Brad Smith : Open source and advertising key business models for software

We’re in the third phase of software business models with open source and advertising models leading the way. This per Brad Smith, Senior VP and General Counsel for Microsoft Corporation, addressing 150 lawyers here at the 15th annual Seattle Computer Law Conference.

Smith made clear that business models have always driven technology, as opposed to vice versa. Software, and the rights to it, have evolved because of the business models that drove them. We’ve now reached the third phase in software business models.

In phase one, software had no value. These were the days of IBM mainframes and Sperry Corporation. Software was a free accessory that you got when you bought very large and expensive mainframe computers. No one saw value in software and never thought of the IP rights that may tie to it. If anything, software was just viewed as trade secret.

The second phase came in the mid 70’s with hobby computers. Seeing that computers could be small personal devices, Bill Gates left Harvard in ’75. The next year Congress debated whether copyright should apply to software.

There were only 1,205 registrations for for software at the Copyright Office for software. And 80% came from two companies, one being Burroughs. One of copyright commissioners at the time said that if we applied copyright to software we would preserve the large IBMS and stymie innovation. In fact, just the opposite occurred.

What ended up driving innovation was the business model – the idea being to create software that would have value independent of hardware. Standardization brought by Intel’s chip and Microsoft’s operating system brought a massive increase in production and massive reduction in prices.

Gates’ and Allen’s model was to sell a perpetual license for software. Buy it once and you never need to pay again. These were the days of shrink wrap license agreements agreed to by the consumer when they opened the wrap and ‘read’ the license.

The third phase has developed over the last 6 or 7 years. Three business models for software have developed, with the latter two showing the greatest potential.

• Licensing. We continue the mass marketing of licenses. Now, it’s just done more on on subscription basis so that you get updates as they came out. This allows for continued services in an ever developing world.
• Open Source. Very distinctive from the first in that developers are working on code in diverse environments. The cost of the development work is not recouped by sales of the software. It’s recouped by service, hardware or other software sales. You are using open source to develop distribution channels to sell something else. This is the Novell and Microsoft deal where Microsoft drives licenses to open source community and Novell gets cut.
• Advertising. Probably the most important business model is ad sponsored software. Software is given away for for free in a web based atmosphere but advertisers are given rights to run ads. This is the google model, acknowledging google is all software.

Smith notes that Yahoo and Microsoft are in the advertising model as well. It’s the only model for search.

In a slight cut at Google, Smith says whether Google’s search is the best is open to debate. But Google dominates search as they have perfected the business model of paying for software with ad revenues. Google collects so much search data that they then analyze to determine the things you you search for. Makes it all the more valuable for advertisers, perhaps offering the highest ROI for software development.

Maybe I ought to be rethinking my view on advertising driving a business model.