Report: Pure Open Source No Longer a Viable Business Model
How do you make money if you give your software away for free? That's the classic question asked of Open Source software vendors and the expected reply is that they charge customers for software customization and support. That's not the way it works anymore, though, according to a report published today by analyst firm The 451 Group.
Titled "Open source is not a business model," the report challenges some long held beliefs about the technology business. Not everyone is happy with the 451 Group's conclusions, either.
The Findings
451 says in writing the report it "analyzed the business strategies of 114 open source-related vendors, including open source specialists such as Red Hat and Alfresco, and those for which open source is used more tactically, such as IBM and Oracle."
The resulting 71 page report is being sold for $3750 and our requests for press access have not been replied to by press time. (Perhaps writing in complete sentences would have helped, we hadn't seen the price tag when we sent that email!)
However, there is a lengthy summary available on the blog of 451's Matthew Aslett where we can glean some of the report's conclusions.
The analysts found that while the majority of open source vendors now use some kind of commercial license (meaning it's not free anymore) when they distribute their software, half of them develop at least some code as "out of sight" property. And although both of those steps increase development costs - they are making more money in the long run as a result.
While people often discuss a limited number of open source business models, like support, hardware sales, etc. the report discovered "over 80 different combinations of development model, vendor licensing strategy and primary revenue trigger being used today by the vendors we analyzed."
While 70% of the companies surveyed offer support services to their customers, that's only a primary revenue stream for 8% of responding firms.
The open source business world sounds very different from what many of us on the outside of it have thought. In fact, Aslett writes that "There is very little money being made out of open source software that doesn't involve proprietary software and services." Aslett concludes that open source is a business tactic, not a business model.
The very definition of open source has been up for debate for some time, but these numbers put an interesting spin on that discussion.
But What About the Dream of Free and Open Software?
Aaron Fulkerson, founding CEO of the fast-growing open source enterprise wiki provider Mindtouch, says that the 451 report is right on the money. Open source has been essential in Mindtouch's efforts to build a community of developer evangelists, but it's no longer the be-all-end-all. Because the company's code is open to developers to work with, discuss and more sophisticated bug reports on, Fulkerson says, it has build a loving community that spreads awareness of the company's software for it.
In the end though, while Mindtouch used to sell only support contracts - now it sells software. "In the end, everyone is selling software," he told us. "[But] You have to create product pull. Open Source Software is the easiest way to do that. I entered this all ideological 3 years ago swearing that what I'm saying now is bullshit. But it's true." Three years ago Fulkerson was hiring a Bono look-alike to draw attention to the company at DEMO, so he's really tried a wide range of things to create that "product pull."
Not everyone sees it that way, or is willing to accept the 451 Group's conclusions. Marcus Estes of open source development shop OpenSourcery contests the report's premise and says that a long tail of purists is doing serious business.
"I question their use of the term vendor. It's certainly untrue that 'The majority of open source vendors utilize some form of commercial licensing to distribute, or generate revenue from, open source software.' Every time a freelance Drupal hacker makes a copy on a web server of the codebase, they're a vendor. And that means that in terms of numbers, small vendors outnumber the enterprise vendors by perhaps 10,000 to 1.The long-tail of open source vendors is a force to be reckoned with - there are now thousands more opportunities for small businesses to provide software services around open source software than there were 5 or 10 years ago. And together, they're taking a bite out of the bigger, proprietary vendors.
The model is clear: custom development and support. No proprietary licensing necessary. We're a purist open source shop and we're growing 100% year upon year. Looks like a business model to me."
Estes has certainly got the religion and in absolute terms he may very well be right. His is a small design-centered shop, though, and enterprise scale vendors may be a different animal and a different conversation.
What do our readers think? Is pure open source a viable business model or have those heady days largely passed, replaced by a more complex time of blended business strategies for monetization?
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"Open Source" is not a business model. Never was, never will be. "Open Source" is a set of criteria that can be applied to how software is developed and distributed. True, you can choose to build a business around "Open Source" software (and/or "Free Software") but it would be a huge mistake to think of the development methodology as synonymous with the business model.
If these people don't understand that distinction, I'd question the value of anything in their report. And I definitely wouldn't pay $3,750.00 for it. Maybe $375.00 or $37.50...
