Open Source Business Models

1
Open Source Business Models

• Alan Kelon Oliveira de Moraes ltalan_at_kelon.orggt
• IN953 Software Engineering 2006.1
• May 8, 2006 Recife PE

2
The community

• 6. Treating your users as co-developers is your
  least-hassle route to rapid code improvement and
  effective debugging.
• 7. Release early. Release often. And listen to
  your customers.
• 8. Given a large enough beta-tester and
  co-developer base, almost every problem will be
  characterized quickly and the fix obvious to
  someone.
• 10. If you treat your beta-testers as if they're
  your most valuable resource, they will respond by
  becoming your most valuable resource.
• 11. The next best thing to having good ideas is
  recognizing good ideas from your users. Sometimes
  the latter is better.

Raymond, E. S. 1999 The Cathedral and the Bazaar.
1st. O'Reilly Associates, Inc.
3
Innovation Happens Elsewhere

• High productivity requires doing less to produce
  as much or more ... in general, than one that
  can take advantage of the efforts of others. In
  most cases, this means that a company wishing to
  innovate productively must recognize that
  valuable work and talent exist outside the
  confines of the company and that it must find
  ways of using that outside material and expertise
  while still maintaining a competitive edge

4
Some reasons to engage with open source

• Getting high-quality, free software and software
  design and development help
• Making your software ubiquitous through
  participation and low cost
• Engaging end-users in design and testing
• Reducing time to market
• Working with partners who prefer a loose
  relationship
• Positioning a company
• Harvesting innovation
• Making standards

5
Some reasons to engage with open source

• Changing the rules
• Changing pricing practices
• Adopting transparent development processes
• Injecting discipline into the development process
• Satisfying more customers
• Avoiding lock-in
• Creating markets and doing m.a.r.k.e.t.i.n.g

6

• Boss, lets start an Open Source group
• OK
• Him - But it must make economic sense
• Me - Sure no problem
• gulp

Langham (2005) Surviving the five year itch A
tale from the trenches of European Open Source
business models
7
What is a business model?

• The way a company makes money
• The financial and operational essence of a
  company

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Business models for technology non-tech
companies

• Conventional
• Selling a product through a distribution channel
• Loss leader
• Offer low price or free product to sell
  product(s) or service(s)
• Give away razors to sell razor blades
• Web Model
• Aggregate eyeballs and sell advertising
• Value Apportion
• Provide valuable data or service over time via
  subscription

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Setting Up Shop The Business of Open-Source
Software

• Few companies have enough people, money, or time
  to do everything that needs doing, especially
  when competing against larger companies with
  greater resources.
• A strategy exists to address all these challenges
  at once turning some (or in exceptional cases
  all) of a companys software products into
  open-source ones.
• Much of the value provided to customers will not
  be provided solely by you, but rather by other
  developers who are attracted to working on your
  open-source products

Hecker, F. 1999. Setting Up Shop The Business of
Open-Source Software. IEEE Softw. 16, 1 (Jan.
1999), 45-51.
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Setting Up Shop The Business of Open-Source
Software

• Support Sellers Revenue comes from media
  distribution, branding, training, consulting,
  custom development, and post-sales support.
• Loss Leader A no-charge open-source product is
  used as a loss leader for traditional commercial
  software.
• Widget Frosting Companies in business primarily
  to sell hardware use the open-source model for
  enabling software such as driver and interface
  code.
• Accessorizing A company distributes books,
  computer hardware, and other physical items
  associated with and supportive of open-source
  software.

Hecker, F. 1999. Setting Up Shop The Business of
Open-Source Software. IEEE Softw. 16, 1 (Jan.
1999), 45-51.
11
Setting Up Shop The Business of Open-Source
Software

• Brand Licensing One company charges other
  companies for the right to use its brand names
  and trademarks in creating derivative products.
• Sell It, Free It A companys software products
  start out their product life cycle as traditional
  commercial products and then are continually
  converted to open-source products when
  appropriate.

