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marginal cost of producing each one is very small, but if you sell a lot of them,

you make back your investment and then plow profits back into developing the next

generation. But when you insist that you cannot charge for software, you can only

give it away, you take the software business away from being a scale economic

business."

Added Bill Gates, "You need capitalism [to drive innovation.] To have [a movement]

that says innovation does not deserve an economic reward is contrary to where the

world is going. When I talk to the Chinese, they dream of starting a company. They

are not thinking, 'I will be a barber during the day and do free software at night.'. . .

When you have a security crisis in your [software] system, you don't want to say,

'Where is the guy at the barbershop?'"

As wemove into this flat world, and you have this massive Web-enabled global workforce,

with all these collaborative tools,there will be no project too small for some members

of this workforce to take on, or copy, or modify-for free. Someone out there will

be trying to produce the free versions of every kind of software or drug or music.

"So how will products retain their value?" asked Mundie. "And if companies cannot

derive fair value from their products, will innovation move forward in this area,

or others, at the speed that it could or should?" Can we always count on a

self-organizing open-source movement to come together to drive things forward for

free?

It seems to me that we are too early in the history of the flattening of the world

to answer these questions. But they will need answers, and not just for Microsoft.

So far-and maybe this is part of the long-term answer-Microsoft has been able to count

on the fact that the only thing more expensive than commercial software is free

software. Few big companies can simply download Linux off the Web and expect it to

work for all their tasks. A lot of design and systems engineering needs to go around

it and on top of it to tailor it to a company's specific needs, especially for

sophisticated, large-scale, mission-critical operations. So when you add up all the

costs of adapting the Linux operating system to the needs of your company and its

specific hardware platform and applica102

tions, Microsoft argues, it can end up costing as much as or more than Windows.

The second issue Microsoft raises about this whole open-source movement has to do

with how we keep track of who owns which piece of any innovation in a flat world,

where some is generated for free and others build on it for profit. Will Chinese

programmers really respect the rules of the Free Software Foundation? Who will govern

all this?

"Once you start to socialize the global population on the idea that software or any

other innovation is supposed to be free, a lot of people will not distinguish between

free software, free pharmaceuticals, free music, or free patents on car designs,"

argued Mundie. There is some truth to this. I work for a newspaper, that is where

my paycheck comes from. But I believe that all online newspapers should be free, and

on principle I refuse to pay for an online subscription to The Wall Street Journal.

I have not read the paper copy of The New York Times regularly for two years. I read

it only online. But what if my daughters' generation, which is being raised to think

that newspapers are something to be accessed online for free, grows up and refuses

to pay for the paper editions? Hmmm. I loved Amazon.com until it started providing

a global platform that wasn't selling only my new books but also used versions. And

I am still not sure how I feel about Amazon offering sections of this book to be browsed

online for free Mundie noted that a major American auto company recently discovered

that some Chinese firms were using new digital-scanning technology to scan an entire

car and churn out computer-aided design models of every part within a very short period

of time. They can then feed those designs to industrial robots and in short order

produce a perfect copy of a GM car-without having to spend any money on R & D. American

automakers never thought they had anything to worry about from wholesale cloning of

their cars, but in the flat world, given the technologies that are out there, that

is no longer the case.

My bottom line is this: Open-source is an important flattener because it makes

available for free many tools, from software to encyclopedias, that millions of people

around the world would have had to buy in order to use, and because open-source network

associations-with their

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open borders and come-one-come-all approach-can challenge hierarchical structures

with a horizontal model of innovation that is clearly working in a growing number

of areas. Apache and Linux have each helped to drive down costs of computing and

Internet usage in ways that are profoundly flattening. This movement is not going

away. Indeed, it may just be getting started-with a huge, growing appetite that could

apply to many industries. As The Economist mused (June 10, 2004), "some zealots even

argue that the open-source approach represents a new, post-capitalist model of

production."

That may prove true. But if it does, then we have some huge global governance issues

to sort out over who owns what and how individuals and companies will profit from

their creations.

Flattener #5

Outsourcing

Y2K

India has had its ups and down since it achieved independence on August 15, 1947,

but in some ways it might be remembered as the luckiest country in the history of

the late twentieth century.

Until recently, India was what is known in the banking world as "the second buyer."

You always want to be the second buyer in business-the person who buys the hotel or

the golf course or the shopping mall after the first owner has gone bankrupt and its

assets are being sold by the bank at ten cents on the dollar. Well, the first buyers

of all the cable laid by all those fiber-optic cable companies-which thought they

were going to get endlessly rich in an endlessly expanding digital universe-were their

American shareholders. When the bubble burst, they were left holding either worthless

or much diminished stock. The Indians, in effect, got to be the second buyers of the

fiber-optics companies.

They didn't actually purchase the shares, they just benefited from the

overcapacity in fiber optics, which meant that they and their American clients got

to use all that cable practically for free. This was a huge stroke of luck for India

(and to a lesser degree for China, the former Soviet Union, and Eastern Europe),

because what is the history of modern India? In short, India is a country with

virtually no natural resources that got very good at doing one thing-mining the brains

of its own people by educating a relatively large slice of its elites in the sciences,

engineering, and medicine. In 1951, to his enduring credit, Jawaharlal Nehru, India's

first prime minister, set up the first of India's seven Indian Institutes of

Technology (IIT) in the eastern city of Kharagpur. In the fifty years since then,

hundreds of thousands of Indians have competed to gain entry and then graduate from

these IITs and their private-sector equivalents (as well as the six Indian Institutes

of Management, which teach business administration). Given India's 1 billion-plus

population, this competition produces a phenomenal knowledge meritocracy. It's like

a factory, churning out and exporting some of the most gifted engineering, computer

science, and software talent on the globe.

