Open Source Finally Wins

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In yesterday’s edition of The Daily Reckoning, I asserted, “There is going to be a rapid acceleration in the adoption of smartphones very soon. This is because the Android operating system has basically won the technological battle of the bands. It will become the standard. Microsoft has been beaten in the mobile space and its proprietary operating system is fading fast. Nokia has made a series of blunders as well and is now losing the mobile operating system space it once seemed destined to own forever.”

Today, I’ll tell part of what this development might mean for investors.

I lived and worked in Silicon Valley, mostly doing public policy research, but occasionally consulting for software companies. I was able to rub shoulders, at least, with most of the historic names. Bill Gates wasn’t one of them, however. As you probably know, he relocated to Redmond, Wash. He may have done so in part because he was so universally loathed in the Valley.

I have no window into the business culture that created the management philosophy of Microsoft. Regardless, it was Microsoft’s unrelentingly hardball business practices and skillful utilization of FUD – fear uncertainty and doubt – that energized the open source software movement. That movement is now at last on the verge of making the company largely irrelevant.

Developers who felt they had been treated unfairly or unethically by Microsoft often devoted enormous time, money and effort to create an alternate OS outside the control of Redmond. Sun Microsystems, a subsidiary of Oracle, gave more than a billion dollars to Linux developers. Linux, as you probably know, is an open source OS based on Unix, the OS developed first by AT&T employees at Bell Labs.

Current Linux operating systems are, in my opinion, superior to Windows. Nevertheless, I use the latest MS system because so many of the programs I need run only on Windows. I don’t, however, use MS Office, preferring Sun’s free OpenOffice. My wife, however, specialized in Oracle on Linux when she was helping look for Z bosons at the Stanford Linear Accelerator. To this day, she simply won’t use Windows, even if it makes some tasks more difficult.

She is, however, part of a minority. For the most part, Linux advocates failed to dent Microsoft’s’ OS dominance. This is not to say that the existence of a free alternative to Microsoft’s operating systems didn’t have a beneficial effect. I think the existence of a high-quality option to Windows has helped keep, to a certain degree, MS from completely controlling non-Apple software development. Apple, of course, completely dominates its software chain, which is why it accounts for so little of the market. Apple is a profitable company and makes great gadgets, but it’s unlikely they’ll ever have a bigger piece of the market than they now have.

There’s more to Linux, however, than Red Hat and GNOME. Linux programmers did succeed in denying Microsoft control of the server market. For non-techies, servers are just computers that do things other than interface as personal computers. They “serve” other uses, frequently “serving” processes and data on demand. Linux-based server software, especially Apache, have long dominated the server market. Apache, by the way, started out as a very “patchy” program. Linux-based software has also prevailed in the realm of supercomputers and research clusters used by many of the biotech companies in our portfolio.

While some economists say that Microsoft has been good for computing and America, I think that its negative impact on third-party developers may be greater. If you want to sell a product that runs on the Microsoft OS but are not a chosen partner of the company, you’re going to be at a severe disadvantage. Those disadvantages don’t exist in the server world, because Linux standards are open, giving no one special privileges. This allows more and faster innovation, which is what I care about most.

The most important Linux product of all time, however, is just beginning to have its impact. That is the mobile operating system Android. Google bought the original developer Android Inc. in 2005 and pretty much gave it to the Open Handset Alliance. This was part of Google’s strategy to move computing into the cloud and beyond Microsoft’s control. I think they’ve succeeded in that but, ironically, they seem to have overlooked a critical consequence of that move.

In Q4 2010, the Android OS was the world’s best-selling smartphone platform, ending the 10-year rein of Nokia’s Symbian. Recent events have solidified this trend. Open source advocates may have lost the personal computer battles, but they’re set to win the mobile war. This opens the doors for third-party developers like they’ve never been open before. Most importantly, it does so just as mobile devices, including phones and pad computers, are gaining the power they need to supersede laptops.

The next generation of Android pad computers is simply going to rock.

Moreover, the OS is a major cost component of smartphones. Since the industry is settling on the open source Android standard, which costs basically nothing, this will shave as much as $150 off the price of a device. The equivalent of smartphones that now sell for $200 will cost $50, or they will be given away free in place of the old feature phones.

Naturally, many third-party developers are going to exploit the killer app, SMS text. SMS will be the cheapest and fastest way to access increasingly complex cloud-based applications. These cloud-based applications will be accessed via the mobile device but the processing will be performed in the distributed network, the cloud. Even now MMS, Multimedia Messaging Service, abilities are being added to SMS. These include pictures, audio and video files, all the stuff that you now access via the Web. In short, SMS will be nearly indistinguishable from the Web, but cheaper and probably faster.

So here’s my extra-credit question. Who’s going to control the SMS/MMS search engine on your next smartphone or tablet computer?

I think I know, and I’ve shared my thoughts with the subscribers of Breakthrough Technology Alert. Whether I’m right or wrong, the answer to that question is worth a great deal of money…perhaps a small fortune.

