I was thinking of writing something on this for a few days, but I got lazy. Then, I saw this (Glyn Moody, The H Open) article, and it gave me the perfect motivation to actually write this.
I'll first sum up what he says, as he covers most of the important stuff. Follow the jump to read more about Linux, Microsoft, capitalism, socialism, cars, and the music industry.
When open-source (I won't say "free software", as that'll lead to way too much confusion between libre free and gratis free) software was first being distributed, it could make money as the source code was also being sold for personal modification and redistribution; people could of course get free-of-charge distributions of the original program, but to make their own customized program, it was worth paying for the original source code. It still is today, though that has changed as the method of distribution (previously, floppy disks sent by mail) has become far faster and cheaper (now, files hosted online).
The most visible open-source software business model is that of Red Hat and its RHEL. It essentially gives away the product but sells the support, and this is critical for a lot of businesses, schools, and other agencies. Red Hat has been able to make millions of dollars in profits as a result. This also makes perfect economic sense, as the cost of producing another copy of RHEL is zero but the cost of providing support to consumers is not insignificant. This is exactly how a perfectly competitive market should work; there are a large number (more than 20) firms in the market, the price of the good equals the cost of producing an extra unit of it, and all of the firms sell at this price (and in turn make the most profits at this price). In this case, the 2 markets are of the Linux product (price is $0) and the support service (price varies slightly (versus competitors like Canonical, Mandriva, etc.) and depends on level of support, but starts at $80/year).
These leads me to my first point: Linux is the embodiment of capitalism, not socialism.
With Linux, one gets as close as possible to total freedom and infinite choice. Right now, on DistroWatch, there are over 650 unique distributions of Solaris, BSD, and Linux, and there are even more (that haven't been submitted to DistroWatch). Almost all of them distribute the product for free, as that is the marginal cost of producing the product, while almost all of the company-backed products sell support for similar prices, which is the price where these companies profit most. If a developer can't sustain the costs of developing further, that developer leaves the market, and invariably, another developer takes the original one's place. While this doesn't happen with larger companies, Mandriva has filed for bankruptcy before in hard times (and they have made it through each time).
Relate this to the car market, where there are many different auto manufacturers, both domestically and internationally. In the recent recession, GM and Chrysler had to file for bankruptcy, while Ford was generally doing poorly; other automakers started picking up their sales. Now, however, GM and Chrysler are back in the game, while Ford's sales (and shares) have skyrocketed; in the process, Toyota and Honda sales have fallen considerably. Auto bailout notwithstanding, that's how the market is supposed to work.
This is also how it used to be for the OS market at large. IBM, Commodore, Microsoft, and Apple, among other companies, all vied for market share; some entered while others dropped out, and the price was generally the same across the board (with a few exceptions).
Notwithstanding the presence of Apple in the high-end (price-wise) OS market, Microsoft has a monopoly over the OS market at large. It can dictate what features are and are not present without regard for consumer preferences (though that is changing very slowly) and can dictate what price it will sell at. For a monopoly, the most profitable price is not equal to the marginal cost; suffice it to say the the price will almost always be higher than the marginal cost, which is bad for consumers.
It's almost like...socialism. There, I said it.
Want to know why? Think about the days of socialism in Eastern Europe and the car market there. Only one firm (the government manufacturer) was present in each country, meaning that the government would dictate exactly what would happen to the cars regardless of consumers' wants and needs. The cars were quite expensive relative to consumers' incomes there but were near-dangerous to drive (due to the appalling build quality). In addition to this, consumers would have to wait 3-5 years on average to have a car (of that quality, of course) delivered as the government was the only supplier/seller of cars.
Doesn't that sound like a certain software company I have mentioned frequently? Hmmm...
The next part of the article discusses the implications of the open-source software business model for the music industry. Often, I have spoken negatively (to put it kindly) about the music industry's inability to keep up with modern times (DRM-free $0.99 iTunes songs being a notable and laudable exception), instead trying to further lock consumers down with ever increasing DRM and other restrictions. I have also spoken about the music industry's tone-deafness with regard to quoting losses from pirated music, as the vast majority of established musicians' income now comes from (ironically, being in the modern era) live concerts. This article is the first time an exact figure is quoted: $7.5 earned from live concerts for every $1 earned from record sales, and that's a conservative estimate (as far as I have read).
7.5 to 1. And the industry still doesn't get it.
However, I have wondered before (and the article takes note of this too) what lesser-known artists would do in this regard. I see before me (in the article) a most ingenious solution, proposed by a lesser-known indie artist named Jill Sobule. She has proposed a scale of donations for which donors would get increasing rewards, from a free download of the album for a $10 donation or a CD sent out before official release for a $25 donation to a house concert (as well as all of the above listed (in the article)) for a $5000 donation or allowing the donor to sing in the album as well (as well as all of the above listed (in the article)) for a $10000 donation. For one of her albums, she made (and I quote) "$75000 in just two months". Her business model is such that she builds up a dedicated fanbase and uses their donations to help make the albums (and give the donors all of the appropriate listed rewards). When she gets enough money (which looks to be very soon), she will start doing live concerts.
That, my dear readers, is impressive.
And why is she able to release the songs for free (or very, very cheap)? That's because the donations cover her initial costs to make the song, while the marginal cost of producing copies is $0.
That, and not a business model based on ever-increasing restrictions, is capitalism.
I would love to see your thoughts on this, so please do leave your thoughts in the comments section!