Great post Marshall. I very much believe the blended model is the future for commercial open source companies. It is extremely difficult to sell to the long-tail and the reality is that the money sits at the top. A blended model ensures maximum value for the community and the organizations that are leading the products.
Roy / Magento
Two seconds, I'll just go and /. you... prepare for server meltdown and intarweb cable combustion.
Marshall,
I agree to that "Open Source" could hardly be a business model. However, let me just play a game of words a little bit. How about "Open to bid Source", could it be a business model?
You see, that's the difference. Open Source opens platform and asks volunteers to contribute. Please be note that in this paradigm there is no separation between consumers and producers because basically the programming volunteers themselves are both of the consumers and the producers in this picture. This is the intrinsic reason that the present "Open Source" is not a business since to be a business there must be a separation between the group of consumers and the group of producers.
Now let see what the "Open to bid Source" might work. In essence, my intention is to create a group of consumers that is different from the group of producers. Thus the process of transaction may occur and a business model is established.
Again, in this new paradigm we may have a platform of open source. This time, however, the open so
I'm not sure about this concept of long tail vendors. If your revenues are not a multiple of you or your employee's salaries, you are decidedly not a vendor, you're a day laborer.
This discussion reminds me of something Jerry Garcia said during an interview in the 1960's (yes, I certainly do remember the 60's).
When asked about the "free" concerts that the Grateful Dead were putting on at the time, Jerry responded, "Free means different things to different people. A free concert to me can mean that I'm free to put it on anytime and anyplace I want. Free to the fan might mean that they don't have to pay to see it."
Jerry was right. Open source might be free. But free might mean that anyone is free to add code, ideas, or advertisement. Or free can mean that the end user gets it for free.
One thing has not changed throughout history: There is no such thing as a FREE lunch.
@Yihong,
In a way your model already happens. The only difference is that consumers hire producers ( programmers ) that modify the source to add new features or extend the system. The transaction happens internally in a "consumer organization".
If you want to move the line back so that the transaction touches upon the original creators, then the bid to Source system has to be more efficient than this one.
The problem is that you are introducing a middle man ( whoever manages the bidding system ) to broker the features, which is inherently less efficient.
So far, I would preferably hire programmers on a side to do exactly as I want, within my timeframe, under my control and bypass the brokers.
Just establishing dialog here.
I think these kind of ideas may get somewhere...
Best,
A
I fully agree with Aaron Fulkerson being quoted by Marshall Kirkpatrick and the comment posted by Phillip Rhodes. Free and open source software is a licensing model not a business model. GPL, BSD-style, MIT-style and other licenses may ignite collaborative software development and for sure facilitate the distribution. And there is also no doubt that any free and open source software licensing model puts certain constraints on the business model. The latter model is nothing else but a way to maintain a recurring revenue stream. So I can only assume that the 451 Group had in mind to question non-viable business models that are used to monetize free and open source software. But they somewhat mixed the concepts, got lost, and published a mess.
Phillip Rhodes writes: ""Open Source" is not a business model. Never was, never will be. "Open Source" is a set of criteria that can be applied to how software is developed and distributed... If these people don't understand that distinction, I'd question the value of anything in their report."
Adam Sliwinski writes: "Free and open source software is a licensing model not a business model... The latter model is nothing else but a way to maintain a recurring revenue stream. So I can only assume that the 451 Group had in mind to question non-viable business models that are used to monetize free and open source software. But they somewhat mixed the concepts, got lost, and published a mess."
I'm not sure I understand the criticism. Our report actually supports and demonstrates the points you are making (hence the title).
"The resulting 71 page report is being sold for $3750"
Hahaha, it is pretty obvious that it is not any open source-proponents behind this report.
By the way, the GPL-license has been around since 1989 and there it has never been about to give anything away for free. It is free as in free speech not as in free beer ;) In other words, you would never be able to get payed for a silly report, cause the information shall be open and free, but there is nothing that hinder you to earn money for you software even if the source is open and free. ;)
Not a viable business model - except for the users, and the people they need to support the software, and the ones they need to customize it, and the ones they need to teach the users, and... Ooops - is there a business model there after all ?
Additionally I would also like to point out that nowhere in our report does it state that pure open source is not a viable business model. What we have observed, however, is that most of the vendors building business around open source code are using some form of commercial licensing to distribute, or generate revenue from, open source software.
