Open Source Software Business Models
Description
"OSS profitability and business models are still poorly understood and there is no single framework that would explain their potential determinants. The most critical issue for an OSS business is that the licensing terms used allow the free redistribution of the licensed software. Therefore, it is usually not feasible to base revenue on licensing fees.
Rajala et al. identify the following essential elements in any business model for software companies:
- product development
- source of revenue and pricing
- sales channel options
- servicing and implementation approach [1]
Jussi Nissila identifies the key elements of any software business model in slightly different terms:
- value creation and revenue logic
- market offerings and positioning
- product development, implementation and servicing
He also argues that, in the case of open source business models, the above key elements must be complemented by the:
i) extent of community development and review;
ii) style of development method as more open or more closed;
iii) license type as more restricted or more liberal; and
iv) importance of the OSS in the end product. Importance ranges from pure OSS where no proprietary components are added, OSS driven where the core is open source with proprietary component added, to proprietary software driven where the core is proprietary with some open source components added.
Dual Licensing seems to be one of the most popular ways of making money. In addition to the revenues that comes from selling the fee license, this model may also provide complementary revuenues through technical support and services.
Dual-licensing [2] differs from a purely free model. First, the OSS community does not have the development power to start competing products because the control of the core is held by the original developer. Second, users have the possibility of buying a proprietary license.
There are two fundamental legal requirements for a commercially successful dual-licensing model: the i) need of a license with a strong copyleft clause; and ii) possession of undisputed rights over the software." (http://www.osbr.ca/ojs/index.php/osbr/article/view/827/800)
Typology
Thomas Prowse [3]:
(see also this alternative: Taxonomy of Open Source Business Models
1. Open Source Software Service Model:
"This well-established OSS business model is premised on charging for services to support the use of OSS software. While there are many companies of various sizes that have implemented this as their core business model, the best example is Red Hat, which generated $750 million in revenue last year and has a $6 billion market cap.
At a high level, this business model is designed to benefit from large-scale adoption of certain types of OSS software. The OSS company target those user companies and organizations that prefer or require commercial support for the OSS. For example, the Red Hat business model focuses primarily on the popular Linux open source operating systems. In targeting user companies, it may offer its support service to a bank that is using Linux in its enterprise servers. In most cases, the OSS company positions itself as a supplement or alternative to relying on support from either the applicable open source community or an internal support team within the user company. In addition, this class of OSS company typically focuses on the addition of complementary services and products to drive revenue opportunities.
A recent post by Glyn Moody entitled 'Why No Billion-Dollar Open Source Companies?' discusses the challenge that the fundamental economics of OSS are bringing to the service-based OSS business model. Glyn's post has triggered a very interesting and healthy debate on OSS business models in general." (http://www.osbr.ca/ojs/index.php/osbr/article/view/1157/1107)
2. Dual Licensing:
Thomas Prowse:
"This established, yet declining, OSS business model is premised on a dual (or multiple) license approach. Typically, this has involved the combination of a reciprocal (copyleft) license with a more conventional commercial software license. One of the most cited examples is MySQL, which licensed its database product under both a GPL and a largely conventional commercial software license.
At a high level, this business model is designed to use the OSS license to facilitate large-scale adoption of the licensed product and then follow such adoption with the offer of the commercial license. The commercial license is positioned to address certain actual or perceived deficiencies of the OSS license for certain types of adoption and use of the licensed product. In many cases, the marketing of the commercial offering has focused on creating "Fear, Uncertainty, and Doubt" (FUD) in the mind of actual or potential end users about the legal implications of licensing software under the so-called "viral" GPL, and now Affero GPL.
According to a study by the 451 Group (reported on by GlobalThoughtz Research), the proportional use of a dual-licensing approach among open source software vendors has declined from 20% of vendors two years ago down to just 5% of vendors using this approach today. I believe that the decline in dual licensing is being driven by both the inherent challenges of creating and maintaining a code base that is capable of being dual licensed as well as the increasing education and sophistication of end users with respect to OSS licensing." (http://www.osbr.ca/ojs/index.php/osbr/article/view/1157/1107)
3. Open Core Business Model:
Thomas Prowse:
"This somewhat established, but still emerging OSS business model is premised on the open source licensing of the core software offering and the proprietary licensing of certain add-ons to that core product. Good examples of this approach include SugarCRM and Word Press.