Hecker, F. 1999. Setting Up Shop The Business of
Open-Source Software. IEEE Softw. 16, 1 (Jan.
1999), 45-51.
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Seven open source business strategies for
competitive advantage

• The Optimization Strategy
• The Dual License Strategy
• The Consulting Strategy
• The Subscription Strategy
• The Patronage Strategy
• The Embedded Strategy
• The Hosted Strategy

Koenig (2004) Seven open source business
strategies for competitive advantage. IT
Managers Journal
13
The Optimization Strategy

• Either the integrated system or the subsystems
  need to be modular (suboptimal and
  inefficient) and comfortable in order to
  optimize performance for the other.
• The modular and conformable layers are
  commodities
• Make money at the borders to the modular layers
• E.g. Linux Oracle

Koenig (2004) Seven open source business
strategies for competitive advantage. IT
Managers Journal
14
The Dual License Strategy

• A software company offers free use of its
  software with some limitations, or alternatively
  offers for a fee commercial distribution rights
  and a larger set of features.
• Some restrictions
• Any modifications that are distributed must also
  be made public in source code form
• Cannot use the free version as a component of any
  commercialized product or solution
• Advantages Improved customer awareness and
  faster adoption, stronger competitive
  positioning, and a large base of users to find
  bugs and recommend improvements to the software.
• E.g. MySQL, Sleepycat (Oracle)

Koenig (2004) Seven open source business
strategies for competitive advantage. IT
Managers Journal
15
The Consulting Strategy

• Delivering a customer solution involves
  integration of hardware, software, and
  maintenance
• middleware integration
• Custom application consulting
• E.g spikesource.com

Koenig (2004) Seven open source business
strategies for competitive advantage. IT
Managers Journal
16
The Subscription Strategy

• Maintenance
• Services
• E.g. Linux distros (Red Hat, Novell)

Koenig (2004) Seven open source business
strategies for competitive advantage. IT
Managers Journal
17
The Patronage Strategy

• To drive standards adoption
• To anticipate a de-facto standard and the
  supporting community will converge around that
  contribution
• Advantages
• Commoditize a particular layer of the software
  stack
• Eliminate competitors that are extracting revenue
  from that layer
• E.g. IBM Eclipse

Koenig (2004) Seven open source business
strategies for competitive advantage. IT
Managers Journal
18
The Embedded Strategy

• Reuse and tailor existing platforms
• E.g. Linux

Koenig (2004) Seven open source business
strategies for competitive advantage. IT
Managers Journal
19
The Hosted Strategy

• Don't sell your software, let users use it or
  rent it
• E.g. SugarCRM

Koenig (2004) Seven open source business
strategies for competitive advantage. IT
Managers Journal
20
Open Source Paradigm Shift

• Commoditization of software
• Network-enabled collaboration
• Customizability and Software-as-Service

OReilly (2005) The Open Source Paradigm Shift.
In Perspectives on Free and Open Source Software,
eds. Feller et al., MIT Press
21
How open is open enough?

• Leveraging openness while keeping differentiation
• Apple
• IBM
• Sun

J. West. How open is open enough? melding
proprietary and open source platform strategies.
Research Policy, 32, 7 (July 2003), 1259--1285.
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Apple reuse and leverage
J. West. How open is open enough? melding
proprietary and open source platform strategies.
Research Policy, 32, 7 (July 2003), 1259--1285.
23
IBM from platforms to applications

• Phase I application software
• Phase II system software

J. West. How open is open enough? melding
proprietary and open source platform strategies.
Research Policy, 32, 7 (July 2003), 1259--1285.
24
Sun opening new platforms

• Strategy 1 new platforms
• Strategy 2 partly-open source
• Strategy 3 if you cant beat them, join them

J. West. How open is open enough? melding
proprietary and open source platform strategies.
Research Policy, 32, 7 (July 2003), 1259--1285.
25
Shifting from proprietary to open source
strategies

• Proprietary platforms
• Open standards
• Open sources

J. West. How open is open enough? melding
proprietary and open source platform strategies.
Research Policy, 32, 7 (July 2003), 1259--1285.
26
Towards a Product Model of Open Source Software
in a Commercial Environment
Deng et al. (2003). Towards a Product Model of
Open Source Software in a Commercial Environment.
In 3rd International Workshop on Open Source
Software Engineering. ICSE 03.
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Apache chairman Days numbered for commercial
software

• As the open-source stack grows and grows and
  takes over more areas, there's less money
  available in packaged products
• All of your software will be free. It means that,
  over time, you aren't going to be paying for
  software anymore but will instead pay for
  assistance with it
• A license can ruin a perfectly good piece of
  software A bad license can make it so
  restrictive that nobody wants to use the software

