The Guest Blog

The following has been submitted to Blogactiv by Mr Florian Mueller.

The simplest way to dismiss any claim that MySQL should not play a role in the assessment of the Oracle/Sun merger due to its limited revenues is to point out that MySQL is apparently important enough to Oracle that it puts the entire Sun transaction in jeopardy just to get control over its open source competitor. If MySQL’s importance were a matter of revenues, it should be easy for Oracle to agree to divest it.

But there’s something at stake that transcends the case at hand: the ability of competition authorities to appropriately interpret traditional competition rules in the context of certain revenue generation models that are enabled by today’s digital technologies.

Twitter was considered fairly influential in the 2008 US presidential election, but according to conventional economics it would have had a market share of 0.0%: the company did not generate even one cent of operating income that same year . This may be the easiest to understand example ever of how detached from revenues a company’s actual market relevance can be in the digital age. Another very popular revenueless offering is Wikipedia (financed entirely through donations).

Purely digital products and services have no physical unit cost (cost of goods, warehousing and distribution). High access volumes may increase the cost of operating Internet servers (hardware purchases, consumption of electricity), but on a per-unit basis even that cost is often negligible.

Such a cost structure enables, and tremendous opportunities for fast user base growth without a need for major (or any notable) marketing expenditures incentivize, various “free” and “freemium” (“free” plus “premium”) business models prioritizing rapid and widespread adoption over short-term and even mid-term income production, often offsetting initial capital needs through an influx of external capital.

One of Silicon Valley’s most recognized thought leaders on business strategies in the information age, Chris Anderson, wrote a book (published last year) entitled “Free! Why $0.00 Is the Future of Business” and coined, among others, the term “freeconomics” (“free” + “economics”).

Meanwhile, a leading venture capitalist even advocates a business model named “less than free” , which rewards customers financially for using a “free” product, citing as an example a new navigation system offered by Google.

While open source is often used as a synonym for free-of-charge software, “freeconomics” can also be applied to closed source software. Some closed-source free-of-charge computer programs became highly popular, such as compression tool PKZIP (in the early days of personal computing) or chat programs such as mIRC .

An increasing number of computer game developers make their products available free of charge in principle but charge for gameplay-related items (such as a magic sword in a fantasy game).

While the traditional economical principle of every company’s innate desire to maximize its profits and determine prices accordingly is still valid in the digital age, the willingness of many digital businesses to forgo some or even all revenue opportunities for extended periods of time is unprecedented in history. In such an environment, even enterprises with a greater desire for short-term revenue maximization are often forced to adopt similar strategies in order to meet customer (and investor) expectations.

In markets with high barriers to entry, such as the database market, a late entrant may regardless of product quality always be forced to undercharge, being able to raise prices so slowly that it is unlikely to reach the price points of incumbent vendors anytime soon. There is a great risk for such a disruptor that every little strengthening of “premium” offerings at the expense of the “free” base product can result in customer defections and impede the acquisition of new customers. At the same time the incumbents will have cost structures in place and shareholder expectations to meet that prevent them from adopting a “freemium” strategy as their primary business model (even if they offer a “free” product, they will not be committed to providing it with unlimited functionality).

In markets in which operators with traditional pricing structures compete with businesses pursuing a “free” or “freemium” approach, revenues cannot be compared at all. Even multiplying a “free” or “freemium” income figure with a seemingly high factor may still not result in a valid comparison.

In a regulatory context it is, therefore, imperative to define the market relevance of “free” and “freemium” competitive forces such as MySQL in other ways than merely on the basis of revenues. Otherwise, ever more undertakings employing “free” and “freemium” business models, or generally disruptive models with extremely disruptive pricing structures (such as Skype, an Internet-based telephony service), would effectively be beyond the reach of competition law, a consequence that no one could seriously advocate.

It is in the interest not only of consumers but ultimately (looking beyond any individual case) of all players in the market to develop and apply appropriate criteria for market relevance. In the present case and probably in many future cases, a “freemium” vendor would be acquired by a competitor with a more conventional business model. There will, sooner or later, also be the converse takeover situation. And a traditional player denying the market relevance of a “freemium” company today (on the basis of inappropriate, obsolete criteria) may at a future point in time want to be able to make a case against abuse of a dominant market position by a “free” or “freemium” competitor, then having to make the opposite case of the one that appears favorable today.

In the interest of legal certainty, a departure from old-fashioned revenue-based approaches dictates the definition and consistent application of alternative criteria for market share and relevance. Besides revenues, there is a variety of valid quantitative and qualitative angles to identify a key competitive force. Given the increasing importance of “free” and “freemium” business models, there can be no doubt that the related case-law will continue to be developed over the coming years and decades. The rule of law must be adjusted to these new realities, not surrender in their face.

Values persist; methods evolve.

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Florian Mueller has almost a quarter century of IT industry expertise since writing computer books as a teenager. In recent years he became involved with several European Union decision-making processes as a campaigner and strategist. He successfully advocated the European Parliament’s 2005 rejection of a proposal on patent legislation, represented the strategic interests of football club Real Madrid and now opposes Oracle’s plans to acquire MySQL as part of Sun Microsystems.

In 2005, Florian was named European Campaigner of the Year by the European Voice.

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