Open Source Software Business Models
Open Source has been gaining ground for quite some time. Some would say, using the example of Linux, that Open Source has Microsoft and the rest of the traditional software giants on the run. No doubt that open source software has had a major impact on the economics of the software business, across many different market segments.
But is it a good model to use in your software business--if you are actually interested in making money?
Not Generally My Cup of Tea--But Let's Take Another Look
I will admit that my feelings toward open source business models have always been lukewarm, at best. Maybe there's a bit of dinosaur in me. But the idea of putting into the public domain the code that you've sweated to produce, at great emotional and financial expense rubs me the wrong way. It trikes me as fundamentally opposed to the basic nature of capitalism and the entrepreneur.
Like just about everything else in business, however--the devil's in the details. Using Open Source methods has been shown a number of times that it can be a competitive weapon in the software business--when used thoughtfully and strategically.
Poor Use of Open Source
Let's first examine a typical example of what I consider a misuse of the Open Source model. It often goes like this: Technical founder with a crack programming team, and little marketing money or expertise, decides that they are going to use Open Source to inexpensively roll out their new product in the market. Being programmers, they love the idea of Open Source from a user perspective, and so have a strong belief that the market they are aiming at will love it as well. Unfortunately, they aren't trained as marketers, and don't think the situation completely through.
Here are some of the negative things that can happen:
1) Since the company is releasing the initial product as Open Source, they are not quite as diligent as possible with QA of the code, as well as other "commercial product" polishing activities. Basically the product is rushed to market. The product isn't well-received, costing them the one opportunity that you have, to make a good first impression
2) Open Source tactics are used prior to developing a proven business model: "We'll release a free, Open Source product, and have so many users, we can figure out how to make money later". This is reminiscent of the old "eyeballs" business plans prevalent just before the Internet bubble burst in 2001. It's very important to have a solid idea of what the Open Source release is going to gain you, and what the steps are that will to allow you to capitalize on the wide attention. Ultimately, you need to monetize SOMETHING. There are ways to make money with an Open Source model: customization, training, training, premium versions--but in many instances, these won't really support a serious, mainstream core software development effort--if you are also interested in profits.
3) The company has done some thinking about the business model issue, and has decided that there will be a free, Open Source version released initially to seed the market. The follow on product will be commercial/paid with added features, with the hope that the large user base from the free version will upgrade to the more attractive premium version. But without expert marketing analysis, balancing how much to "give away" in the free version, and how much to "hold back" for the premium version, can be quite tricky. If you don't get the balance right, the potential revenue stream can be greatly reduced.
4) The company is in a market segment that highly values order and traditional business practices--in this circumstance, using an Open Source model could seriously devalue your product, in the eyes of your target prospects.
Good Use of Open Source
The other side of this story is that when implemented thoughtfully, Open Source can be a major strategic weapon in certain markets. Let's look at some scenarios of how an Open Source strategy might be implemented more shrewdly:
A) When entering a new market against a huge, strongly entrenched (but slow and stodgy) competitor, where it will be difficult to get traction with traditional marketing methods. This is Open Source used as a Guerilla tactic.
B) In markets where the availability of Source Code REALLY IS IMPORTANT. This may be for reasons of integration, or for reasons of business continuity (for example, a bank application) where they would require source escrow anyway.
C) Having a free Open Source version for one type of small volume customer (internal developments), but to redistribute the code for commercial purposes, there is a royalty/fee. This is using the Open Source model only partially. MySQL has used this model very successfully for quite a while.
D) Formulating a well thought out, hybrid business model ahead of time. For example, a free Open Source version is made available to seed the market. Backed by extensive research and marketing planning, a paid premium version is made available, with just the right features at just the right price, creating huge upgrade numbers with minimal marketing expense.
E) An Open Source product is created for a particular market segment, with data backed by research that this segment will require and pay for substantial levels of integration, customization and/or support.
Summary
That's my view of the good and bad in Open Source as part of a commercial business model. Used well, it can be a major weapon--when the situation calls for it. But if used blindly by companies just following a trend toward the newest thing--it can be the "Business Model of No Return".
Drop me a note or post a comment with what you think.
Phil Morettini
PJM Consulting
http://www.pjmconsult.com/
info@pjmconsult.com
But is it a good model to use in your software business--if you are actually interested in making money?
Not Generally My Cup of Tea--But Let's Take Another Look
I will admit that my feelings toward open source business models have always been lukewarm, at best. Maybe there's a bit of dinosaur in me. But the idea of putting into the public domain the code that you've sweated to produce, at great emotional and financial expense rubs me the wrong way. It trikes me as fundamentally opposed to the basic nature of capitalism and the entrepreneur.
Like just about everything else in business, however--the devil's in the details. Using Open Source methods has been shown a number of times that it can be a competitive weapon in the software business--when used thoughtfully and strategically.
