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The entrepreneur, the shoe and the software patent

8 July 2006 by Ch. Tronche | Filed under Software patents.

I’ve once again came across a paper by a reputable magistrate and economist that distinguishes “open source” or “free” (like in free beer) software and “real economy” software.

This is a common mistake, especially in software patents promoters circles, but not only.

I’d like to shed some light on the issue by telling you a bit about the shoe business.

Not that I know much about the shoe business. I funded and helped founded a small company developing proprietary software (which is still alive and well after two years of existence, by the way). However, I’m not sure that all the people sentencing us about software patents and the economy of software have more hands-on experience on what it takes to create and make live a software editor
than I have in the shoe business.

These people should learn about shoe business, because it gives us some unique insights in the economy of software. Especially in a world with free software, and without software patents.

Our shoe story begins with a proprietary software editor armaggedon:

You work hard to write some piece of software. You create a company to distribute it and make it better, and, man has to eat, you hope to make money with it. And then — BANG — someone writes an open source software making the same thing, and starts giving it away for free. You start losing market shares. How can you make money ?

In short, you can’t. At least not with your software.

The point is that your problem here isn’t a lack of patent. It’s a lack of added value. If someone else’s software does the same job as yours, and the guy is ready to give it away for free, meaning he’s able to produce it at such a low cost he doesn’t need to charge for it, it shows that the software isn’t worth that much. And if users prefer “the other one’s” to “yours”, it means you’re unable to add some helpful features the other one can’t replicate. The added value of your product for your customer isn’t worth the money you’re asking. You’re the one to blame.

“But, that’s unfair”, you say. “I was first”. May be, may be not. May be the other one started first. But anyway, the other guy has done the work too. Would it be fair to exclude him or her ?

“I can’t make a living of it, while the other one doesn’t even try, that’s unfair competition !”.

No, that’s just competition on the marketplace where every actor has strengths and weaknesses . What’s unfair is when someone as a unique commercial monopoly (a patent for example) others can’t replicate whatever they do. They can’t compete. This is unfairness.

Your problem is that your business plan / strategy was flawed from the beginning. You’ve overestimated the entry barrier to your market. Or may be your plan was good at the beginning, and something in your environment changed. It happens all the time, and has nothing to do with patents.

The shoes.

You arrive in the town, there’s no shoe store. “BUSINESS”, you think, “there’s a need to fill here. People aren’t gonna walk barefoot in the streets”. You mortgage your house to get the money, work hard, open the store, the customers start flowing in.

Then comes a guy who’s rich already, thanks to dad. “Funny thing to run a shoe store”, he thinks looking at you. And he opens one right next to your door. No mortgage to pay for: he displays lower prices. And you lose all your clients. And, worst thing of all he doesn’t even need to sell to live ! Damned.

Now, would you call for a law so there’s only one privately owned shoe store in any town, and no one has a right to open one more when another one’s established already ? (This would be the Shoe Town Extension Agreement Monopoly Act – or STEAM – but what this STEAM protection is really is smoke). What about freedom ? Free market, free economy ? And what when the Big Shoes Continental Company will have put a store in every town in the country. Actually, most of them will be permanently closed. Why on the Earth should Big Shoes pays for a stock in every town, since they won’t sell less or at a lower price with ever-closed stores in 99 towns and only one opened in the 100th ?

I guess you won’t call for a law creating such a monopoly, not if you believe in the free enterprise.

Now why would you call for this same monopoly they call a patent ? Very same thing. Or have you lose your principles when it comes to intellectual stuff ?

But why, why, why, the self-called “defender of the modern economy of the digital era” are asking for such an outrageous monopolistic anachronic mechanism, one they’d all but vociferate against in the shoes economy ?

They are communists.

Honestly. I can’t see a better explanation. They don’t believe in the market forces. Software patents promoters are communists disguising themselves as modern economy knights.

Ah yes, innovation. Sure software is lacking innovation these days. I’ll came back to that in a future post. Suffice to say for now that a conclusive, undisputed study linking patents to the rate of innovation in the software world is still to be shown.

