently used widely. Red Hat in particular, the largest company providing these services, uses the fact of its continuing contributions to the Linux open-source code as a selling point. According to its 2011 annual report, Red Hat earned more than $900 million in revenue in fiscal year 2011, 85 percent of which was from subscriptions to its support services, and it had a Generally Accepted Accounting Principle (GAAP) operating margin of 16 percent. Red Hat, Novell, and other like-minded companies have also expanded into the business of providing proprietary extensions for the core open-source Linux system. Companies that base their business model on providing support for open-source platforms are also motivated to contribute to open-source software, but they may have different incentives than the voluntary individual contributors.

A somewhat more recent development is dual licensing, whereby a copyright owner will distribute the same software under either a proprietary license or under an open-source license, typically the GPL. The open-source licensee may not pay a fee, but the license comes with other requirements, as discussed previously—in particular the requirement to disclose any changes or additions to the software. This may not be a feasible option for certain businesses wanting to make changes that they would like to keep out of the public eye. On the other hand, there are many businesses that simply want to use the software as it exists or that do not derive any, or enough, value from keeping their modifications from the open-source community. Through this product differentiation, a company can hope to increase its consumer base as well as its profits.

Another reason for the use of, and contribution to, open-source software has been referred to as the "hold-up" problem. If a user requires a modification after the initial licensing of a proprietary software product, the user is at least partially at the mercy of the software provider. The licensee may have invested time and effort (and, therefore, "dollars") into a given software package and realizes that there would be costs to transitioning to a different software package. The software provider is aware of this as well and would likely take it into account when setting a price for modifications and updates, especially for a customized modification. Because it is not possible to contract for all eventualities at the time of the initial license, this might reduce the licensee's incentives to make complementary investments or purchase the software in the first place. The larger the complementary investments, the less likely it is that a company would want to use an option from a different software provider. Using an open-source option avoids the hold-up problem.

End-user companies and individuals contribute to and use open-source software to have software that fits their particular needs, that can be customized, and that can be obtained at a lower cost than a proprietary option. By some estimates, it is this type of contributor who has had the largest role in the advancement of open-source software. Because software is often not the business of these companies but rather a means to an end, they are less likely to feel proprietary about the contributions they make.

One of the costs of using open-source software includes the cost of complying with the license requirements, particularly the requirement to provide or offer to provide the source code. For the most part, this is not an overly burdensome requirement but it is fundamental to the advancement of open-source software.

The litigation related to open-source software can be placed into two general categories. The first category comprises copyright suits brought by those in the open-source community against companies that violate the terms of the GPL, such as Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008), and the BusyBox cases. The second category comprises intellectual property infringement matters, for the most part, patent-infringement cases filed against companies in the open-source community. The outcomes could have economic effects on the broader open-source community.

Jacobsen v. Katzer and the Busybox Cases
In Jacobsen v. Katzer, 535 F.3d 1373 (Fed. Cir. 2008), the court acknowledged what are often the non-pecuniary economic benefits to those who contribute to open-source software, stating that there "are substantial benefits, including economic benefits, to the creation and distribution of copyrighted works under public licenses that range far beyond traditional license royalties." Id. at 1379. The court gave examples of specific benefits (a subset of those discussed above), including the generation of market share and reputational effects, and went on to state that the "choice to exact consideration in the form of compliance with the open source requirements of disclosure and explanation of changes, rather than as a dollar-denominated fee, is entitled to no less legal recognition." Id. at 1382.

As discussed, many of the incentives underlying the provision of, and contributions to, open-source software are based on the restrictions contained in licenses such as the GPL. The court recognized the importance of not destroying those incentives and concluded as follows:

The clear language of the Artistic License creates conditions to protect the economic rights at issue in the granting of a public license. . . . The attribution and modification transparency requirements directly serve to drive traffic to the open source incubation page and to inform downstream users of the project, which is a significant economic goal of the copyright holder that the law will enforce.