Krill (2006) http//www.macworld.co.uk/news/index.
cfm?RSSNewsID14172
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Licensing and Sponsorship

• Several project characteristics may be important
  to OSS success including
• project age
• project development status
• programming language
• type of software developed
• intended audience
• reputation of participants
• licensing issues
• organizational involvement in the project

Stewart et al. (2005) A Preliminary Analysis of
the Influences of Licensing and Organizational
Sponsorship on Success in Open Source Projects.
In Proceedings of the 38th Annual Hawaii
International Conference on System Sciences
(HICSS'05)
29
Licensing and Sponsorship

• 147 projects on Freshmeat.net
• Dependent variables
• Change in subscribers (popularity)
• New releases (vitality)
• Independent variables
• License restrictiveness
• Is the project sponsored?
• Initial popularity
• Control variables
• Project category
• Project age

Stewart et al. (2005) A Preliminary Analysis of
the Influences of Licensing and Organizational
Sponsorship on Success in Open Source Projects.
In Proceedings of the 38th Annual Hawaii
International Conference on System Sciences
(HICSS'05)
30
Licensing and Sponsorship

• Hypothesis 1 OSS projects that use a
  nonrestrictive license will become more popular
  over time than those that use a restrictive
  license.
• Hypothesis 2 Sponsored OSS projects will become
  more popular over time than non-sponsored OSS
  projects.
• Hypothesis 3 OSS projects using a restrictive
  license will experience higher levels of vitality
  than those using a non-restrictive license.
• Hypothesis 4 OSS project popularity will have a
  positive effect on OSS project vitality.

Stewart et al. (2005) A Preliminary Analysis of
the Influences of Licensing and Organizational
Sponsorship on Success in Open Source Projects.
In Proceedings of the 38th Annual Hawaii
International Conference on System Sciences
(HICSS'05)
31
Guide to Legal Issues in Using Open Source
Software

• A guide to help New Zealand government
  departments assess and mitigate the legal risks
  of using open source software.

New Zealands State Services Commission (2006)
http//www.e.govt.nz/policy/open-source/open-sour
ce-legal/guide-to-legal-issues-in-using-open-sourc
e-software.pdf
32
Guide to Legal Issues in Using Open Source
Software
New Zealands State Services Commission (2006)
http//www.e.govt.nz/policy/open-source/open-sour
ce-legal/guide-to-legal-issues-in-using-open-sourc
e-software.pdf
33
Guide to Legal Issues in Using Open Source
Software
New Zealands State Services Commission (2006)
http//www.e.govt.nz/policy/open-source/open-sour
ce-legal/guide-to-legal-issues-in-using-open-sourc
e-software.pdf
34
Guide to Legal Issues in Using Open Source
Software
New Zealands State Services Commission (2006)
http//www.e.govt.nz/policy/open-source/open-sour
ce-legal/guide-to-legal-issues-in-using-open-sourc
e-software.pdf
35
Proposal of licensing guide
Ribeiro (2006) Potencial e Modelos de Negócio
para novos empreendimentos em Software Livre, TG,
CIn-UFPE.
36
The real development community?

• The myth of a global, expansive open source
  development community is just that a myth.
• The reality is more like severe clumping of
  development around Linux, Apache, and very few
  other projects.
• Even JBoss and MySQL are overwhelmingly developed
  by those respective companies, and not by a crowd
  of outside developers (95 and 85, respectively,
  I believe) Asay 2005

Asay (2005) So you want to build an open source
community... http//asay.blogspot.com/2005_09_01_
asay_archive.html
37
The real development community?

• Between 80 percent and 85 percent of persons
  working on Eclipse projects are paid salaries by
  their employers who send them to work for
  Eclipse.

Krill (2006) Death of the software salesman?
http//www.infoworld.com/article/06/02/16/75460_HN
death_2.html
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Community tensions
Sebastian Rahtz (2005) OSS Watch
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In the end

• There is no right business model for Open
  Source.
• Whatever works for you, your customers and the
  community you participate in, is right.

Langham (2005) Surviving the five year itch A
tale from the trenches of European Open Source
business models
40
Open Source Business Models

• Alan Kelon Oliveira de Moraes ltalan_at_kelon.orggt
• IN953 Software Engineering 2006.1
• May 8, 2006 Recife PE