This, alas, was one of the few things India did right. Because its often dysfunctional

political system, coupled with Nehru's preference for pro-Soviet, Socialist

economics, ensured that up until the mid-1990s India could not provide good jobs for

most of those talented engineers. So America got to be the second buyer of India's

brainpower! If you were a smart, educated Indian, the only way you could fulfill your

potential was by leaving the country and, ideally, going to America, where some

twenty-five thousand graduates of India's top engineering schools have settled since

1953, greatly enriching America's knowledge pool thanks to their education, which

was subsidized by Indian taxpayers.

"The IITs became islands of excellence by not allowing the general debasement of the

Indian system to lower their exactingstandards," noted The Wall StreetJournal (April

16, 2003). "You couldn't bribe your way to get into an IIT . . . Candidates are accepted

only if they pass a grueling entrance exam. The government does not interfere with

the curriculum, and the workload is demanding. . . Arguably, it is harder to get into

an IIT than into Harvard or the Massachusetts Institute of Technology. . . IIT alumnus

Vinod Khosla, who co-founded Sun

105

Microsystems, said: 'When I finished IIT Delhi and went to Carnegie Mellon for my

Masters, I thought I was cruising all the way because it was so easy relative to the

education I got at IIT.'"

For most of their first fifty years, these IITs were one of the greatest bargains

America ever had. It was as if someone installed a brain drain that filled up in New

Delhi and emptied in Palo Alto.

And then along came Netscape, the 1996 telecom deregulation, and Global Crossing and

its fiber-optic friends. The world got flattened and that whole deal got turned on

its head. "India had no resources and no infrastructure," said Dinakar Singh, one

of the most respected young hedge fund managers on Wall Street, whose parents

graduated from an IIT and then immigrated to America, where he was born. "It produced

people with quality and by quantity. But many of them rotted on the docks of India

like vegetables. Only a relative few could get on ships and get out. Not anymore,

because we built this ocean crosser, called fiberoptic cable . . . For decades you

had to leave India to be a professional. . . Now you can plug into the world from

India. You don't have to go to Yale and go to work for Goldman Sachs [as I did.]"

India could never have afforded to pay for the bandwidth to connect brainy India with

high-tech America, so American shareholders paid for it. Sure, overinvestment can

be good. The overinvestment in railroads turned out to be a great boon for the American

economy. "But the railroad overinvestment was confined to your own country and so

too were the benefits," said Singh. In the case of the digital railroads, "it was

the foreigners who benefited." India got to ride for free.

It is fun to talk to Indians who were around at precisely the moment when American

companies started to discover they could draw on India's brainpower in India. One

of them is Vivek Paul, now the president of Wipro, the Indian software giant. "In

many ways the Indian information technology [outsourcing] revolution began with

General Electric coming over. We're talking the late 1980s and early '90s. At the

time, Texas Instruments was doing some chip design in India. Some of their key

designers [in America] were Indians, and they basically let them go back home and

work from there [using the rather crude communications networks that existed then

to stay in touch.] At that time, I was heading up

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the operations for GE Medical Systems in Bangalore. [GE's chairman] Jack Welch came

to India in 1989 and was completely taken by India as a source of intellectual

advantage for GE. Jack would say, 'India is a developing country with a developed

intellectual capability.' He saw a talent pool that could be leveraged. So he said,

'We spend a lot of money doing software. Couldn't we do some work for our IT department

here?'" Because India had closed its market to foreign technology companies, like

IBM, Indian companies had started their own factories to make PCs and servers, and

Welch felt that if they could do it for themselves, they could do it for GE.

To pursue the project, Welch sent a team headed by GE's chief information officer

over to India to check out the possibilities. Paul was also filling in as GE's business

development manager for India at the time. "So it was my job to escort the corporate

CIO, in early 1990, on his first trip," he recalled. "They had come with some pilot

projects to get the ball rolling. I remember in the middle of the night going to pick

them up at the Delhi airport with a caravan of Indian cars, Ambassadors, based on

a very dated 1950s Morris Minor design. Everyone in the government drove one. So we

had a five-car caravan and we were driving back from the airport to town. I was in

the back car, and at one point we heard this loud bang, and I thought, What happened?

I shot to the front, and the lead car's hood had flown off and smashed the

windshield-with these GE people inside! So this whole caravan of GE execs pulls over

to the side of the road, and I could just hear them saying to themselves, 'This is

the place we're going to get software from?'"

Fortunately for India, the GE team was not discouraged by the poor quality of Indian

cars. GE decided to sink roots, starting a joint development project with Wipro. Other

companies were trying different models. But this was still pre-fiber-optic days.

Simon & Schuster, the book publisher, for instance, would ship its books over to India

and pay Indians $50 a month (compared to $1,000 a month in the United States) to type

them by hand into computers, converting the books into digitized

electronic files that could be edited or amended easily in the future -particularly

dictionaries, which constantly need updating. In 1991, Manmohan Singh, then India's

finance minister, began opening the Indian economy for foreign investment and

introducing competition into the Indian telecom industry to bring down prices. To