The Limits of Open Source

NEW YORK ( TheStreet) -- This is another one of those 1% vs. 99% stories. But you will not find politics in it.

This is a software story.

Technology history is one of software platforms and control over those platforms. Generally, the more companies allowed to participate in a platform the more growth that platform can generate, because no one company can possess all the good ideas.

International Business Machines ( IBM) dominated the mainframe era, and raised the ire of the antitrust authorities. Digital Equipment Corp. created competition with its minicomputer platform, but development costs were starting to sunset that era even as the PC era began.

Microsoft ( MSFT) eventually dominated the PC era, although it wasn't there at the start. It won by absorbing the new platform of the 1980s, client-server, where Novell enjoyed first-mover advantage.

The Internet of the 1990s was Microsoft's Waterloo, thanks in part to the government. Open standards kept the Internet open, they continue to do so, and this remains the high-water mark for competition and growth within any platform.

How can that be guaranteed into the future?

That's what open source was all about. Open source creates competition for anyone who builds a dominant platform. Linux beat Windows, but Linux did not create dominance any more than the Internet's TCP/IP protocol did, because everyone had access to it.

The problem for investors is that within an alternative environment, dominance is hard to achieve. Dominance remains where the big profits are. So even under open source, the path to big profit lies in somehow closing the platform, creating a walled garden, becoming the only choice.

The device market is the platform of this last decade and we all know the name of the big winner. It's Apple ( AAPL). There is an open source alternative in Android, leading some to think there must be huge profits there, as Ed Liston explains at SeekingAlpha.com.

But that's not true. Competition from Apple did not come from open source. It came from building a new platform.

Both Google ( GOOG) and Amazon.com ( AMZN) have found a way to build their own device ecosystems by building dominant public clouds. It's the cloud that is the platform of the coming decade. What should be most disquieting is that both Amazon and Google have used open source to create these ecosystems and these dominant public clouds.

What is the lesson? Open source, by itself, is no guarantee of market competition. We want market competition -- the more of it we can get, the more investments we can create, the more growth we get.

But something beyond mere "open source" must exist to assure that competition continues. In a healthy tech economy, there are a lot of winners, and in 2012 there are just a few.

At the time of publication, Blankenhorn was long IBM, MSFT, AMZN, GOOG and AAPL.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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