I wouldn't trust a "report" for which I had to pay that much money, to say anything sensible about a system that does not *require* parting with lots of money, anyway! Let those of exclusivist mentality look after themselves...
There is no debate about "the definition of open-source"; you can look it up at opensource.org for yourself. Saying otherwise is just muddying the waters.
It's best I don't get started on the term "enterprise". Bah.
@Aldo,
Thank you for your addition. Certainly I know that this idea must not be a novel one since people have worked on the issue of Open Source for long time. Here is, however, the broker role that is actually the really interesting one.
Don't take me wrong. I fully understand your viewpoint that the addition of brokers may cause less efficient. However, there is another thought you might have overlooked as well. That is, how about the middle man is a community organizer rather than a broker. This is the Web-2.0 point of view versus the Web-1.0 point of view.
Therefore, the picture is not that developers seeking customers or customers looking for developers. It will be that both developers and customers joining an Open Source community simultaneously, and let the community be the judge that guides the growth of the Open Source platform.
In analogy, your described picture is a pure free market without government; and my described picture is a government-guided free market. Which one would be better? Wel
Open source is indeed not a business model - but supporting and customising open source applications can be.
In the current climate of tightening the belt, I suspect opportunities for corporate open source will get a boost - if the players figure out an offering that is compelling enough. This is something they certainly could not foresee when writing that report.
@Matthew Aslett:
Well, I haven't read your report (and I'm really not going to pay $3,000+ to read it), so I was only going on this RWW article. And I think it was the title that got me, where it reads "is no longer a viable business model." That implies that it once *was* considered a "viable business model," so I assumed that implication came from your report.
After reading the article a second time, and your blog post, I think that we probably don't disagree much after all.
I agree that open-source is not a business model any more than outsourcing is a business model. The reasons companies use open-source software are very similar to the reasons companies outsource a capability: to reduce the cost of developing or managing activities which are not part of their core competence. A business model is about the economics of the business but it is also about deciding what the company will do and what it won't do. Every company makes these decions. We will design our own chips but we will buy the development software. We will use SAP for entriprize ERP rather than develop an in-house solution. In each case, every competitor can also use the same software or outsourced service - outsourcing levels the playing field. The strategic focus then, the strength in the business model, is not in the use of open-source but in the differentiation in other areas. What is the company doing to stand out from the crowd?
I believe the first comment by Mr. Rhodes is very insightful, Open Source is clearly not a business model and was never intended to be. "pure" open source is a community of hackers working to improve software that they use on a regular basis to solve problems (or annoyances) that they encounter in their daily pursuits. The motivation of these communities is rarely commercial. Like my mate said the other day "It's not about the money, as long as i can eat and work on interesting problems."
Where the issue gets muddled is that open source software, while not a business model, directly affects the environment in which many software development business models operate.
I don't think anyone would dispute that the development of "artificial" software development communities by larger for-profit organizations is a business strategy. For the rest when you talk about software "vendors" what you're often talking about is a few developers in their collective basements, solving a problem and releasing this solution free of charge (and responsibility) to the world. Most of the religious among us would call that (and only that) "pure" open source software development. If that can be done at the behest of some corporate entity and a few developers can get paid for it because the enterprise doesn't have people in house to do it all the better for them and the community. But that's not a business model, that's just a couple of blokes getting paid.
I think 451 group is totally jobless. Who said opensource is a business model. It is a philosophical platform guiding software development. Various business models try their luck on this platform. Some fail and some win. There ends any relation to business models. I haven't read this report but I can say with confidence that it should be a piece of crap.
Here is my take on this kinda nonsense from couple of years back
http://www.krishworld.com/blog/open-source/true-nature-of-open-source-debate-open-source-is-not-a-business-model-it-is-a-platform/
I agree that open source isn't a business model. I also question whether it ever really was.
You don't hear anyone saying that their new company is an "Internet company" anymore because every company is an Internet company. The ones that didn't have realistic accompanying business models failed eight years ago, and the "open source companies" that still don't will meet the same fate.
