Conversion Model

= In the Conversion model, you give something away for free and then convert the consumer of the freebie to a paying customer - somehow. [1]

Description

"As summarized by Sterne and Herring (2005) "In the Conversion model, you give something away for free and then convert the consumer of the freebie to a paying customer." This approach, they argue, is needed because "there is a natural limit to the amount of resources the Donation model can bring to an open source project, probably about $5 million per year." Linux distributors, such as SuSe, RedHat and Ubuntu, where the software is available for free under an open source license, have adopted this model. Subscribers receive services (such as installation and support) or advanced features. In the educational community, the conversion model has proven popular, having been adopted by Elgg and LAMS." (http://www.downes.ca/files/FreeLearning.pdf)

Example

SuSE Linux

"The first feeble attempt at the Conversion model was the Media Kit. This business model entailed "giving away" the software but charging for the box, CDs, and documentation. SuSE Linux is the market leader in the media kit market. It loads lots of stuff into its Linux distribution (i.e., SuSE Linux Professional supposedly includes 3,500 packages) thus making it too large to download, so that it can sell 250,000 media kits per year for $89 each. The problem with the media kit model is that it also appears to have a natural limit in the annual sales range of $25 million." (http://de.sys-con.com/read/158863.htm)

Red Hat

"Recognizing that the media kit model didn't have the juice to get it into the big leagues, Red Hat innovated once again in 2002 and invented the Enterprise Server - Maintenance and Support business model. Red Hat "gives away" its GPL Linux distribution but sells maintenance, support, and training linked to its distribution. The Enterprise Server model has worked very well for Red Hat, propelling their business to an annual run rate of $260 million (equivalent to 175 McDonald's outlets, larger than the McDonald's franchise in 20 states - not bad). SuSE Linux, a rapidly vanishing part of Novell, has imitated the Red Hat Enterprise Server - Maintenance and Support business model with moderate success. (All indications are that Red Hat is trouncing SuSE in the marketplace.) As the open source movement matures, its opportunity frontier is shifting from the operating system to middleware to applications. Red Hat, as we have mentioned, is the clear winner at the operating system layer and as such its maintenance-based conversion business model is being imitated by venture-backed companies in the middleware layer."

JBoss

" JBoss appears to be a successful example of an open source middleware company that is pursuing the Enterprise Server - Maintenance and Support model. It's giving away its application server, which competes with the IBM's WebSphere and BEA's Tuxedo, and selling maintenance, support, and training. According to Joe McGonnell, director of marketing, JBoss is achieving about 250,000 free downloads per month across the JBoss branded products and Hibernate. Their Web sites are being visited by 260,000 unique visitors per month. This compares to 2.3 million unique visitors as measured by hosts per month at Apache. (One way to double-check these numbers is to look at the popularity statistics page on www.freshmeat.net. There you will find JBoss ranked 249 [2] and Hibernate at 943 [3]. In comparison, Apache ranks 11.) The company's vice president of product management, Shaun Connolly, told ZDNet UK that JBoss has about 500 customers who each pay about $35,000 per year for maintenance, representing $17.5 million of revenue per year. In addition, JBoss sells support and training, which probably increases its annual revenue to $30 million per year. JBoss has managed to break through the "glass ceiling" of the older open source business models by imitating Red Hat's Enterprise - Maintenance and Support model, evidence that the business model is viable for middleware. In terms of go-to-market, JBoss has not been very forthcoming. They declined to answer our questions about the size and composition of their sales force."

More Information

• Sterne, Paul and Herring, Nicholas. LinuxWorld: The Conversion Model. 2005. Linux World, Dec. 30, 2005. http://de.sys-con.com/read/158863.htm