Should Governments Specify Licence Conditions?

I have been made aware of a meme passing around Government purchasing circles to the effect that Government ought not to be dictating licence terms in the course of procurement.  This has two variants, a strong variant that Government ought not be specifying, for example, a class of licence that ought to apply to the procurement and a less strong variant to the effect that Government ought not be specifying particular licence terms. Of course, the underlying aim of this meme is that if a Government can’t dictate licence terms then it can’t require open source.

To argue these positions requires a complete lack of understanding of the role that a licence plays in an acquisition.  I will take software as an example, but any procurement involving a licence would serve as well.   When anyone “acquires” a piece of software they, primarily, acquire two things.  The first, is a copy of the software being acquired.  The second is a licence in relation to that software.  Neither is useful without the other.  A copy, even legitimately acquired, can’t be used* without a licence and a licence can’t be exercised without a copy.   However, of these two components – the licence and the copy, the licence is by far the more important because it demarcates the whole of the uses to which the copy can be put.  If your licence is good enough, you can dispense with the provision of a copy because you can acquire the copy from elsewhere.   The acquisition of the licence, and the terms of the licence are the greater part of the substance of the procurement.

To take a practical example, if I were to buy a copy of Office from Microsoft I can choose from Office Home and Student 2013 or Office Home and Business 2013.   Microsoft provides a comparison chart which discloses that the main difference between these two packages is that the first can only be used for “Home Use” while the second can be used for “Home or Business Use”.  Now, the purpose for which I might use Microsoft Office is not a function of the copy of the software I acquire.  It is wholly derived from the licence terms which apply to that copy.  To argue that the Government is not able to specify the characteristics of a licence is to literally prohibit Government from discriminating between a licence which permits only home use (which would be useless to the Government) and one which permits use in the course of business.

For a public servant to even entertain the possibility of a broad based limitation on specifying licence characteristics would be to demonstrate a total failure to understand the subject matter.  The licence is the substance of any software acquisition.  To not be able to specify licence characteristics is equivalent to not being able to include technical specifications in any other sort of acquisition.  It is a nonsense.

The only time where specifying a licence ought to be prohibited is where the licence terms effect an exclusionary dealing.  So, if the licence terms permitted use only by persons who had signed up for some form of online service being offered by a third party, that would be anticompetitive because it would require bidder’s  customers to be funneled through to the a third party.  Open source licences do not have these dependencies.

* technically, some uses may be permitted if they do not involve an infringement.  However, the scope of things which count as an infringement these days is so broad that in any practical scenario the use of software will involve performing an activity which would, in the absence of a licence, infringe copyright.

Open Source Law Releases Report On Open Standards

Open Source Law Releases Report On Open Standards

Update: UK Open source principles released

I have been doing a bit of work for a variety of people recently relating to standards and standards setting.  In early May I saw that the UK open standards consultation process had been extended because of a potential conflict of interest by one of the facilitators.  Linux Australia commissioned a report from me about Open Standards.  That report (link below) was completed last week and, I understand,  Linux Australia has used it as a basis for a submission to the UK Open Standards Consultation process.  The report covers a variety of issues relating to open standards.  Some of the issues it covers are:

• the difference between open formats and open standards.  I think if government focusses on open “standards”, then that’s a big problem.  In practice it would resolve to “open standards or anything goes”, with no middle ground.  However, there are plenty of viable open formats which have not been standardised.  Moreover, invariably any format used by an application will initially not be standardised, so there needs to be an incentive for that first format to be open.  The report suggests, for example, that open formats should be preferred to closed standards;
• what is open in relation to a format.  The word “open” is tossed around in government with varying degrees of precision.  Often it can mean no more than “specified”.  Thus, a format which requires the payment of extensive  licence fees can nevertheless be “open”.  The report endorses the proposition that if some format gives a preference to a particular bidder, then it’s not open.
• discriminatory “non discriminatory” terms – the report draws attention to the fact that licensing terms for standards are commonly overtly discriminatory.  For example, the requirement to pay per copy licence fees directly discriminates against any open source implementation of the standard.  Despite this obvious bias, such terms are routinely permitted to be categorised as “non-discriminatory”.  The report rejects the usefulness of terms like “RAND/FRAND/RANDZ”.

The report is licensed under a creative commons licence.
The full report can be downloaded here.

