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The Emerging Role of Open-Source Software in Merger Analysis

Scott Sher, Charles Biggio, Ramsey Shehadeh, Jonathan Lutinski, 2011 European Competition Law Review, Issue 7, p. 322 et seq.

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Open-source software is having an increasingly material impact on software markets. A recent International Data Corporation (IDC) study found that open-source software revenues are growing at a 22.4 per cent compound annual growth rate, and will reach $8.1 billion by 2013. One expert explained:

“The open-source software market has seen a strong boost from the current economic crisis … [it] is increasingly a part of the enterprise software strategy of leading businesses and is seeing mainstream adoption at a strong pace.”

Open-source software can be a substantial market disruptor. One of the most famous examples is Linux, which serves as the operating system for over 40 per cent of the websites on the internet. Another is Apache HTTP Server, which serves approximately 54 per cent of the websites. On the consumer software side, Firefox, developed by Mozilla, is the number two internet browser. These examples are important not only because of their obvious commercial significance as complex products that can run at the core of an enterprise, but also because they offer credible competition to proprietary software vendors, and in some cases displace them entirely.

Despite its commercial significance, the role that open-source software plays in merger market analysis remains ill-defined. There is little precedent at the enforcement agencies in the United States, Europe and elsewhere regarding open-source software in merger analysis. As a result, merging parties are left wondering whether, how, and to what extent the Department of Justice (DOJ) and Federal Trade Commission (FTC) (or foreign regulatory authorities, most notably, the European Commission (EC)) consider open-source software in their competitive analyses. In this article, we examine several scenarios in which open-source may be relevant to the antitrust analysis of a software merger:

- Where open-source software is available in the market and two leading providers of proprietary software merge, leaving few or no commercial providers of alternative proprietary software.

- Where a firm with a market-leading proprietary product acquires a firm that provides a successful open-source alternative.

- Where two firms with competing open-source software solutions merge, leaving no additional open-source software alternatives in the market, but there are competitive closed-source alternatives.

In this article, we first discuss the nature of open-source software to allow for proper assessment of the competitive effects of mergers where open-source software is the target of the transaction or a potential alternative to the merging parties’ products. Following that discussion, we analyse how the US antitrust agencies evaluate the competitive import of open-source software under the Horizontal Merger Guidelines, and how the EC may assess the role of open-source competition differently.

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