After considering how the multi-billion dollar financial derivatives market evolved from freely distributed pricing technology and grew through co-operation, the fantastic growth of “open-source” software no longer seems so weird.

People create the software to build collectively a technology that, once shared, can be used to generate tremendous profits. In this light, the Linux platform is very similar to Black-Scholes. It has formed the basis for the generation of billions in value.

Open-source is two things: the source code for the software is openly available to anyone, and just as importantly, the software is free. According to Wikipedia, the term “open-source” was coined in 1998 by Christine Peterson. She was working as part of a group of people who were trying to market Netscape’s latest strategy. In January 1998, Netscape had announced that it was going to post the source code for the Mozilla browser on the internet, and make the share the software on a free license.

As aside, it is interesting to see that, although it took a while, the Mozilla strategy is starting to pay off. Mozilla is that engine that powers the FireFox browser. Introduced in November 2004, 25 million people downloaded the browser in the first 90 days it was available.

The most well known open-source effort is the Linux operating system.

The Linux project was launched in 1991 when a 21 year old Finish university student named Linus Torvalds made a now famous post to the Usenet newsgroup comp.os.minix that included this:

“I’m doing a (free) operating system (just a hobby, won’t be big and professional like gnu) for 386(486) AT clones…”

Torvalds released the source code for his little project in September 1991. Within seven months, two more versions had been released, and the alt.os.linux and comp.os.linux newsgroups had been set-up. Both newsgroups are still going strong. Hackers used the newsgroups to discuss the new operating system, help each other with problems and to get in touch with Torvalds to suggest new additions to the code. Torvalds would consider each new addition. If he felt it added functionality or solved a problem, he would include the code in the next release, along with a file that gave credit to the person who wrote the code.

Over the course of the last 14 years, Linux has become a major force in server software. It has forced Sun Microsystems to change its business model, it has formed the basis of core strategies at IBM, Novell, Oracle and HP, and Linux has become a major threat to Microsoft, with 33% of the server market.

Like the financial derivatives community, the open-source software community has two types of innovators – hackers and companies. People who write open-source software call themselves hackers. The expression comes from the idea of “hacking-around” with the code; that is to say tinkering with it, or fixing problems. Hacker does not mean someone who hacks into private computer networks, though I think the folks who build open-source code do not really mind the confusion. It gives the impression that they are dangerous tough guys. Hackers write code to impress their friends and colleagues and contribute to the greater good, just as academics write papers for the same reasons. The hackers (or the academics) add to the code base because they want glory and recognition from people they respect. The companies co-operate because they know that collectively building the technology base will then enable them to make money using the technology.

The open-source community is a system of independent, self-motivated hackers and companies that, collectively, produce predicable results; in this case, a steam of constant innovation.