At a high level, this business model is designed to use the OSS license (and OSS economics) to drive the large scale adoption of the licensed product and then follow on or supplement that offering with proprietary add-ons. In the case of SugarCRM, this may take the form of new CRM modules or increased scalability. In the case of Word Press, which hosts my personal blog, this may take the form of premium services that it makes available as part of its hosted-service offering.
While the open core model has generated a lot of interesting debate and polarized positions, such as the scathing critique by Brian Prentice of Gartner in his 'Open-Core: The Emperor’s New Clothes' blog post, it does, by most accounts, represent an important evolution in OSS business models." (http://www.osbr.ca/ojs/index.php/osbr/article/view/1157/1107)
4. Hybrid Open Source Software Business Model:
Thomas Prowse:
"This novel OSS business model is premised on the combination of the commercial licensing of a software product with the availability of both the source code for the product and certain rights to modify and use the source code under the umbrella of the commercial license. Since QNX, which was recently acquired by Research In Motion Limited, is the pioneer in this space, I have quoted its description of this business model type from its About Page below: "The company has pioneered an innovative hybrid software model with three main components: 1) open access to product source code; 2) a commercial-friendly licensing model that lets customers modify source code and retain ownership of their modifications; and 3) a transparent development process that allows customers and community members to participate in product development – a benefit normally restricted to open source projects. Put simply, the new approach combines advantages of both commercial and open-source software models."
While we are still in the very early days, the hybrid model represents an intriguing twist on existing OSS business models and offers an interesting blend of openness, transparency, and commercial certainly." (http://www.osbr.ca/ojs/index.php/osbr/article/view/1157/1107)
5. Entersource:
Thomas Prowse:
"Earlier this year, I came across the term "entersource" in Eric Knorr’s post on Infoworld’s Modernizing IT blog entitled 'Open source: Less profit, more fun', which leads off with the provocative statement that "Open source ain't what it used to be. It's both more and less." According to Eric, "a diminished percentage [of developers] work for healthy open source software vendors, where the old-fashioned business model -- give away the code and make money on support -- isn't doing so hot." Eric quotes Black Duck CEO Tim Yeaton, who sees the area of enterprise application development as the "real open source explosion", and Eric reports that Michael Skok of North Bridge Venture Partners dubs this co-mingling of open source and enterprise software “entersource”.
Since the four other models discussed above are grounded in the fundamental business equation of how the company makes money, it may seem, at first blush, that the customer-centric approach of entersource is a poor fit as a business model. In Sesame Street lingo, “one of these things is not like the others”! In fact, I see entersource and its variants as the major emerging OSS business model.
According to Eric’s blog, Michael Skok sees entersource "chiefly as a means for collaborative development". As I noted in my related blog post (and discussed in greater detail in my October 2008 OSBR article 'Treasury of the iCommons: Reflections of a Commons Sourcing Lawyer'), this exploding trend of "commons sourcing" is increasing. As Eric points out, this is reflected in the fact that "enterprise developers are collaborating across company boundaries to develop components that can be shared under open licenses". This phenomena is driving unprecedented cost savings within companies that are frequently order-of-magnitude improvements over the status quo. When interviewed by Makesh Sharma in The Australian article entitled 'Open source enables innovation without lawyers or fees', Roger Burkhardt, Ingress CEO, makes the point that "the open source model allows us to bring together the best minds in the world to work on a problem" and allows engineers from different companies to "collaborate without months of legal work."
As Michael Skok notes, there is an increased focus around OSS on "real ROI and payback, which has had the effect of making open source a 'mainstream, reliable, de facto part of the landscape'". In addition, Michael observes that "very few of these Open Source projects will reach the critical mass required to create a company," adding that, "a good product doesn't make a good open source project." In fact, he says, it is the reverse: you need a community first, and then a project to serve that community." In this context, we can expect to see entersource and its variants as a critical addition to the OSS business model landscape." (http://www.osbr.ca/ojs/index.php/osbr/article/view/1157/1107)
Discussion
" 4 stages of evolution of open source:
• Stage 1 – Software developed by communities of individuals • Stage 2 – Vendors begin to engage with existing open source communities • Stage 3 – Vendor-dominated open source development and distribution projects • Stage 4 – Corporate-dominated open source development communities"
(http://openlife.cc/blogs/2010/november/recommended-reading-control-and-community-451-group)
More Information
See in particular the overall analogy of the Beekeeper Model
- Open Source Software - Business Aspects
- Open Source Commercialization
- Open Business ; Open Business Models; Open Source Business Models
Also: