From Innovations, a website published by Ziff-Davis Enterprise from mid-2006 to mid-2009. Reprinted by permission.

The software industry is abuzz this week about Oracle’s audacious announcement last week that it would sell Red Hat Linux and undercut Red Hat’s pricing. Oracle baldly stated that it would strip out the Red Hat trademark from the underlying code and compete against Red Hat with its own product.

Such an act would be illegal, not to mention insulting, in the proprietary software world. But under terms of the GNU Public License (GPL), it’s totally legal. Any company that develops software under most open-source licenses faces the same quandary as Red Hat. And that’s why open source is such a great platform for innovation.

Open-source software is licensed under terms that require the developer to publish openly the programming instructions for the software. You can’t charge for open-source programs, although there are ways to charge for additions to them. Most open-source software vendors make their money by charging for support and custom enhancements.

Open source software has disrupted the software industry – for the better – in fundamental ways. It has removed the cloud of legal threats that hovered over the industry in the pre-GPL days. It was a cloud that led to enormous duplication of effort and sky-high costs for buyers. Most major software markets are today boiling down to one or two proprietary software vendors and a flock of open-source alternatives.

There’s no question that innovation flourishes when programmers get access to source code. Take SugarCRM, the leading open-source customer relationship management software. Its website lists almost 300 add-on modules that have been created by customers and developers to complement the core suite. A SugarCRM user gets access to this vast library by default and for free.

The Firefox browser and Thunderbird e-mail client, both developed by the non-profit Mozilla organization, are catching on like wildfire in large part because of the hundreds of extensions that have been developed for them. This dynamic is changing buyer attitudes.

But open source is driving innovation more broadly by lowering the overall cost of software. Open-source options today are available for almost anything you want to do. Sourceforge.net, the Library of Congress of open source, lists more than 130,000 projects, all freely available, much of it stable and reliable.

What this means is that software costs are no longer an inhibitor to good ideas. A creative person can now assemble the building blocks for a robust commercial application – operating system, database, programming language, web server and the like – for no money. That drives innovation up the stack to the really interesting stuff: the applications.

It’s no surprise that the Web 2.0 social media phenomenon has exploded recently. Hundreds of entrepreneurs have used open-source tools to launch services on the Internet at little or no charge. These services would have been impractical in the days before open source. The barriers to entry have been lowered by free software, as they have been by cheap storage (I wrote a bit about that last week). This unleashes innovation because developers no longer have to worry about intellectual property rights and patent infringement. They just focus on ideas.

Which brings us back to Oracle. It’s true that there wasn’t much innovative in the product Oracle introduced last week. It’s Red Hat Linux. But to square off against a competitor by selling its own product at a lower price, well, you’ve got to hand it to Oracle. That’s pretty clever. Even innovative.