Impact of user skills and network effects on the competition between open source and proprietary software

Abstract

Despite the availability of source code, deploying open source software in an enterprise environment requires skills. Recent surveys and case studies show that the skills of IT staff in an organization are one of the key factors in open source software adoption decisions. Another important factor organizations consider when choosing a platform is network effects. This paper studies how users’ skills and network effects may influence the market where proprietary software competes with open source software. In the model, users make adoption decisions considering their own skills and the network effects of the software, and the proprietary software vendor prices its product strategically. It is found that in the presence of network effects, the proprietary software dominates the market when the open source software does not provide higher benefits to users. This implies that open source software, as a low-cost substitute to proprietary software, may not survive in a market exhibiting network effects. To gain market share, open source software has to outperform proprietary software by a large margin, which can be achieved when a significant portion of users are highly skilled and thus can customize the open source software to better satisfy their needs.