As open source developers gave away their software for free, many could see only the devaluation of something that was once a locus of enormous value. Thus Red Hat founder Bob Young told me, “My goal is to shrink the size of the operating system market.” (Red Hat, however, aimed to own a large part of that smaller market.) Defenders of the status quo, such as Microsoft VP Jim Allchin, claimed that “open source is an intellectual property destroyer,” and painted a bleak picture in which a great industry is destroyed, with nothing to take its place.

The commoditization of operating systems, databases, web servers and browsers, and related software was indeed threatening to Microsoft’s core business. But that destruction created the opportunity for the killer applications of the Internet era. It is worth remembering this history when contemplating the effect of on-demand services like Uber, self-driving cars, and artificial intelligence.

I found that Clayton Christensen, the author of The Innovator’s Dilemma and The Innovator’s Solution, had developed a framework that explained what I was observing. In a 2004 article in Harvard Business Review, he articulated “the law of conservation of attractive profits” as follows:

When attractive profits disappear at one stage in the value chain because a product becomes modular and commoditized, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage.

I saw Christensen’s law of conservation of attractive profits at work in the paradigm shifts required by open source software. Just as IBM’s commoditization of the basic design of the personal computer led to opportunities for attractive profits “up the stack” in software, new fortunes were being made up the stack from the commodity open source software that underlies the Internet, in a new class of proprietary applications.

Google and Amazon provided a serious challenge to the traditional understanding of free and open source software. Here were applications built on top of Linux, but they were fiercely proprietary. What’s more, even when using and modifying software distributed under the most restrictive of free software licenses, the GPL (GNU Public License), these sites were not constrained by any of its provisions, all of which were framed in terms of the old paradigm. The GPL’s protections were triggered by the act of software distribution, yet web-based applications don’t distribute any software: It is simply performed on the Internet’s global stage, delivered as a service rather than as a packaged software application.

As we moved from the Web 2.0 era into the “mobile-social” era and now into the “Internet of Things,” the same principle continues to hold true. Applications live on the Internet itself—in the space between the device and remote servers—not just on the device in the user’s hands. This idea was expressed by another of the principles I laid out in the paper, which I called “Software Above the Level of a Single Device,” using a phrase first introduced by Microsoft open source lead David Stutz in his open letter to the company when he left in 2003.

The implications of this principle continue to unfold. When I first wrote about the idea of software above the level of a single device, I wasn’t just thinking about web applications like Google but also hybrid applications like iTunes, which used three tiers of software—a cloud-based music store, a personal PC-based application, and a handheld device (at the time, the iPod). Today’s applications are even more complex. Consider Uber. The system (it’s hard to call it an “application” anymore) simultaneously spans code running in Uber’s data centers, on GPS satellites and real-time traffic feeds, and apps on the smartphones of hundreds of thousands of drivers and of millions of passengers, in a complex choreography of data and devices.