Here are the figures:

Figure 1: Govt Cost Shifting

Figure 2: File Format Feedback

Figure 3: Format Grid

CeBIT Gov 2.0 Conf: Open Source Wrongness

CeBIT Gov 2.0 Conf: Open Source Wrongness

I was contacted earlier today by “Stephen from CeBIT”.  Stephen ultimately was asking whether I would like to pay CeBIT for the privilege of presenting on open source related issues at an upcoming Gov 2.0 conference.  Stephen’s line was that there would be many potential customers at the conference so it would be a good investment.  In effect, Stephen was asking to be paid for marketing to Government.

Selling to Government, at least in Australia, is universally acknowledged to be difficult for SMEs.  Ultimately the reasons for this are that the Executive is particularly averse to failure and are subject to fairness tests in the award of contracts.  As a result, the Executive establishes a bureaucracy to ensure that each potential supplier is treated the same, and any engagement is subject to particularly extensive terms and conditions.  All of this carries with it a cost of engaging with Government.   In other words, marketing to Government is particularly expensive.

This is a particular problem for businesses based on open source because it means that the costs are heavily front loaded.  Part of the reason businesses pursue an open source strategy is that they do not have a marketing budget sufficient to kick start their operation – they may barely have enough in order to develop the code.  Several years ago John Roberts then CEO of SugarCRM spoke about marketing leverage of closed source vs open source businesses:

“I started looking at the financials of proprietary firms, and I started seeing that, some of the largest CRM providers that spent 80% of their operational expenditure on sales and marketing, and less than 10% on engineering.”

In other words, for an open source project to compete in a marketing sense, they would typically need to increase their headcount by a factor of 10.  Note that none of these extra people are improving the value of the software or solution to the Government customer.  All of them are engaged in lobbying the Government customer to adopt the product.

It gets worse – the expectation of Government is that these marketing costs are front loaded, and that they be recovered through licensing fees.  As mentioned above these costs are extraordinarily high in a relative sense for open source SMEs.  The corresponding risk of bidding for work is therefore very high – and higher the smaller the SME.  The fees for the provision of services are seen to be largely undifferentiated – an hour of service on product X is seen as being roughly the same value as an hour of service for product.  However product X is seen to be not comparable to product Y almost by definition (as their feature sets are different and/or the products may have network effects through lock in).  The upshot is that no premium can be charged for the price of services, but a premium can be charged for the grant of a licence. Thus the only way to recover these costs is through the licence fee.  You can see why this would be a problem for open source businesses.

It is somewhat pointless pursuing Government engagement with open source on these terms because genuine open source bids will always be underrepresented.   The Gov 2.0 conference looks to be an exemplar of this problem in microcosm.

Government instead, needs to be proactive in seeking out and evaluating open source solutions and, in particular, being technology neutral in its acquisition terms.  The Gov 2.0 projects seem to be not a bad model – with funding provided against open proposals with a comparatively low engagement cost.  Standardising on  closed data formats is particularly unhelpful, regardless of whether the format is an ISO standard.  If necessary, Government needs to reengineer its procurement practices as necessary to address any procedural fairness  issues.

Call for Tax Deductibility for Donating (to) FLOSS (AU)

Call for Tax Deductibility for Donating (to) FLOSS (AU)

Brendan Scott

May 2009

Summary

There is cause to believe that an entity could be established in such a way as to be a deductible gift recipient under the Australian Income Tax legislation and that donations of open source software to that entity would give rise to a tax deduction to the benefit of the donor while preserving public access to the software.  Such an arrangement would benefit individual FLOSS developers (who have an income against which a deduction can be claimed), including those whose FLOSS activities are pro bono at the moment.  There is no reason to think the same principles would not apply to other licensing schemes, such as open content.

Background

Some while ago Open Source Victoria (OSV) asked me to investigate some issues relating to the tax deductibility of donating FLOSS to charities as a means of promoting participation in FLOSS within Australia.  OSV agreed to partly fund the work, and I mapped out some options for them at the time.  I’ve recently spoken with OSV and they were happy for some aspects of work to be made public.

Who Benefits?

Policy makers too often overlook the fact that the whole of the community benefits whenever software is released under a FLOSS licence.   The intended beneficiary of such a scheme are therefore the community as a whole.  However, consistently with existing government policy to provide incentives for the creation of works, the donors of such FLOSS software would also benefit through a tax benefit in return for the donation.   Further, as businesses will likely be able to deduct the costs of development of software which is created in the course of their business, the donors most likely to benefit are those individual developers engaged in pro bono development.