For the millions of developers in the open source community, open source is a better way to build software. For platform providers, an open source strategy is a way to entice developers to write stuff for your platform. For system integrators and hardware manufacturers, it's another tool in the box that they have to maintain. For some companies, it's a lead-generation engine or a slightly less gimmicky version of a Bono look-alike. Companies have applied the principles behind open source and free software in a wide variety of ways (and not all of them require the sale of ones and zeros.)
Perhaps this report is indicative of the beginning of the end for the open source business movement. Maybe someday soon just being open source won't get you VC anymore, and it won't excuse you from running a business that works. Soon, there will be no more open source companies because every company will be an open source company.
After all, a movement is successful when it becomes the status quo.
Ross
SourceForge
This is a little like saying "It's not longer viable for governments to build roads (substitute infrastructure of your choice here provided by government of your choice)".
Roads are "free" to use - except that they aren't really. It's paid for by tax.
I suppose the distinction - and the understanding of how Free/Open Source Software is a viable business model as well as a platform - will come if the author (and the authors of the 451 report) begins to separate infrastructure from specific requirements. Infrastructure is something that benefits everyone - when applied to software, you will suddenly realise that this means Operating Systems, Databases, File-systems and a lot of other categories of software fall under "infrastructure". Therefore people (individuals and organisations) can come together to build such infrastructure software. This is demonstrated very well by Free/Open Source Software. The "tax" paid here is the individuals time or the organisations sponsorship of the project by way of either individuals employed or by cash/kind donations.
On the other hand, open and free (as in freedom) infrastructure software open a whole new world of opportunities for building systems specific to one's requirements based on common infrastructure. The specific components may be proprietary, but a whole industry is spawned on supporting the infrastructure and building/integrating on top of/into the infrastructure software.
Imagine how many reports would've been sold if the title had been: "Pure Open Source a Viable Business Model - Confirmed"
Instead, we have the latest example of the report selling business model, "1. Recycle SCO/early SUN dogma 2. Create controversial headline 3. get /.'ed 4. Profit.
While the only hair brains that will buy this report are the VPs and middle managers at SCO/closed source companies who need validation for their own internal reports in these job-risky times, and who are spending shareholder monies, that's about as far as the report itself will get. In the meantime the controversial title and the preconceived direction of the report, along with the free summary will be used to validate long held beliefs by the closed source believers who will once again be able to give each other a slap on the back and email each other I told you sos. And at the same time, the author/publisher accomplishes another goal. 1. get linked 2. publish other crap believed by the public corporations' middle managers and VPs, 3. have better positioning and page rank thanks to previous controversial titles and reports, 4. Profit.
In the meantime, I'll go back to creating and hosting web sites using drupal, on hand-assembled and white-box systems running Debian, without a single closed source application other than some drivers that will one day be resolved in favor of FOSS, and continue to make my living of web site creation, hosting, and adding/adjusting content to several web sites that make money for me today and may one day be the next Craigslist, Citidex, or other leader in their respective categories. Their growth rates certainly suggest the possibilities. And all on FOSS.
Or ask the consultants who earned their fees for installing and supporting other members of my family who are using FOSS for their desktops, servers, VOIP, websites, productivity and groupware in their small businesses to lower their costs and compete more effectively with their competition.
Yeah. That's a report worth it's weight in ink.
I'm not a big fan of open source but i believe software should be free when it is possible.
In my opinion, the best approach can be giving away a free copy with branding,advertisements,etc on it and asking a small fee for those who want to remove them.
I think 451 is correct. Just as the first comment by Phillip states, it was never intended to be a business model. Open Source is a unique "social model" made possible because of the internet. A business model presumes there is a "business" an entity with an identity that produces a product. That is simply "one" approach to coordinating groups of people to produce a product. It's long been the dominant approach for two primary reasons: time and space. To coordinate people across time and space costs money, and lots of it. The internet finally allows us to consider an alternative to the "business model" which is the "social model" for production. You can coordinate large groups of people, who don't have to adopt a particular business identity, around creating a common goal (the product).
The 451 folks are missing the boat. What do I mean by that? They are selling their article for $3750! Now that’s a business model. One of the inherent challenges to the Business Model paradigm is that it treats knowledge like property. The internet is making knowledge ubiquitous. Does this mean everything is free and our market system collapses? Not in the least, but it does mean we will make a transition from a paradigm in which having a “Business Model” is the only approach to coordination to one in which a “Social Model” is a viable alternative paradigm to production. It’s not a matter of better or worse within one paradigm, it truly is a different paradigm and we have a long way to go before we see what new and exciting markets will emerge.
