Making Money from Open Source and the Business Model Debate

Matt Aslett makes great observations about open source business models in a recent blog follow-up discussion:

I am very glad that they took that decision, because in hindsight the statement “there is no open source business model” would have been inaccurate in the context of our report. We identified that there are multiple models used to build a business around open source: theoretically hundreds.

The 451 Group did a lot of research as they developed their model of discussion, and their definitions around development model, license choice, and revenue trigger are great. But it still feels like they start falling victim to the shades of grey slicing problem.

I'm still more of a fan of the tool analogy. As a company, you have a certain budget to spend developing the product, it's marketing, sales and distribution. Imagine a proper old hardware shop where you have a certain budget and need to figure out how you're going to spend to buy what tools from which aisles (development, marketing, sales, legal) to launch and build (and maintain) your product. "Open source licensing" is a set of new tools in the legal aisle and "collaborative community development" is a new aisle. It's not that there are hundreds of business models, but rather one can combine the tools in hundreds of ways. (Some ways are more proved than others depending upon the business.)

Indeed, "dual licensing" doesn't even belong in the open source licensing tools. It's an attribute of copyright law. I can license my intellectual asset to as many people as I want in as many ways as I choose. The Microsoft EULA attached to software at the local office supply store is different to the Enterprise Agreement signed when a corporation purchases based on a bundle of units and services is different again from a volume license to a smaller organization. No one accuses Microsoft of "dual" or "multi-licensing" their software. The fact that MySQL began closed licensing royalties as well as selling service agreements subscriptions (i.e. product) of their GPL distributed software does not mean that they invented "dual licensing".

The fundamental question around which this all revolves is the confusion embodied when one asks, "How can you make money when you give the software away for free?" Large "software" companies (Microsoft, SAP, Oracle, Adobe, etc.) have spent a lot of time questioning the scale of "the business model(s)" rather than looking at the opportunities the tools provide. In the end, they need to understand that it's not the "software" that a customer is buying but the solution and the support and maintenance and certified tested warranted removal of risk embodied in their product packaging and testing capabilities. (This is a core competency Microsoft has over most "software" companies when you consider the size of the test matrix defined by OEMs, ISVs, and device manufacturers that needs to be exercised between code complete and release-to-manufacturing.) Whether you call it a "license" fee and then charge 20% of the license fee per year for maintenance, or distribute the "license" fee into the maintenance "subscription" over time isn't a discussion about open source. It's just business.

Comments

[Jack Repenning]

I'm with you: open-source software is a tool, which can reduce costs and increase velocity for the company. No one obsesses over the business model around other cost-cutting measures.

For the first half of my career, I wrote software for hardware (computer) vendors. They were always wanting to give the software away. People argued over whether they were making enough back in increased hardware sales to cover the software costs, and about "Laffer curve" like optimal pricing policies, but no one confused that discussion with "the business model." The business model was selling computers.

[Matt Aslett]

"It's not that there are hundreds of business models, but rather one can combine the tools in hundreds of ways."

I agree, although I have to admit that is not what we said when we wrote our original report. As I wrote the other day I am confident we will not be referring to those combinations as “open source business models” this time next year when we return to the subject.

I do still think there is real value and interest in understanding how those tools can be combined to achieve a desired business outcome, regardless of whether that is considered a "business model" or not.

[Barry Klawans]

I agree with most of Matt's statements, but I predict that in a year we will understand that some business models incorporate open source, but aren't open source business models. That phrase will slowly fall in to disuse as people come to understand that, as Stephen points out, open source is a tool that can be included in a business plan.

-Barry

[Matt Aslett]

"I predict that in a year we will understand that some business models incorporate open source, but aren't open source business models"

Exactly. I'm just glad I have a year until we publish our follow-up to think about how best to address it it a meaningful way.

[Plugtree]

"In the end, they need to understand that it's not the "software" that a customer is buying but the solution and the support and maintenance and certified tested warranted removal of risk embodied in their product packaging and testing capabilities."

That's correct, but certain assumptions must be made when you start an open source business: for starters the support must be great and way better than commercial software. Your clients buy the support, because they won't/can't buy the software product. So it's just business yes, but it has it differences with the common software model where you charge for licenses.

Just my 2 cents.

[Stephen Walli]

@plugtree: You make a good point. Defensible differentiation is still needed for a strong business. Red Hat certainly demonstrates this when you look at the current linux kernel contribution statistics: http://www.linuxfoundation.org/news-media/announcements/2009/08/linux-foundation-updates-study-linux-development-statistics-who-wri

[Rich Sands]

The interesting question isn't whether we call them "open source" business models or not - it is the nature and size and risk of business models involving giving software away. Some companies choose to give it away - the proper old hardware shop example. Others are forced to, because the code itself is free (open source).

You've talked a lot in your last two posts about enterprise software business models: here's some useful software - its free but we charge for commercial-grade support, etc. Not many have made a BIG business from this model. Red Hat reported a shade over $650M revenue last fiscal year. Not chump change but Oracle reported $23.3B last year. Google, a company that gives away its software but sells something else entirely - ads - reported $21.8B. The big money in giving away software comes from driving enormous adoption, then selling something valuable based on that adoption - in Google's case, search-qualified eyeballs.

As you said, open source is one tool in the bag, particularly well-suited for making developers enthusiastic about a platform. You can pay your mortgage by supporting open source infrastructure with paid subscriptions. But Oracle is almost 36 times larger than Red Hat, the poster child for the support subscription business model. If you try that model you'd better have realistic expectations (and cost structures). There are other models that can potentially scale much larger. None of them are easy to execute, or we'd see a lot more Googles, Red Hats, etc. Open source has made it necessary to adopt a free (as in beer) business model for many categories of software out there. That is why business people insist on calling it an "open source" business model - because it is open source that forces that model on them.