The output of Taiwan’s information and electronics industry was about US$188.6 billion last year, with the software industry only accounting for US$11.4 billion, or less than 6 percent. This ratio has not changed much over the past 10 years, and it is consistent with Taiwan’s image as a “hardware giant,” but a “software dwarf.”

Various theories have attempted to explain the persisitent sluggishness of Taiwan’s software industry, one of the more convincing positing that the industry was never able to emulate the winning strategy of the hardware industry, which is designing and manufacturing globally competitive products.

Although the software industry has an outsourcing business model similar to the hardware industry’s original design manufacturing (ODM) and original equipment manufacturing (OEM) models, its associated revenue model tends to be project-based.

In contrast, the revenue model for hardware ODM/OEM is product-based. Compared with project-based production, product-based production is more profitable, shows greater scalability and provides more momentum for company growth.

Not being able to create products that can be exported internationally, Taiwan’s software industry has no choice but to focus on shorter-term projects from the domestic public and private sectors. As the nation’s government agencies and private companies habitually undervalue software products and services, local software firms often struggle financially and are rarely seen as role models for young people.

Taiwanese universities’ best software engineering graduates favor the semiconductor industry, the information and communication systems industry, and international employers.

So, how can Taiwanese software companies escape this situation and grow to develop and market globally competitive commercial software products?

Aggressively embracing open-source software might be a promising strategy. Open-source programs are developed through collaborative efforts by programmers belonging to different organizations, and its source code can be downloaded and sometimes even commercialized for free.

However, an open-source program’s quality and its follow-up services are often inferior to commercial software. Many decisionmakers in government agencies and private firms are therefore skeptical about the value of open-source software and shy away from the concept.

In reality, open-source software has come a long way in the past 10 years.

Through extensive use, repeated hardening and communal enhancements, the quality, performance and stability of widely used open-source programs, such as Linux, Android, MySQL, Chrome, etc, exceed their commercial counterparts.

Second, allowing users to download and try software for free is regarded as a highly effective marketing tool for customer acquisition and feedback collection. People often feel more comfortable with software using a publicly available source code, because doing so lowers security and lock-in risks.

Finally, the “freemium” business model, which makes the basic version of a product available for free, while advanced versions and follow-up support services require payment, has enabled many open-source software companies to become profitable and even go public.

In light of the increasing appeal of open-source software, some start-ups make the source codes of their products available so as to win over market and user acceptance.

Even well-established commercial software companies have pursued similar strategies. For example, Microsoft has open-sourced such major software products as Windows Core OS, SONiC and the .NET Framework.

The extent to which one engages in the use and development of open-source software can be classified into four tiers:

Tier 1: Importing a specific open-source program for product development or personal use, including reporting software bugs and usage experiences that need improvement.

Tier 2: Developing deployment and management tools for open-source software, and providing consulting, configuration and optimization services.

Tier 3: Acquiring an in-depth understanding of the system architecture, core algorithms and program logic of a specific open-source program, to be able to fix bugs and add new features.

Tier 4: Initiating a new open-source project, and mustering a team to form a community and join its development.

The involvement of most local firms, universities and agencies in open-source software remains largely at tier 1: They use open-source software, but do not contribute to its further development.

People at tier 2 could potentially create professional support companies that help customers simplify their use of open-source software.

Those at tier 3 could start a company that optimizes, customizes and adds new functions to open-source software.

Those at tier 4 can become an open-source software’s authoritative developer and establish a company that monetizes it using a freemium model.

By engaging heavily in the development of open-source software of reasonable complexity, local firms could substantively strengthen their research-and-development capabilities.

Moreover, through intense participation in the operation of an open-source software ecosystem, such software companies would be able to pick up concrete skills, including how to position, develop, market, sell and support software products already blessed with significant commercial value.

Finally, close interactions with other parties in the same open-source software community would enable companies to establish business connections required to target international markets, and cultivate long-lasting alliances and partnerships along the way.

Chiueh Tzi-cker is a joint appointment professor in the Institute of Information Security at National Tsing Hua University.

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