That is, such a scheme would provide an incentive to individual developers to create and donate FLOSS.

Outline of the Arrangement

In some circumstances the donation of gifts to charities gives rise to a tax deduction to the value of the gift.  Such deductions are not available for all donations, but whether the gift is money or an asset does not remove its deductability.   Software is an asset, so it can be a gift.  The arrangement therefore involves establishing an entity which grants OSI compliant licences over software donated to it in such a way that the gift of copyright to the entity would give rise to an entitlement to claim a tax deduction for the value of that copyright.

Discussion

Eligibility for a Deduction

There are a number of things to be established in order for a donation to an entity to be tax deductible. These are:

1. that the donation falls into one of a number of specific categories of things which can be gifts;

2. that the recipient of the gift has a special character as a Deductible Gift Recipient (DGR). This involves both being entitled to endorsement as a DGR and actually receiving that endorsement;

3. that any additional special conditions are satisfied. Special conditions can apply to gifts based on the character of the DGR and/or the circumstances of the donation; and

4. that the donation has the character of a gift as defined by taxation law. This includes both the nature of the gift itself and the manner in which the gift is given.

Deductible Gift Recipient

The legislation does not make it particularly easy to become a DGR.  Indeed, it has a Byzantine structure which the unkind might think was specifically designed to prevent entities becoming DGRs.  The tax deductibility of gifts is dealt with in Division 30 of the Income Tax Assessment Act 1997.  Section 30-15 has a table which sets out the circumstances in which a gift will be deductible (Deductibility Table).  The Deductibility Table sets out not only the categories of gift recipient, but also links the gift recipient to specific categories of gift and/or special conditions on gifts and/or deductibility of gifts.  A gift recipient may appear in different rows of the table, indicating that the same recipient may receive different categories of gift or that different gifts are subject to different special conditions (or both).

From a review of all of these the following seemed promising:

“(1) A fund, authority or institution covered by an item in any of the tables in Subdivision 30‑B”;
“4(b) a public library in Australia”; and
“4(c) a public museum in Australia”.

The tables in Subdivision 30-B list a large number of funds, authorities and institutions.  Some of these are named specifically (eg item 2.2.19 “the Foundation for Gambling Studies”), while others are identified by category (eg item 2.1.1 “a public university”).  Of all the entities listed in Subdivision 30‑B, the only ones likely to be applicable in the proposed circumstances are:
(a)  4.1.1 a public benevolent institution;
(b)  12.1.2 a public library; and
(c)  12.1.3 a public museum.
In certain circumstances, there may be other categories which are appropriate – for example, certain research arms of universities are entitled to be DGRs.  In addition, there would be the possibility of having the entity specifically listed in the legislation – if a specific naming was possible it would be the easiest route home, but the least likely to be able to be achieved. Failing that, the most promising seem to be establishing a library or a museum.    The detail of what constitutes a public benevolent institution is rather stringent and would be difficult to qualify under.

Gifts

In addition to the entity being established as a DGR, the gifts themselves need to have the requisite character.  These requirements are set out in a number of court cases and include:
(a)  that there is a transfer of money or property;
(b)  the transfer is made voluntarily;
(c)  that there is no material benefit to the donor by way of return; and
(d)  it essentially arises from benefaction and proceeds from detached and disinterested generosity.

There is no reason why the donation of code could not qualify under this definition as a gift.

Anti-Avoidance

In addition to the provisions qualifying what is, or is not a gift, the Act also has “anti-avoidance”  provisions which are relevant.  These are intended to apply to invalidate gifts where a scheme or arrangement has been contrived to avoid the spirit of the deductible gift recipient provisions.  In essence a gift is not deductible where as a result of a gift:
(a)  the value of the gift to the recipient is reduced (including where the reduction is from an event that happens after the gift is given);
(b)  another fund other than the recipient becomes liable to another person;
(c)  the donor of the gift (or an associate) receives a benefit (other than the tax deduction); or
(d)  there is a requirement for the recipient or another fund to acquire other property from the donor.

There is no reason in principle why the anti-avoidance provisions should preclude software donations of the kind contemplated by these arrangements.

How Much of a Deduction?