I’ve heard the European Community was lagging behind the US in the software domain, and the lack of patent was to blame. Europe certainly doesn’t lag behind Japan for software – while Japan has software patents. The European Community does lag behind US (and Japan) in other domains, where patents are commonplace. So I find the explanation a bit short.

BUT WAIT – THERE’S HOPE

Does it mean there’s no way to survive in the shoe business in this town ?

What to do if you’re a proprietary software editor, and some open-source software doing the same thing as your jewel’s on the rise ?

The best thing is first to retreat. You’ve been outplaced by something better. It’s the 10X change, the creative destruction. You’re the candle maker seeing the raise of the light bulb, there’s no point fighting against that. There’s no point in pretending you’re the only one with a right to produce light by artificial mean. Whatever you do, sooner or later, the light bulb wins, so don’t bet your long-term wealth on it.

But that doesn’t mean there’s nothing to do.

First you shouldn’t have been caught by surprise. Your average candle last for at least twelve hours, while the first light bulbs lasted only one hour, with a power installation the size of a gas factory. Before Edison can compete with you, you’ll have time to react. But act now, don’t wait until he fills all the available space.

Free software starts clumsy, full of bugs, feature-poor, user-unfriendly and unstable, to say the least. But don’t be to sure of you when seeing the first alpha. If at some point it “catches”, things gonna start to get bad for you. First a community builds around your free competitor. More and more people are using it. Just for fun (it’s free, so what ?).

Time to anticipate. The crucial question is : what can you do the free software squirrels can’t ?

This is something that, as an entrepreneur or a marketer, you’re supposed to have asked yourself every morning when you wake up, shoe business or software business, patent or not. How do I differentiate myself from my competitors ?

If you’re offering a product or service many can do, you’ll have to compete on price [See for example Guy Kawasaki]. However, you can’t beat something free in this respect.

But there’s a thing that, sure like earth, you can always do, and the smart kids won’t be able to.

Service.

You’re the entrepreneur, they’re brilliant engineers and students, passionate amateurs alike doing it for fun and fame. But even them have to eat, and they have a day job. They can’t go to the customer. Guarantee her that they’ll side with her when things are going crazy, when the software crashes and the database must be restored or whatever voodoo computer guys do (and even open source software crashes sometimes !). They can’t commit resources, you can.

You’ve written your software, you got unique insights in the way this particular class of software works, a know-how at least very difficult to replicate or transfer. The software was your core product, but you had to build a full product around [If you don't know the difference, see for example Geoff Moore]. Even before you were a service company, you learned to serve your customers well, to understand their needs and their work to sell them better your software.

The free software people can’t do that. They won’t even try. Serve your customers amazingly well, and your business is safe for ever. Until a competitor with a better customer service displace you, but believe me, no patent will protect your customer service.

[A note to policy makers: people in service are physically close to the customer, while pre-packaged stuff can be produced anywhere and shipped everywhere, especially immaterial goods. So if you want jobs here that won't be sent elsewhere, service is the way to go.]

Now, Mr software entrepreneur, there’s even better. You want higher margins ? Use the system. Adopt the free software of your competitors ! You won’t have to fix all the bugs by yourself. And you can even sell a migration to your customers !!! You go on with your know-how, your customer service and customer proximity. The overseas free software supporters work hard and they get nothing, you can ask for all the money your customer has reserved for the project.

Free software can displace competitions, and help you getting higher margins. Who could pretend this isn’t “real” economy ?

(Free) additional conclusions

  1. A shoe store is still a viable business.
  2. Software patents have nothing to do with economy. Market competition has, and patents are the contrary of market competition. They may be justified in some domains, certainly not in software, a sector most dynamic by itself. If you’re a policy maker, don’t waste your time trying to stimulate innovation there. As (good) engineers say “if it isn’t broken, don’t try to fix it”.
  3. If someone tells you what’s good for entrepreneurs and SMEs, ask him his entrepreneurship experience first.

And by the way, my favourite company has no free software competitors. This is because I designed it right from the start to be a service company: ASP payroll software. Such software has so little value without the associated service that no free software aficionados ever tried to write one. And when they will, it won’t make much difference.Because our customers trust us.


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