Update Dec 12th 2013: here’s the video! About half way through there’s a short clip from A Beautiful Mind that gets clipped out, that’s embedded a bit below in this post:

Note from Joost: This is the write up of the presentation I gave today at WordCamp Europe and an earlier version in Dutch at Drupaljam. I created this presentation together with Marieke, who also wrote this post based on it.

Introduction

At Yoast we make money using the open source platform WordPress. For some people this might feel contra-intuitive. Can you make money while giving knowledge away? And should all of your software be free if you work with open source?

In this post we would like to explain how making money in an open source community is not weird at all. In fact, our point is that making money in an open source community is even beneficial for the open source community (and of course, for us too J).

Tragedy of the commons

The concept of the “Tragedy of the Commons“ was first introduced by Hardin (1968). Hardin’s article has been influential in economics, but also among ecologists and environmental policy researchers. More importantly for us, it is applicable to common-pool resources. And in our opinion, the open source community can be seen as such a common-pool resource. Let us explain the Tragedy of the Commons:

Imagine a pasture. A green pasture. A pasture that is open to all herders in the neighbourhood. Every herder can put sheep on the pasture. The sheep will grow and give wool, lambs en meat. All benefits are for the herder. Each herder is thus motivated to add more animals. This will lead to overgrazing. The pasture will become less productive. Even when the number of animals exceeds the capacity of the pasture, each herder is still motivated to add more and more animals. Surely, the herder receives all of the proceeds for the animals and only a partial share of the cost of overgrazing. Eventually, this leads to the tragedy, the ruination of the pasture.

Open source: a reversed tragedy of the commons

The open source community is a common-pool resource. Let’s look at the open source community as a pasture. It is a platform in which people can participate and contribute and from which users can download free software. Contributing to develop software and donating your knowledge to the open source community can be seen as proceedings that take care of our pasture. But what about the sheep in this example?

It seems as though in the open source community, developers take great care of their pasture, but hesitate to reap their benefits. It is like a reversed tragedy of the commons: in the WordPress community there are many benefactors who bring fantastic ideas and products to the community, but who make virtually no money. So, we are mowing lawns and watering our pasture, while there aren’t any sheep grazing (in fact, it is even worse, see our aside on ‘free-riding’).

That is what Joost was doing up until 2010. He developed all kind of functionality for the WordPress community. Entirely for free. Beautiful and useful of course, but from 2006 onwards he had a child to feed. So, Joost needed a full-time job in order to make a living.

Insights from Adam Smith and John Nash

Adam Smith stated that if every individual does what is best for him, the situation would be most optimal. Assuming Adam Smith was right, Joost would have chosen to focus solely on his professional career in 2006 and quit working for the WordPress community immediately. Fortunately, John Nash already showed (both theoretically as well as mathematically) that Adam Smith was wrong, as is explained well in this scene from A Beautiful Mind:

Applying John Nash’s principle to open source

According to John Nash, the most optimal result will come as individuals do what is best for them and for their group. This means that the most optimal result will come by both taking care of your pasture as well as using the pasture for your cattle. Applying this to the WordPress community would mean that one should invest in open source software development as well as in individual gain (through the open source community).

Making profits in open source

Although contra-intuitive for some, developing open source software and making profits, can go hand in hand. We would even dare to state that making profits in our company enhances the development of an open source community like the WordPress-community. As Joost started making money of his WordPress-work, he was able to quit his full-time consultancy job. Now, he can spend much more time on the development of open source products and in fact hire other people to develop alongside him.

Win-win equilibrium

John Nash calculated an equilibrium. So, the optimal result will appear when harvesting your pasture and reaping the fruits from your cattle is in the right proportion. The most optimal result for us will appear if we actively develop new open source software as well as profiting from selling (support for) open source software. For us, it also means that we want to continue to distribute free plugins. Simultaneously, we sell plugins and offer support for paying costumers. Making profits will allow us to invest more in open source. Investing in open source will allow us to make more profits. It truly is a win-win equilibrium!

Of course, an equilibrium is always vulnerable. Putting too much effort in developing free open source software would eventually result in a bankruptcy of our company. Putting to much effort in maximizing our own profit would result in damaging our reputation and by doing so in diminishing profits (and of course in less open source development).

Conclusion

Making money with the development and distribution of open source software is very possible. This combination is not weird at all; it is a nice Nash-equilibrium!

This situation could be seen as a Victory of the commons: a nice green pasture and lots of healthy sheep.

This post first appeared on Yoast. Whoopity Doo!

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