In theory the whole value of the asset is deductible.  The Act has different rules for different categories of gift.  In some circumstances no deduction is available for the donation of assets worth less than $5,000.  However, it is plausible that a gift of software under the arrangements contemplated would not be subject to this $5,000 minimum.    There are specific procedures in the Act to establish a value of assets.  For the arrangement to work could require establishing software valuers approved by the relevant department.  Presumably the market value of the donation of a substantial project (Joomla? ) would be signficant.

What needs to be done?

From here there is still a fair bit of work to be done before such an entity could commence operation.   A start would be to establish the infrastructure for such an entity – eg finding people to run it, creating constituting documents which would be consistent with an open source donation, establishing a valuation procedure and making an application for deductible gift recipient status.

See also:

This post from Stormy Peters on GNOME foundation/KDE in the US

Wouldn’t $1Bn worth of Open Coursework be better?

One of the election platforms of the (Australian) Federal Government last year was the provision of computers to all secondary school students (ie years 9-12) in the country, administered by the States.  The problem for the States was that the Commonwealth would fund the hardware, but States would need to pick up software, networking, installation, maintenance and all the other associated costs.

The good news for open source is that the States are trying to squeeze the most they can out of the money they are receiving and it looks likely that Netbooks and open source will play a substantial role:

NSW wants to offer 197,000 secondary school students wireless-enabled netbooks that would possibly run on open-source software such as Linux.

The Australian Article 2 December 08

Now, much as the prospect of Linux laptops in the hands of 197,000 NSW school students warms the cockles of my when-I-have-my-open-source-hat-on heart,  it’s less than impressive to me with my parent hat on.

If I had my druthers rather than taking $1Bn and sinking it into a depreciating asset, I would have taken that $1Bn and spent it on a renewable and appreciating asset like open courseware.[1]  Some back of the envelope calculations indicate that $1Bn could produce a text book and associated teaching notes for every course taught in secondary school in the country [2] – this would save Australian families several hundred dollars per child *per year*.  Moreover, it would save schools a tremendous amount for copyright taxes and text book purchases (the price of text books would not be zero, but would reduce to the be close to the cost of printing). It would make the learning of children more effective as they would have access to all relevant texts in a format most appropriate to their learning style and would be particularly useful for children from disadvantaged backgrounds who might otherwise not have the same quality of access to texts.

Openly licensing this material would allow the textbooks to be incrementally updated over time.  Moreover, individual teachers would be able to customise and extend them for their needs.    Openly licensed, they would also not be subject to copyright limits which destroy innovation.  There would be no barrier, for example, to enhancing texts with online materials or supplementary applications, audio or video.  Imagine how much more effective our teachers would be if they spent their time customising material for their needs, rather than reinventing the material from scratch…

[1] No, AESharenet FFE (or most other AES licences), CC-*-NC, CC-*-ND are absolutely, definitely not “open” for these purposes as I’m concerned.

[2] Assume 200 pages per text, at 6 person hours per page, and 1200 person-hours in a year = 1 person-year per text.  Assuming a teacher qualified enough to write the texts gets paid $200K/year (<cough>) $1e9 is equivalent to 5,000 texts.

Aspire One: Victorian Education Discriminating Against Linux?

Strike me pink!  Less than a week after OSIA sent its submission to a Victorian Parliamentary inquiry into how Victoria can better engage with open source, Cafuego reports some very concerning goings on to do with the Acer Aspire One, the Victorian Department of Education and Early Childhood Development and apparently discriminatory treatment by the Department of machines loaded with XP compared with those loaded with Linux (when being sold to eligible purchasers).

Somehow it seems that the Acer Aspire One loaded with Linux, a freely available operating system for which no licence fee is payable is $156* (ex GST) more expensive than exactly the same machine** loaded with Windows XP, a closed operating system for which a not-insubstantial licence fee is payable and for which additional inventory costs must be incurred (eg acquiring, tracking and managing those stupid authentication stickers).  Scotty might not be able to change the laws of physics, but someone has managed to change the laws of economics.  [Update 14/9: I have received second hand reports that the low price is a tender price to Victorian education.  That seems unlikely, given how recently the Aspire One has been released (and how long a tender process takes).  Rather, there is probably a standing purchasing arrangement that this has been brought under?]