Regards,

Patrick Cox
For Daily Reckoning Australia

Patrick Cox
Patrick Cox has lived deep inside the world of transformative technologies for over 25 years. In the 1980s, he worked in computer software development and manufacturing. By the mid-1990s, he worked as a consultant for Netscape - the company that handled 90% of all Internet browsing traffic at the time. InfoWorld and USA Today have featured Patrick's research many times.
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12 Comments on "Open Source Finally Wins"

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Technofreak
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Dude, what planet are you on? Planet Google?

I’ll stick to OSX/iOS thanks. It works and has better hardware and developers.

Dan
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Technofreak: The author is on this planet. The thing that will make or break Apple is whether corporations take on OSX/iOS exclusively for portable solutions. This is where I suspect Apple will find problems. They have succeeded in creating a market where productivity is not as tightly measured (personal smartphones), but I haven’t seen many examples where an iPhone or iPad are part of the required equipment of an employee, eg: a sales rep, a delivery man, a manager or whatever. Generally a smartphone of any kind is all that is required. I agree that Apple’s software development pathway is… Read more »
Tim
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Corporations? What is the breakdown on smartphone use according to Enterprise/Corp vs retail/SME AND Android Vs iOS Further, look at revenues per OS. iOS vs Android. How does it look. Next, breakdown of downloads, iOs vs Android. Ecosystem: Apple’s relentless focus on UX vis-a-vis buying (EASY now beats “FREE”) via iTunes now means people are inured to buying in-app. Developer benefits: iOS vs Android. I am having Apps built for me, haven’t touched Android yet. Dev path is iOS, mobile app (WWW/HTML5 framework using Sencha or similar) THEN Android. The dev and user experience (this is important) is critical. Nonetheless,… Read more »
Technofreak
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Quite an inaccurate commentary with no mention of iOS in the scheme of things.
In the large global IT org that I work in the office is 99% iOS smartphones. Nobody has even mentioned Android. There is one Windoze phone. Unfortunatley we have to use Windoze PCs predominantly. So I do not agree with anything this article says.
Android is know for its terrible hardware/OS version fragmentation which many comment reminds them of Windoze.

Ty
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It’s important to note that a mobile phone is an appliance not like a computer and phones and tablets are not the same. Google, in buying Andriod, has now given many hardware manufacturers choice in what OS they would like to put on their products. However, because of the many various versions of OS and hardware specifications, the lack of standards, it’s hard for software developers to create applications that work for everyone. This means that things don’t “just work” and that is a problem for the customers. This is the current Apple advantage. They have three hardware products: iPod,… Read more »
linuxuser
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I love the DR, but this submission has got it wrong in so many places that I’m starting to wonder about the quality control; it is hard to believe the author really has any experience in the industry at all. 1. Important parts of the Android OS are *not* open source, such as the Dalvik JAVA engine which runs almost all apps and various Google PIM applications. 2. Microsoft and Nokia have partnered and are bringing Windows Phone 7 to all of Nokia’s phones. The result is a behemoth whose clout should absolutely not be discounted. Furthermore, MS is scrambling… Read more »
SV
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I dont get it. Do those millions without internet access actually have any money to pay for the value-adding sms-based services? Do they have the money to buy an Android-based smartphone or any smartphone for this matter? did not year 2000 show that investors can blow any idea into a bubble, believing their own spiel? The actual working and profitable business will come several years later. Just because SMS is still there, doesn’t mean it will still be popular in a few years. When mobile phones became popular, there was an expectation that payphone would die. However people still continued… Read more »
SV
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“That [open source] movement is now at last on the verge of making the company largely irrelevant.” I would not bury Microsoft just yet. In understanding MS, one needs to see that, as a major corporation it is simply unable to follow each and every fad; it is bound to miss some opportunities this way. However MS has a track record of catching up, sending competitors to oblivion/irrelevance and re-taking market share Examples: – Novell – Netscape (Netscape corporation, not the browser) – Sausage software (that maverick ozzie company with the first html WYSYWIG editor refusing to sell to MS)… Read more »
Chris
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I don’t know what this SMS-based access stuff is about – smartphones are clearly reliant of 3.5/4g data services.

Still, I agree that the future for Android is quite bright. The storm on the horizon is the extensive patent infringement suits filed against Google, manufacturers of Android-compatible phones and even some app-developers. Here is a link discussing one such suite: http://fosspatents.blogspot.com/2011/03/android-patent-suit-no-38-tierravision.html (they are too numerous to comprehensively list here).

Depending on how these lawsuits are resolved, Android may lose its current status as a ‘free’ phone OS.

PeterG
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This is a huge disservice to your readers to offer investing commentary on the smartphone and tablet environment without even a nod to Apple – the company has redefined and defined both those spaces in the last 4 years.

And from an investing point of view it’s worth noting how apple fare in the personal computer marketplace – the are 7% of the revenues but 35% of the industries profits.

35%

linuxuser
Guest

Correction; the Dalvik engine is actually open source.
An example of a closed source application is the Android Marketplace.

PeterG
Guest

And further to my post above – see this article from the WSJ blog

http://blogs.wsj.com/digits/2011/04/19/a-look-at-ipad-users-apple-still-trouncing-android/?mod=e2tw

“Google Inc.’s Android might be the most popular smartphone platform, but if you add other mobile devices like tablets to the mix, Apple Inc.’s iOS beats Android in the U.S. by a wide margin — 59% to be exact.”

wpDiscuz
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