See our extensive overview of Open Source Business Models which covers how business can make money using open source. This article discusses some of the problems involved with the commercialization of open source, such as the relationship between communities and businesses.

Business involvement in Open Source Communities

Citation 1

"Money is good.

Without money flowing in to OSS, fewer people will be able to do useful work.

Sure there is a perception of OSS being written by the selfless hackers giving all their spare time. In reality though, people need to eat, pay the rent and buy computers etc. When organisations fund OSS development they help make it real. OSS businesses have found various ways to make money and do so in various ways." (comment at Slashdot article at http://ask.slashdot.org/article.pl?sid=07/04/28/207220&from=rss)

Citation 2

"I agree with this 100%. If you look at the work that goes into Gnome, a very large proportion of it comes from developers at Redhat and Novell. A lot of the developers are still unaffiliated with any large corporations, but certainly if you browse through the Gnome bugzilla you will see that a lot of the core developers that are pushing Gnome forward are paid for their work. And this really helps the community. Furthermore, Gnome has lately benefited from the interest of late from mobile and embedded developers, who have done a lot of work in push down the resource usage of Gnome components.

Gnome is a big project. There is a lot of code, and a lot of it is showing its age. If Gnome was an all volunteer effort, there would be a lot more focus on exciting new technologies, and less focus on fixing bugs and cleaning up old code. In a sense, this is how I see KDE. KDE is pushed forward by developing new projects and applications, but to a certain degree suffers from the fact that things are constantly being reinvented rather than refined. The hard work that has gone into Gnome by commercialization has helped reduced bugs in the code, kept it up to date, and continues to push the project forward." (E. Klitzke at http://ask.slashdot.org/article.pl?sid=07/04/28/207220&from=rss)

Typology of Engagement

A Canadian study defined five stages of engagement, each generating more profit than the prior strategy, but also requiring more engagement:

From Peter Carbone [1]:

"Stage 1 - Use: This stage focuses on development efficiency. At the most basic level a company leverages existing open source projects to reduce development time and costs. In other words, the company is a user of open source; its employees use F/LOSS (Free/Libre Open Source Software) and the open source community is neither harmed nor helped by the company. While the company wraps up its own value around F/LOSS, it provides no or little competitive value.

Higher levels (stage 2 and 3) of maturity result in contribution or even leadership of open source projects in order to accelerate this R&D effectiveness value.

Stage 2 - Contribute: This stage occurs when the company moves beyond passive user to collaborator. Managers begin to contribute code to and/or fund the open source project. This benefits the community and enhances the software distribution. However, there is a very narrow business focus, little rivalry, and a loose company-community coupling.

Stage 3 - Champion: At this stage executives provide support and a known leader to champion the development of the open source project. The community benefits from the company's activities and vice versa. The company proactively selects and manages an ecosystem anchored on F/LOSS to attain business goals.

Real profits and competitive differentiation can be achieved at stages 4 and 5 of maturity when a company shifts its focus from efficiency to value appropriation and a more strategic interaction with the market and value chain.

Stage 4 - Collaborate: The company has now become an open source strategist. Executives identify a position within the ecosystem, define a business model that relies on F/LOSS, and then release code, fund efforts, and exert influence to attain the company's business goals. The community benefits from customer driven resources to produce new versions of software. The company obtains a competitive advantage by changing the environment. Competitive value and proprietary value are coupled with business strategy.

Stage 5 - Redefine: This is the most aggressive stage where executives invest in programs and tools to design products relying on F/LOSS projects. The community benefits as it can exploit linkages across F/LOSS projects. The company gains a significant competitive advantage by harnessing changes in multiple ecosystems.