Online prices from LWT tell a similar story.  The Acer Aspire One loaded with Linux, is $72 (ex GST) more expensive than exactly the same machine loaded with Windows XP.  Well, actually, that’s not entirely true.   The Windows XP version is not “exactly the same machine”.  That was a lie.  It’s actually a higher spec machine with a better warranty service.  (The differences for the LWT machines are:  Linux/XP: 3 Cell – up to 3 hours vs 6 cell – up to 6 to 7 hours battery life; no HDD/120GB (this may be a typo??); 3 year courier pick up vs 3 year on site warranty; case blue only vs blue or white).

Details of exactly how such steep discounts can be given are unclear at the moment.  There are suggestions that this too-good-to-be-true deal is brought to you by the Victorian Department of Education and Early Childhood Development, which is apparently paying a subsidy on the XP loaded versions (and, of course, by the gormless taxpayers of Victoria on whose behalf the Department is spending the money – cheers!).

Maybe we’ll find tomorrow this has all been a big mistake, that there’s a simple explanation to it all.  Maybe SSDs are outrageously expensive?  Tonight it looks very worrisome.  If the Department really is engaging in gobsmacking discrimination against Linux then:

(a) it shows that the value for money fit for purpose metric used by the Government is fatally flawed;

(b) it’s an excellent example of how whole of government purchasing helps create and perpetuate monopolies; and

(c) whoever within the Department thought this was a good idea should be sent to the Reflection Room with a copy of Baxter Healthcare.

In addition, it would be nice if netbook sellers dropped the pretence of trying to hide the cost of the OEM licence for XP.  Artificially offering different specs simply to hide the OEM licence price undermines effective price competition.  Rather than encouraging this practice, the government should be outlawing it, given that the industry has failed to self-regulate this disclosure.

Notes:

* This figure is based on Cafuego’s photo of the catalog posted on his blog.

** Actually, not exactly, the XP machine has more memory (1GB v 512MB) and a 120GB hard drive v 8GB flash drive on the Linux version.

Report on National Innovation Review Released

The Commonwealth Department of Innovation, Industry, Science and Research has released the report it commissioned by Venturous Australia on the Review of the National Innovation System.  I put together a submission for OSIA arguing that open source should be given much more prominence in national innovation priorities.   The report has recognised the importance of collaboration, with at least one recommendation specifically in relation to open source.

Some relevant extracts include:

Intellectual property is also critical to the creation and successful use of new knowledge – particularly the ‘cumulative’ use of knowledge as an input to further, better knowledge. In this regard, particularly in new areas of patenting such as software and business methods, there is strong evidence that existing intellectual property arrangements are hampering innovation. To address this, the central design aspects of all intellectual property needs to be managed as an aspect of economic policy. Arguably, the current threshold of inventiveness for existing patents is also too low. The inventive steps required to qualify for patents should be considerable, and the resulting patents must be well defined, so as to minimise litigation and maximise the scope for subsequent innovators.

at page xii, recurring in recommendation 7.2

On the other hand, there is one area in which it is clear that there will be substantial spillovers from software development.  Where firms develop open source software and donate the code from their development back to the open source project, this will generate clear spillovers for the rest of the community which will be able to access their developments. It is hard to think of a more straightforward case for government support. The Panel accordingly recommends that R&D on open source programs should qualify for the multiple sale test. Given the pervasiveness of positive spillovers, it may also be cost beneficial to relax somewhat the degree of technical risk required in relation to open source software.

(at page 109, see also recommendation 8.7)

Professional practitioners and beneficiaries of the IP system should be closely involved in IP policy making. However, IP policy is economic policy. It should make the same transition as competition policy did in the 1980s and 90s to being managed as such.

Australian governments should open publishing as far as possible.  Material released for public information by Australian governments a creative commons licence.

To the maximum extent practicable, information, research and content funded by Australian governments – including national collections – should be made freely available over the internet as part of the global public commons. This should be done whilst the Australian Government encourages other countries to reciprocate by making their own contributions to the global digital pubic commons.

(Recommendations 7.3, 7.8 and 7.14)

The Tragedy of the Anti-Commons

or Why Government FLOSS Purchasing Policy is Misapplied

Summary

Misapplication of “value for money” requirements when purchasing software results in poor value for money – Government purchasing policies for software tend to support the creation of monopolies.

Government purchasing has effects on the price paid by citizens for the product purchased. In some cases purchasing produces volume which permits scale discounts and therefore a net benefit to citizens who also purchase the product. However, in the case of lock in software* Government purchasing can create a monopoly in the software which leads to increased costs for citizen purchasers and a net detriment for society as a whole. It is not appropriate for value for money policies to be assessed on a per acquisition basis when software is being acquired. Doing so will almost certainly create net costs for the community when considered in the aggregate.

