Spot The Pattern: Commoditization

Round Mountain Gold Mine. Pic from https://upload.wikimedia.org/wikipedia/commons/thumb/3/32/Round_Mountain_gold_mine%2C_aerial.jpg/1024px-Round_Mountain_gold_mine%2C_aerial.jpg
Round Mountain Gold Mine

Last week, I spoke with the CEO of a company that makes a proprietary category-leading workflow product. He asked me “what should we open source and when?”

This is one of the most common questions we get. There is no easy, standard answer to this question, but I usually start by looking for features of the ecosystem that either are or could be commoditized.

A commodity is something that is the same no matter who makes it. Gasoline is a commodity. Customers don’t really care where they buy gas. They want it cheap and reliable, but the gas itself should be the same stuff regardless of which oil company refines it and pumps it into your car.

In practice, of course, gas from different companies is not identical. Some places enhance it with detergents, mix it with ethanol, or add stabilizers.  But for the most part, consumers ignore these small differences.  You put it in your car and it works.  People pick gas stations based on price and convenience.

It’s hard to charge a premium for a commoditized good. People are not willing to pay extra for a product if they can get the equivalent for less elsewhere. As a result, gas stations compete on price.  This squeezes margins, and so in the end they make their money on the convenience store, just like movie theaters do with popcorn.

Open source software businesses are often in the same position. There’s a core offering that is, to put it bluntly, boring. Anybody could offer this boring core without innovating. You cannot be in the market without matching the core’s offerings, and customers want standard interfaces these days, so there’s not much opportunity to differentiate on the basic core offering.

Database servers follow this model. From a business perspective, storing rows of data is not interesting. Everybody can do it, and nobody really does it much better than anybody else. There are performance improvements at the margins, and we can build interesting services on top of storing information, but basic data storage and retrieval is just facilities maintenance, not the thing your customers choose you for.

Of course, not all data storage is basic. You can store things faster or in ways that make access easier. You can stack data vertically instead of horizontally. You can keep all the data in memory, duplicate it across multiple servers, or sync with client-side storage. These are features that can set one product apart from another. You might be able to charge a premium for them. None of them, though, is actually the boring, basic task of putting data on a disk and making sure you can find it later.

For a business that manages data but can’t find competitive advantage on storing it, the database is a cost. It’s not worth spending a lot of money to develop or acquire a database that improves on the standard set of features because there’s just not much improvement to be had. Best to source those features as cheaply as possible.

Of course, the same logic applies to everybody else in your industry. We’re all trying to get the boring stuff done as cheaply as possible. This is where open source cooperation comes in. We can’t compete on those features, so there’s no point being competitive about it. We use open source to get together and collaborate with all the other folks who want rock-solid databases. Open source lets us do this even if we’re in competition on a range of other fronts.

We see this pattern a lot in free and open source software. Product categories go open source, then contract, then perhaps expand when somebody figures out the next frontier of differentiation. Most recently, we’ve seen this effect around web rendering engines. Every browser’s goal is to depict HTML in standard ways. Aside from being at Google’s mercy, there’s little reason for most companies to make their own rendering engine when there’s a pretty good one that is open for the taking.

Spotting this pattern early is a crucial step in knowing what to open source and when.  You can lead or let somebody else lead — either might be strategically useful, but spotting the pattern lets you choose which position to take.

Sometimes it makes sense to open source what you have mainly as a signal to others that an area is becoming commoditized and so they should open source their stuff too.  That is, you don’t necessarily have to be aiming for a dominant position in a new open source area — in fact, you often don’t have to decide that in advance.  Instead, you open source because an area is about to become commoditized, and the earlier you shift your investments, the better positioned you will be get the type of influence that serves your needs in the inevitable post-commoditization universe.  (For more about the various forms that influence can take, see Open Source Archetypes.)

Once you start looking for the commoditization pattern, you see it all over the open source world. It is a common tool for understanding the strategic position of all kinds of products. In addition to the basic pattern, there are two more big concepts around commoditization worth considering: the cyclical nature of commoditization and the factors that allow resisting that cycle. We’ll cover those in future posts.

Thanks to Microsoft for sponsoring the Open Source At Large blog series.

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