At this stage, the company changes its position in the value chain; for example, a company can shift to a service business model from a product business model." (http://www.osbr.ca/archive.php?issue=1&section=Ar#A2)

Graph at http://www.osbr.ca/images/archives/carbone.gif

Overview of the commercial uptake of Open Source software

June 2005 status

"And so Linux entered commercial use. Its first, and still most successful, niche was Web servers; for at least five years, the majority of the world's Web servers have used open-source software. Then, several years ago, IBM started to contribute money and programmers to open-source efforts. IBM, Intel, and Dell invested in Red Hat Software, the leading commercial Linux vendor, and Oracle modified its database products to work with Linux. In late 2003, Novell announced its purchase of SuSE, a small German Linux vendor, for more than $200 million. IBM invested $50 million in Novell. IBM, Hewlett-Packard, and Dell began to sell hardware with Linux preinstalled. IBM also supports the Mozilla Foundation, developer of the open-source Firefox browser, and with Intel, HP, and other companies recently created the Open Source Development Labs (OSDL), a consortium promoting the business use of Linux, which has hired Torvalds and other open-source developers. Now, Linux is running on everything from $80 routers to cell phones to IBM mainframes, and is much more common on desktop PCs. Red Hat is a highly profitable $200 million company growing 50 percent per year, and commercial open-source vendors serve many important software markets. For instance, in databases, there is MySQL, which now has annual revenues of about $20 million, doubling every year. In application servers, there is JBoss, and in Web servers, Covalent. In the server market, the eventual dominance of Linux seems a foregone conclusion. Michael Tiemann, Red Hat's vice president for open-source affairs, told me, "Unix is already defeated, and there's really nothing Microsoft can do either. It's ours to lose." Of course, Microsoft, which refused all interview requests for this article, sees things differently. But surveys from IDC indicate that in the server market, Linux revenues are growing at more than 40 percent per year, versus less than 20 percent per year for Windows. Unix, meanwhile, is declining." (Charles Ferguson, Technology Review, June 2005, at http://technologyreview.com/articles/05/06/issue/feature_linux.asp?p=2 )

May 2007 Status

"Presently there are four multi-billion dollar companies that have a very significant open source element to their businesses: IBM, Sun, Novell, and Red Hat (you could make an argument for HP and Dell too if you like). In addition to these juggernauts, there is growing investment in open source models. In the first quarter of 2007 the following companies raised approximately $100 million to fund businesses that directly rely on open source software or services.

Avidence (www.avidence.com) - $5 million, Series A

Adaptive Planning (www.adaptiveplanning.com) - $7.5 Million, Series C

Black Duck Software - (www.blackduck.com) - $12 million, Series C

Fonality (www.fonality.com) - $7 million, Series C

Groundwork Open Source (www.groundworkopensource.com) - $12.5 million, Series C

Greenplum (www.greenplum.com) - $19 million Equity and Debt offering

Penguin Computing (www.penguincomputing.com) - $9 million, Series B

PostPath (www.postpath.com) - $15 million, Series C

rPath (www.rpath.com) - $9.1 million, Series B

Terascala (www.terascala.com) - $3 million, Series A

(http://opensource.sys-con.com/read/367993.htm)

Open Source in Government

For the ‘governmental uptake’ of Linux, see http://news.com.com/2100-1001-272299.html?legacy=cnet& (August 2001 overview by CNet’s News.com)

Strategies

Competitive Motivations

Peter Hoddinott [2]:

"* Firms providing services and customizations around given technologies may be incented to see those technologies open sourced as open source technologies are typically more affordable. More affordable technologies may lead to an increase in their use, and this will likely result in an increase in the demand for the firms' services and customizations.

Firms competing in a market where there is an effective monopoly on some technology may be incented to see that technology open sourced. Such commoditization of the technology would likely remove the monopoly, change the competition dynamics in that marketplace, and possibly better position the firms' to appropriate a greater market share.

Firms that have an interest in sustaining the development of technologies that have little marketplace differentiation and/or margins, may elect to collaborate to advance these technologies as open source. By collaborating with an open source project, the firms' may save money, generate good will, avoid anti-trust issues, and possibly create an industry standard that the firms' effectively control, all while retaining each firm's independent interest in sustaining the technology."

