Hal Stern's thoughts on the economy, software, services, technology, and snowmen. Hal Stern: The Morning Snowman

Our historical models for commerce and corporations rely heavily on the notion that distribution and compensation happen at the same time. Buy a software package, you get the license keys (or the installation CD) at the time and/or place of purchase. Buy an audio CD or a DVD, and the goods and money are exchanged at the point of retail distribution. A variety of economic literature exists looking at how and why corporations exist in this model, primarily arguing that corporations lower the transactional cost of commerce. Ronald Coase won a Nobel Prize for this work, and it makes sense -- the companies most efficient at creating products make money; the companies like Wal-Mart most efficient at distributing products also make money.

What happens when distribution and compensation are not tied? What is the economic model for broad, widely accessible distribution with compensation derived from places other than the point of sale? The model isn't so foreign in the consumer space -- this is how pre-paid phone cards work (the wide distribution of phones creates a market) and it's how musicians get compensated for having their music played on broadcast radio. The ASCAP/BMI royalty system charges radio stations a "tax" based on their financials, and the royalties are distributed to artists based on a sampling of what's been played. Distribution is free and wide, compensation happens periodically with statistical models for a true-up of the sing to ka-ching to bling cycle.

Now modulate the accepted commerce models by a low-cost, ubiquitous and high-bandwidth set of networks, one of which is the wireless service I'm consuming sitting in Newark Airport at this early hour. The Internet provides a distribution channel that is significantly lower cost than any real-world retail channel, and with greater reach, greater precision, and greater transparency than the tiered worlds of planes, cranes and country song refrains (about truck drivers). If you can represent your product as bits -- music, movies, images, software, advice, contracts, endorsements -- the notion that you'd tie compensation to distribution is flawed.

The beauty of the broad penetration of Internet distribution is that it fosters the creation of communities of interest. This is what makes eBay tick; it's what makes open source projects work. The primary driver for creating open source software is to create a broad distribution. No different than the wireless companies giving away "free" handsets that are locked to their phone services.

Compensation is independent of distribution in this world. If you want to monetize open source projects, you can charge for their support (viz. Red Hat), create value-add on top of the distribution (a la Oracle's database running on Linux), or create additional services of interest to the community that are related to the distribution (like Sun's compute grid and the Sun Developer Network). Economic models are just as Coase-y in this world -- the companies best at driving down transaction costs for delivering value-add or servicing the needs of the community will thrive.

The bottom line is that open source software isn't a product, it's a mechanism -- it creates distributions. How companies monetize the distribution will depend on how well they address the care and feeding of the community. The transactional sales compensation model for a lot of bits is declining (despite the protests of the major media players, despite the fact that they've benefitted from the "alternative" non-point of sale models like ASCAP and BMI for decades). Welcome to the world of broad distribution.

And today it has a new player: OpenSolaris. Nearly 1,000 pages of content have been provided via blogs.sun.com, kick-starting that care and feeding process.

Hello, world.