A number of recent lawsuits filed by the Software Freedom Conservancy (SFC) involve similar issues. The SFC was established by the Software Freedom Law Center and has filed claims against at least 20 companies since 2007 alleging violations of the terms of the GPL used to license BusyBox, a software application based on the Linux kernel. The most recent case, brought against 14 companies, alleges that the defendants have infringed the plaintiffs' copyrights by not providing "either (i) the 'complete corresponding machine-readable source code' or (ii) a 'written offer . . . to give any third party . . . a complete machine-readable copy of the corresponding source code.'" The defendants include Best Buy, Samsung, Westinghouse, and JVC, and the products that are accused of containing the software include high-definition televisions, digital video recorders (DVRs), DVD players, video cameras, and wireless routers. The plaintiffs are seeking a permanent injunction, as well as actual damages and any additional profits or, alternatively, statutory damages.

The SFC has settled a number of the cases it has filed for undisclosed settlement amounts and compliance with the terms of the GPL. One of the defendants, Westinghouse Digital Technologies, which had applied for bankruptcy in California, refused to participate in discovery. Consequently, the court granted SFC triple damages of $90,000 for willful copyright infringement, almost $50,000 in legal fees, and an injunction against Westinghouse. In addition, the judge ordered all infringing high-definition televisions to be forfeited to the plaintiff.

The decision in Katzer, as well as the opinion and order against Westinghouse, should provide incentives to companies that license open-source software to comply with the terms of the GPL. Licensees of other open-source licenses may also be encouraged to look carefully at their policies. In addition, these developments will serve to enforce the incentives of many who already contribute to, and those who may be thinking of contributing to, open-source software.

Lawsuits Against Red Hat and Google
A number of patent-infringement lawsuits have been filed against Red Hat, as well as other companies that use open-source software in their products, although Red Hat appears to be the biggest target. Not surprisingly, Red Hat submitted an amicus brief to the U.S. Supreme Court asking it to affirm the Bilski decision limiting the patentability of business methods, which, in Red Hat's opinion, included software. The opinion of the Court in Bilski did not place software outside the protection of the patent system.

Red Hat's record in court is mixed. It successfully defended a lawsuit filed by IP Innovation, a unit of Acacia. The case was in the Eastern District of Texas, typically considered a plaintiff-friendly venue for patent litigation. Nonetheless, the jury not only found that Red Hat did not infringe but also invalidated the patents at issue. On the other hand, Red Hat's settlement of another patent-infringement case filed by Firestar may not have been quite as satisfying. However, as part of the settlement, Red Hat negotiated that both licensors and licensees of the Red Hat product would be covered. At least for the time being, this should help to maintain incentives for those companies to continue to contribute to and use open-source software.

In April of this year, a jury ruled against Google in a patent-infringement suit filed by Bedrock Computer Technologies. This case was also filed in the Eastern District of Texas. Bedrock has also sued MySpace, Paypal, Yahoo, Amazon,, AOL, and two small Texas companies. In all likelihood, the two small Texas companies were included so the plaintiffs could get their venue of choice. While $5 million is not a large damages amount for a company like Google, the patent covers certain functionality of the Linux kernel, and after Google's loss, other companies have decided to enter into licenses with Bedrock. Of course, if there are enough patentees who can claim infringement and demand licenses for Linux-based, open-source software, the economic viability of the many systems based on Linux will be brought into question.

One of the most significant matters related to open-source software, at least in terms of potential damages, is working its way through the courts now. In Oracle v. Google, currently slated for trial in November 2011 in the Northern District of California, Oracle was seeking between $1.4 and $6.1 billion dollars in a patent-infringement case involving the Android mobile operating technology. Google requested leave to file a Daubert motion to exclude the testimony of the damages expert, who used an entire market-value-rule approach to the royalty base and a royalty rate of 50 percent. The court recently struck the expert's testimony as unreliable, with leave to try again and guidance for testimony that would be admissible. Perhaps because the actual damages amounts were released so recently or perhaps because it is Google, which, even compared with Red Hat, is just so darn rich and big, but the reaction of the open-source community has not yet been the vast outrage that one might have expected.

The incentives behind the use of and contributions to open-source software vary widely. Certain terms in open-source licenses are important to maintaining those incentives and have been upheld as valid by the courts. Other litigation affecting the open-source community in general and patent-infringement lawsuits in particular may challenge the viability and growth of open-source software.

Keywords: litigation, intellectual property, open-source software, incentives

Jennifer Vanderhart – September 20, 2011

Copyright © 2011, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).