(http://www.osbr.ca/archive.php?issue=7&section=Ar#A7)

Selling Models

We provide a longer and different overview in our entry onOpen Source Business Models.

From Peter Hoddinott [3]:

- Sell subscriptions: Used by RedHat

The software is free but additional features or services associated with commercial software are only available via a monthly, quarterly or annual subscription. Other examples include the use of a dual license, paid updates, indemnification, stack maintenance, maintenance and support, and content through knowledge portals.

- Sell services: Used by Google, Yahoo and Mozilla

The software or an interface is made available to companies. This ultimately drives traffic to a host website where it is used to generate advertising dollars and business intelligence. Other examples include testing, hosting, training, and consulting.

- Sell hardware products: Used by Digium

The software is provided for free but the customer pays for the hardware. This embedded approach uses the open source project as a platform. Other examples include hardware with embedded open source software (OSS) which is delivered on a cell phone, a system product that includes an open source asset and integrates with complementary products such as the Apple computer, and hardware with OSS running on top which is delivered as an out of the box solution such as TiVo.

- Sell software products: Used by Oracle on Linux, Oracle9i Real Application Cluster (RAC)

The core software is free and additional features such as optimization and consulting are paid for by the customer. Other examples include a software fork for a closed software stack, certified stacks, and OEM products." (http://www.osbr.ca/archive.php?issue=7&section=Ar#A7)

Discussion

Why It Makes Sense to Open Up Software

Jonathan Schwartz, CEO of SUN, explains why it makes sense for companies to open source their software:

Now, I've heard from a few stockholders saying, "What? Sharing? Free Software? What's up with that! Go make some money!" And so I thought I'd put down, once and for all, why we're committed to sharing, to open source, open standards, and eradicating the digital divide. Ready?

Because we're going to make more money. How? It's trivially simple. Why do carriers give handsets away for free? Because they make money on the subscription necessary to receive the handset. Why do banks give away free checking, or free credit cards? Because they acquire new customers. Why do Google and Yahoo! give away free search? Because there's a fortune in the end result. So why on earth would we give our OS away for free? Because it'll ensure those without the economic wherewithal to pay for it will still consider using it. Companies that suffered from piracy a decade ago now know the lesson well - piracy is a good thing so long as the pirates are folks who could never afford your products. So stop calling them pirates, call them users. Free software has no pirates. As I've said forever, there's value in volume, even if you're not paid for it.

Do I worry about enterprises or corporate customers taking OpenSolaris and not acquiring a subscription to someone's (hopefully our) service contract? No, not in the least. Do you really think a hospital, or an air traffic control authority or a Minister from an African nation would run their institution on unsupported software? No. No way. Are we guaranteed to get that business? Nope. But we are guaranteed the opportunity will be greater than if we kept Solaris locked up. And I'd rather get 20% of a business that's planetary in scope, than 100% of a business with 17 customers. Like I said, there's value in volume. (And I haven't even touched upon the impact of open sourcing on innovation.)

To prove the point, the Minister this morning was joined by the head of a bank headquartered in his country. His customers are increasingly coming to him via the network. He clearly recognized that a world in which the development and digital divides have been eradicated is a world in which he grows more customers, transaction volumes and business opportunities. And we both recognized that as the divides are eradicated, he'd find himself... ...buying more infrastructure to support his business. (Just so happened he was a Sun customer - and given that it is Q4, I will admit to giving him a brief update on chip multi-threading and storage containers.)