A Tale of Two Widgets

Consider the case where the government must buy one of two types of widget (called Widgets A and B respectively). Assume also that both widgets are more or less equivalent. Not only do both widgets meet the government’s needs, but they would also both meet the needs of most general purchasers of widgets. Assume further that the government price for Widget A is about half that of Widget B. At this point take out your taxpayers hat and place it squarely on your head and think about which widget you’d like the government to buy. That is, would you prefer the government to take more of your money and spend it on Widget B or would you prefer it to spend your money on the cheaper Widget A?

It was the Best of Times

Did you choose Widget A? Surely, based on what I’ve told you, that must be right! You’d think government would need to be mad, bad or corrupt to purchase Widget B in those circumstances. Not surprisingly this purchasing preference is reflected in government procurement policies. For example:

• The Commonwealth Procurement Guidelines require Australian Federal Agencies to secure value for money in procurements. This is stated to be a “core principle”.
• The UK policy on OSS states that contracts will be awarded on a value for money basis (at page 4).

Let’s assume now that the Government does purchase Widget A and take the scenario further to analyse some of the assumptions we made in arriving at the purchasing decision. What if Widget A is used to lay roads? What if Widget A is not interoperable?

What if Widget A has been specifically designed so that if it is used to lay a road, then to drive on the road a car must also be fitted with Widget A? (Assume, for the sake of fairness, that Widget B also requires a car to be fitted with Widget B). Would you still be happy for the government to buy Widget A? Maybe you would – Widget A costs half of Widget B. Presumably you’ll be no worse off. You will need to buy one of the two Widgets and you’ve already paid half** the price of Widget B when the government used your taxes to buy Widget A, if you have to pay half the price of Widget B again, you’re square with the price of buying Widget B – in fact you’re better than square because if the government had bought Widget B you’d pay the full price for it with your taxes and you’d have to pay the full price for it in order to drive your car.

It was the Worst of Times

There is a but – and it is unrelated to the characterstics of Widget A and Widget B, their functions, design and operation. That “but” is the availability of Widget A and how it can be priced. Assume that Widget B is made by lots of different people and there is fierce price competition in relation to it. Assume also that Widget A is only available from a single vendor. The vendor of Widget A (Vendor A) is able to set different prices for Widget A in different markets (the vendors of Widget B are not able to do so, because of the assumed competition in the market). Vendor A can choose to set a very low price for Widget A for Government purchasers, knowing that governments build a lot of roads. They can then choose to set a higher price for other purchasers – the prices given above were prices for government purchasers (not for chumps like you and me). Want to drive on a government road? Sorry, that’ll be 10 times the price of Widget B.*** Now, any way you cut it you are out of pocket. Assuming most roads are laid by the government, over time Widget B will be pushed out of the market or at very least relegated to small niches.

Intermediate Conclusion

We can conclude from the above that it is not possible to make a judgment as to value in isolation. Something which seems to be good value in a particular purchase scenario can lead to extremely poor value from public expenditure.

What’s the Problem

Government procurement can both create and reinforce a monopoly in goods and services which it is acquiring. Anecdotal evidence suggests that bureaucrats look at “value for money” type formulae and assess it against the cost to Government on a purchase-by-purchase basis. This approach is fine in respect of goods and services which are easily substitutable (such as hammers, screws, cars etc). In respect of goods which are specifically designed to prevent substitutability – eg devices which are not designed to be interoperable it is an extremely hazardous approach. If those goods also tend to be a natural monopoly (such as software in general, but particularly that which is designed not to be interoperable) this approach is absolutely the wrong one. The reasons should be obvious:

• the vendor of the product can almost always underprice competitive offerings – even when competitors are loss leading;
• the Government, bound by its bureaucrat’s incorrect understanding of the value for money policy is required to purchase the monopolist’s product;
• over time network effects enable the monopolist to crowd out competitive offerings;
• the vendor, now a monopolist, can charge what it likes to the rest of the community safe in the knowledge that, because of the preponderant use by Government others have no choice but to acquire the product;
• ironically, over time the monopolist will even be able to charge the Government more because of the its huge installed base and the previous elimination of competition.

