When I studied economics, one of the concepts that struck me the most was the concept of externalities. This International Monetary Fund post explains it well. In short, externalities are costs or benefits of an economic activity that affect third parties who did not choose to incur them, leading to a divergence between private and social costs or benefits. They’re spillover effects—positive or negative—that the market price fails to reflect. A classic example is air pollution from a factory, where nearby residents bear health and environmental costs not included in the price of the factory’s products.
Open source is full of externalities. On the positive side, adoption creates ecosystems of developers and provides many paths of distribution. On the negative side, there’s often underinvestment in the very projects that sustain the ecosystem. I have a lot of empathy for why, when open source meets finance and private equity, things can go sideways. You can look at a business built on open source and see seemingly amazing margins—efficient R&D that compounds in a DCF model. A percent here or there over many years really adds up.
My plea to investors in open-source businesses is this: when a business is built on top of open source, incorporate a restorative investment percentage back into the projects critical to the end-user experience of what you’re offering customers. In WordPress, we call this Five for the Future, but it doesn’t have to be five percent; it could be 0.1%. Plan for it when modeling your expected IRR hurdle from an investment. Then, a few years down the line, when the small percentages start to add up, you won’t face a big catch-up or gap.
This underinvestment is itself an externality. It doesn’t appear on the balance sheet, but it can manifest in black swan events, such as security breaches or remote code exploits. Technical debt is one of the largest unaccounted-for externalities in the world today. Engineering, in the long run, is primarily a craft of maintenance rather than creation. The bulk of the cost of something comes from its upkeep over time.
This is a great idea for society and the long-term health of a business.
Unfortunately, the idea of allocating budget to something that you can get “for free” is a tough sell at $MEDIAN_COMPANY, where you probably won’t be held accountable precisely because the issues will be “black swans”. I heard lots about Covid being a black swan from executives trying to justify running their budgets to the absolute brink and failing to produce resilient or anti-fragile systems.
And of course, you may not even be at the company by the time things go south, so the justification may not even be needed!
Talking about it will at least put it in the minds of the handful of organizations that are appropriately sophisticated and incentivized. But I also wonder if there are some other more direct benefits that would make it simpler to sell on a wider scale.
Automattic obviously publishes a ton of open source and gives a lot back to WordPress, but I’m also going through what are other libraries we use or technologies we rely on that have Github sponsor pages or some other way of supporting them, and making it easier for people to put Automattic as a sponsor. I’ve done a lot of this through my personal card but I want to make it part of the company culture.
Your point about restorative investment really resonates, especially since underinvestment is such a hidden externality. I do wonder though, once funding becomes part of the culture, how do we ensure it’s governed in a way that strengthens open source rather than distorts it? Funding itself could create new externalities, such as if contributors begin to expect support instead of contributing from passion and curiosity. Perhaps the answer lies less in central control and more in shared norms across the community, but I’d be curious how you see it.
What sort of under-investment? Is this real, or just FUD?
Commercial software has struggled for a sustainable business model. It seems to have settled on SaaS for now. To work, that demands very trusting customers. There are plenty of those right now, but that kind of trust never lasts. And it’s not clear what their next business model could possibly be.
They’ve spewed FUD about open source many times before. Is this more of the same? Why no specifics?
Kind of makes me think at least a little bit about governments exercising soft power.
Positive externalities → unintended benefits that spill over.
Soft power → governments intentionally harnessing and amplifying those spillovers to shape global behavior.