Sharing is good for our business. Free software is good for our business. Anyone who believes in preserving the old model of software distribution is, at a certain level, fighting gravity. The most popular credit cards are the free ones. The most popular handsets, search engines, and checking accounts are the free ones. Just like the most popular operating systems will be, in the long run, the... Free ones. nd as I've consistently said, and as you'll soon see, there's a lot of value in volume." (http://blogs.sun.com/roller/trackback/jonathan/Weblog/sharing)

The General Public License as an ‘ideal capitalist tool’

“The GPL is one of the most exciting, innovative capitalist tools ever created. The GPL breaks down walls between vendors and customers while enabling strong competitive differentiation. Unlike the BSD, which strikes me as serving an ever-narrowing slice of the development community that shares code simply for the sake of sharing, the GPL takes a hardheaded look at software development (and human nature) and works to maximize choice, control and a free market. From its inception, the IT business has depended on intellectual property. This dependence is enshrined in the U.S. Constitution, Section I, Article 8, which establishes copyright/patent to "secur[e] for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." This limited monopoly grant has enabled software companies to create exceptional, customer-focused products without inordinate fear that competitors will freely clone their innovations for sale as their own. No other open source license has done more than the GPL to make open source commercially viable. By emulating the traditional copyright format, the GPL facilitates commercial involvement in open source communities, which is important for expediting the spread and depth of open source software. Free market open source, thanks to the GPL." (Matt Asay is director of Novell's Linux Business Office, Network World, http://www.networkworld.com/supp/2005/opensource/070405-face-off-no.html)

Is there a Tragedy of the Commons in Open Source

Does business profiteering threaten the model? William Hurley fears so at http://talk.bmc.com/blogs/blog-whurley/whurley/.

"There are too many entities taking advantage of open source technology without giving back. Some are literally pillaging the community that butters their bread. How long before we all suffer the effects? If major project contributors were to stop work, how would that affect the industry as a whole? Let's use the monitoring segment of systems management as an example. Several "open source contributors" simply download code from popular projects and then "build" their software, service, or company on top of it. These contributors often refer to "improvements" they've made. Where are these improvements? Why weren't they contributed to the community from which they took the code? Open source should be about working together for common benefit.

Nagios is one of the most popular monitoring projects in open source, and one of the most abused. There are countless projects, products, and services predicated on the Nagios code base - some symbiotic, others non-contributing parasites. What separates legitimate use from outright exploitation? Where would you draw the line? Should violators be black-listed by the community?

To me, open means that everyone can participate on a level playing field. As a community we have to take the good with the bad, but I cringe when I see a project taking more than its fair share of punishment. How will the community address this problem? Should there be a ratings system? A sort of mooch-o-meter to rank companies and projects that use open source? Would that subjective hierarchy help or hurt the community? How would it be regulated?

The community has to answer some of these questions if open source is to continue to flourish. Everyone who leads, participates in, or utilizes an open source project should realize they have a personal interest in protecting it from abuse. Keeping the pirates honest will take effort, but the repercussions of apathy will affect us all in the future. Besides, tales of the pirate hunters are often more exciting than the tales of the pirates themselves." (http://talk.bmc.com/blogs/blog-whurley/whurley/.)

Open Source, complexity and the need for cooperation between community and business

Thesis, by C. Shotton :

"As open operating systems (Linux, NetBSD, etc.) and applications (Mozilla/Firefox, OpenOffice, etc.) grow in complexity, they outstrip the abilities of ad hoc, grass roots "open source" organizations to develop and maintain them.

Simply put any serious, valuable, widely-used open source project today is very likely a large and complicated one. Open Source has outgrown its own infrastructure and the only one available that can pick up the projects and move them forward are those operated by commercial organizations with the resources to throw at these hard problems."

Counterthesis by Arker:

"As projects become larger and more complex, they outstrip the ability of anything but a decentralised network of programmers. The resources of a traditional centralised software company, even the biggest in the business, is nothing compared to what decentralised networks of programmers have. The linux kernel team being one excellent example. And commercial software houses - *many* of them - are definitely involved, but the model is still distributed. No single company could handle that task - a widely distributed team from all around the world, with both commercial and noncommercial interests contributing, can and does.

Projects that attempt to decentralise their development while still retaining a monolithic structure internally may find that doesnt work so well, of course. For this to work the project must follow the 'unix way' and have many more-or-less self contained modules that work together, rather than building monolithic do-everthing apps."