I support Open Source 100% but I feel that people should decide for themselves after reading the free copy of the report at promotinglinux.com.
I fell for the linkbait. I love the title sizzle but honestly...
s/No Longer/Never Was/g
Conflation is such a easy trap to fall into and even harder to get people to agree upon when it transpires.
I have had similar conversations with CFO's and we've all collectively agreed that the IP/IC generated by a business is when there is a defensible and unique product and/or service is rendered -- and a business model would be nice to have too.
;-)
Seriously. FOSS isn't a business [insert term].
FOSS isn't a salvation for bloated and busted non-FOSS.
FOSS is FOSS.
"His is a small design-centered shop, though, and enterprise scale vendors may be a different animal and a different conversation."
Open source allows for fair competition. If they cannot compete with individuals and small shops, then why need them? Or is it considered good to take easy money while screwing customers? I'd guess so...
Firefox > IE
Not the first or last time open source has/will win.
Open Source is definitely a viable business model.
My name is Philip Copeman, I am the project leader of The TurboCASH Accounting Project.
http://www.turbocash.net
We are the world's leading Open Source Accounting package for Small business. We have over 70 000 users in over 50 countries and in more than 20 languages. Today over 500 people are going to download TurboCASH. At least 50 of these users are actually going to implement the software in their businesses. Tomorrow we will be open again for business.
Open Source is very much a viable business model. Krish on Krishworld explains better than I, why the Open Source process creates better software.
http://www.krishworld.com/blog/open-source/true-nature-of-open-source-debate-open-source-is-not-a-business-model-it-is-a-platform/
I don't expect you to take my word that TurboCASH is a better product than the commercial ones that cost $500 Plus. I simply don't have the marketing budget to do this. To see this, simply try it yourself.
You don't have to look far to see that this Open Source technical advantage applies across many software categories . A short while ago you might have though twice about installing a non Linux web server, now you wont even have the choice, it will all sit behind a web service, which you will just take for a click. Similarly a CMS system that used to cost thousands of dollars form the world's leading proprietary companies simply does not cut it next to an OS offering like Joomla. In the face of all this, you don't hear about Open Source Projects going bust and leaving a trail of Millions in debt. So how is this software succeeding and improving if there is no viable business model beneath it?
To understand this you have let go of the twentieth century concept of the Cathedral business. The one where I have built a centralized control tower with an army of employees, who trundle into work every day and watch anxiously for their pay packets to arrive. This is your classic business model that collects the sales revenue and accountants dispense it to the cost centers and keep the balance for the shareholders.
In an Open Source project, our customers and our employees blur. Today 50 people will install TurboCASH. There are very few alternatives and they will cost between $ 500 to $ 1000. So a TurboCASH installed saves the user up to $ 1000. The user effectively makes this money – today. Today 50 users will collectively be $ 50 000 better off, by the end of the month 1000 will have made $ 1 Million. If the user pays a consultant to help him intall the software, the consultant earns a share of that money. The fact that I do not or Intuit or Microsoft do not, does not mean that it is not a business. The irony is that the users get a package better than money can buy, one that installs often at zero cost and does not enslave him to a life of licences and support fees. There is definite financial business benefit created. Best off all the users doesn't even have to come to any meetings or wait until the end of the month, he gets the benefit – now.
I think the report misses the point (quite apart from the obvious 'who the hell are the 451 group and who is funding them' question)
Open Source makes the vendors less money than Microsoft makes per product. This is because it is a competitive market and its good news for customers. As a customer do you want to know that your vendor is making enormous profits (at your expense) or that there is a tight market with smaller margins and competition.
I can pay megabucks for Oracle or a lot less for Mysql support. Guess which of the two gets the vendor less revenue, but more importantly guess which of the two is good customer news...
Title should be: "The 451 Group Rediscovers the Obvious but Still Doesn't Get Open Source"
Open Source softwares are not usually under monopoly of a certain organization. Everyone can have their own contribution into that and they do. So how someone can charge for them ?
Moreover opensource softwares are very necessary for the survival of the fittest.