The Tragedy of the Anti-Commons

A prospective monopolist has a period of vulnerability before it has established the monopoly product in the market in which this strategy is risky (because it must carry the costs of underpricing). However, the tragic (ie fatalistic) nature of the process, coupled with the huge rewards to be had from playing the game makes it inevitable that sooner or later a monopoly will be established – it only requires one prospective monopolist to succeed for a monopoly to become entrenched. No number of failed attempts will prevent the next attempt and the winner take all nature of the scenario will continually draw in new prospective monopolists.

What is a Better Approach?

Government may have many roles in the procurement of goods and services but supporting, establishing and maintaining unregulated monopolies is not one of them.

While the value for money requirement is fundamentally correct, to elevate it to the status of gospel or taking it out of context is not. Value for money must be determined by reference to the price paid in the aggregate by the community for the Government’s acquisition, not to the price paid by Government or authority for the acquisition. This value for money assessment is further complicated by the fact that the assessment must necessarily:

• be an ongoing one. A purchase today has no immediate cost impacts on the rest of the community – those impacts are all in the future and some of them may be in medium or long term;
• involve a review of pre-existing Government acquisitions (as a previous (acceptable) acquisition may be unacceptable when taken in combination with a proposed acquisition); and
• involve a review of things other than the software – in particular whether the vendor is likely to be in a position to manipulate the market.

Of course, the complexity of issues to be addressed by a value for money assessment make it difficult to apply with any consistency or certainty. In relation to lock in software it may only be a feel good term with little real substance. Any doubt should be resolved against the creation of monopolies.

If the licence terms permit perpetual use of each copy and permit the Government to onsell each copy of the software acquired and to do so independently of any hardware acquired in conjunction with the software that would reduce some of the monopolistic impact of the arrangement. Unfortunately the structure of copyright law usually forbids this arrangement in practice and, in any event, would not eliminate all monopolistic effects.

Particular Example – Whole of Government Purchasing

Whole of Government acquisitions of lock in software provide especially poor value for money on this analysis. Such acquisitions provide a vast installation of the software across government and effectively create an environment in which incremental improvements are net costs rather than net savings. For example, if the software has been purchased for the whole of Department X, then using a cheaper product for some users will not result in any cost savings – on the contrary since there is an effective doubling up on the licensing to the small group it costs more to use cheaper software! Further they create an entrenched installed base which increases the costs in the next round of acquisition (because this installed base effectively dictates purchasing requirements in that acquisition round).

Particular Example – Key Resources

Government acquisitions of software for key services or resources also provide especially poor value for money on this analysis as well. In these cases the importance of the relevant project (for example, the provision of public information by a health body, broadcaster or library) creates a lock in because of the general need of the public to interact with that body. That need for interaction will create in the public a need to acquire the software in order to access the resource, with the consequent establishment of a monopoly. It is a dangerous vanity for public resources to adopt lock in technologies in the provision of information or services through public facing interfaces.

Note on Formats, Standards and Protocols

This discussion has focussed on software primarily because it is more familiar and is conceptually easier to understand. However, the arguments presented apply equally to the adoption of products which require the use of a particular data format, standard or protocol if that format, standard or protocol has the lock in characteristic. Indeed, ultimately the issue is not so much in the software which manipulates data but in the manner in which data is stored and exchanged. In many instances software (and particularly lock in software) has a direct mapping against a specific data format and can therefore be identified with that format. If no lock in data format is used, the negative effects of the acquisition of lock in software is greatly reduced.

Notes

* For the purposes of this paper “lock in software” refers to software for which: the licence for that software ties the licensee to the licensor or to any third party either implicitly; or the software is designed to effect such a tying and there is no capacity either at all or in practice for the licensee to avoid or remove that tying. Lock in software includes software: which is not interoperable (eg doesn’t save to a standard format in its default configuration) or not interoperable outside the product set for a specific vendor or set of vendors, for which there is only one manufacturing source (multiple sales channels don’t count) and that source of the software has a substantial degree of market power in the relevant software market. By definition, lock in software does not include software which meets the open source definition.

** Technically probably less than half. It’s only half if the Government must buy one widget per car on the road.

*** The price will be determined by the demand for Widget A and may not be (but also might exceed) 10x. If, as in the case of software, the law prevents on sale, Vendor A will also be able to price discriminate, by charging each individual consumer as much as they are willing to pay.

Finally, a “widget” in this context is a placeholder term for some object the subject of discussion.

[Note initially made available for review on 7 January 2008]