(both citations from the discussion of the Slashdot article at http://ask.slashdot.org/article.pl?sid=07/04/28/207220&from=rss)

Towards Open Source Network Services

"Investors and other parties with significant interests seem to have finally digested the fact that a certain portion of the addressable software market will not only pay for freely available open source software, but that they insist on paying for freely available open source software. It’s a prerequisite for adoption, in many if not most cases.

As could have been predicted given their profession, shortly after determining that open source firms could in fact make money, investors wished an answer to a slightly more complicated question: how could the open source firms make even more money.

Open source businesses, after all, while often profitable and largely sustainable on an ongoing basis, displayed few signs that they would repeat the trajectory of the proprietary software firms that preceded them. A trajectory that made these same investors the preferred “even more” money; the kind of money that’s necessary to subsidize their numerous failed investments.

Open source has immense advantages in distribution, true, but significant and ongoing disadvantages in achievable profit margins and customer conversion percentages.

This question, then, happens to be a good one. Or at a minimum, a better one than its “how will you make money?” cousin. How are open source firms going to make even better money?

There’s no one answer to this any more than there was one answer to how open source firms would make money. The commercial open source world can be seen in that context as one of the larger and more interesting public economic experiments imaginable. What will people pay for? Where can commercial entities add the most value? All these questions and more are asked and answered, after a fashion, on a daily basis.

What is increasingly clear to me, however, is that the traditional support and service models will be augmented - and perhaps replaced, in some cases - by network services and offerings.

Much of the revenue directed open source firms way thus far has been related to their willingness to pick up the phone when things go awry. In that respect, it’s remarkably like insurance. And though insurance is a fine, profitable business to be in, it’s not likely to be quite as rewarding or profitable in the software business as it is elsewhere. Nor are the ISVs needs aligned particularly well with the customer. If the ISV does a perfect job with the software, after all, why would the customer pay for support?

Network services, for the most part, do not suffer from these failings (though they may, of course, suffer from others). If customers share some data and telemetry back with providers, both parties may benefit. And that service will prove to be more compelling, I believe, for customers skeptical of the value to traditional support and service.

Consider the examples we’ve seen to date: MySQL Enterprise includes “MySQL Network Monitoring & Advisory Services,” Red Hat’s Exchange seems to be a first step towards marrying the Linux ecosystem with network efficiencies, and most recently Canonical’s Landscape, a lightweight network enabled systems management service for Ubuntu customers." (http://redmonk.com/sogrady/2007/08/20/more_money/)

More Information

Graph with commentary: Comparing traditional software companies with commercial open source software companies
Technology Commercialization Theory could explain the commercialization strategies for Open Source Software
Similar content at Open Source Business Models

Articles

Open Source Initiative, "Open Source Case for Business", http://www.opensource.org/advocacy/case_for_business.php

Open Source Initiative, "The Open Source Case for Customers", http://www.opensource.org/advocacy/case_for_customers.php

Behlendorf, Brian. 1999. Open Source as a Business Strategy. In Open Sources: Voices from the Open Source Revolution, edited by C. DiBona, S. Ockman and M. Stone. Online version: O'Reilly. Available from http://www.oreilly.com/catalog/opensources/book/brian.html

Hecker, Frank. 2003. Setting Up Shop: The Business of Open-Source Software [Internet]. hecker.org 2000 [cited 21 Jan 2003]. Available from http://www.hecker.org/writings/setting-up-shop.html.

Young, Robert. 1999. Giving It Away: How Red Hat Software Stumbled Across a New Economic Model and Helped Improve an Industry. In Open Sources: Voices from the Open Source Revolution, edited by C. DiBona, S. Ockman and M. Stone. Online version: O'Reilly. Available from http://www.oreilly.com/catalog/opensources/book/young.html

Manuscript

For a general discussion on how peer production, and free software and open source models in particular, fit in the for-profit economy, see our entry: Peer Production - Immanence vs. Transcendence

Open Source Commercialization

Contents