Poor Use of Open Source
Let's first examine a typical example of what I consider a misuse of the Open Source model. It often goes like this: Technical founder with a crack programming team, and little marketing money or expertise, decides that they are going to use Open Source to inexpensively roll out their new product in the market. Being programmers, they love the idea of Open Source from a user perspective, and so have a strong belief that the market they are aiming at will love it as well. Unfortunately, they aren't trained as marketers, and don't think the situation completely through.
Here are some of the negative things that can happen:
1) Since the company is releasing the initial product as Open Source, they are not quite as diligent as possible with QA of the code, as well as other "commercial product" polishing activities. Basically the product is rushed to market. The product isn't well-received, costing them the one opportunity that you have, to make a good first impression
2) Open Source tactics are used prior to developing a proven business model: "We'll release a free, Open Source product, and have so many users, we can figure out how to make money later". This is reminiscent of the old "eyeballs" business plans prevalent just before the Internet bubble burst in 2001. It's very important to have a solid idea of what the Open Source release is going to gain you, and what the steps are that will to allow you to capitalize on the wide attention. Ultimately, you need to monetize SOMETHING. There are ways to make money with an Open Source model: customization, training, training, premium versions--but in many instances, these won't really support a serious, mainstream core software development effort--if you are also interested in profits.
3) The company has done some thinking about the business model issue, and has decided that there will be a free, Open Source version released initially to seed the market. The follow on product will be commercial/paid with added features, with the hope that the large user base from the free version will upgrade to the more attractive premium version. But without expert marketing analysis, balancing how much to "give away" in the free version, and how much to "hold back" for the premium version, can be quite tricky. If you don't get the balance right, the potential revenue stream can be greatly reduced.
4) The company is in a market segment that highly values order and traditional business practices--in this circumstance, using an Open Source model could seriously devalue your product, in the eyes of your target prospects.
Good Use of Open Source
The other side of this story is that when implemented thoughtfully, Open Source can be a major strategic weapon in certain markets. Let's look at some scenarios of how an Open Source strategy might be implemented more shrewdly:
A) When entering a new market against a huge, strongly entrenched (but slow and stodgy) competitor, where it will be difficult to get traction with traditional marketing methods. This is Open Source used as a Guerilla tactic.
B) In markets where the availability of Source Code REALLY IS IMPORTANT. This may be for reasons of integration, or for reasons of business continuity (for example, a bank application) where they would require source escrow anyway.
C) Having a free Open Source version for one type of small volume customer (internal developments), but to redistribute the code for commercial purposes, there is a royalty/fee. This is using the Open Source model only partially. MySQL has used this model very successfully for quite a while.
D) Formulating a well thought out, hybrid business model ahead of time. For example, a free Open Source version is made available to seed the market. Backed by extensive research and marketing planning, a paid premium version is made available, with just the right features at just the right price, creating huge upgrade numbers with minimal marketing expense.
E) An Open Source product is created for a particular market segment, with data backed by research that this segment will require and pay for substantial levels of integration, customization and/or support.
Summary
That's my view of the good and bad in Open Source as part of a commercial business model. Used well, it can be a major weapon--when the situation calls for it. But if used blindly by companies just following a trend toward the newest thing--it can be the "Business Model of No Return".
Drop me a note or post a comment with what you think.
Phil Morettini
PJM Consulting
http://www.pjmconsult.com/
info@pjmconsult.com
Labels: business model, consultant, open source, Phil Morettini, PJM Consulting, programming, software
posted by Phil Morettini at 4:50 PM
3 Comments:
Interesting.
It strikes me that a basic open source, or free, version could also be used as a competitive weapon to lock customers in to your version quickly before competitors have time to react. Once you have succeeded in getting the market share, you can then develop your commercial base.
Or is that too 1990's? :-)
Colm, I think that's true. The big problem with this approach lies in the downstream monetization of the commercial version--it's harder to get the balance right between the two than people often realize.
I agree with your comment Phil that open source is hard to monetize. I think it relates to the category of software you're building. For instance, OSS that serves enterprises can often very lucratively be accompanied by "service and support," maintenance or product customization packages. SugarCRM comes to mind.
OSS that is aimed at developers can indeed offer more pro-caliber features, much like in the proprietary world.
OSS targeting consumers - such as The GIMP (graphic editing software analogous to Photoshop) - can be supplemented with training.
It's an interesting world. The bottom line is flexibility and thinking out of the box when it comes to revenues. Build a great product (or project) and often the revenue model will be suggested by your fans.
Small digression: One of the things that totally impressed me about OSS when I was working at Linspire (the old "Lindows") was the sheer speed that software COULD be developed if desired. We built a credible iTunes alternative (for Linux) in less than 3 months using the building blocks commonly available in the OSS community. It rocked - no pun intended. And, to get back on topic, the business model was (a) to drive adoption of our non-free Linux OS, (b) drive sales of a $49.95 annual subscription service that kept the OS up-to-date, and (c) to tap into music sales from a sister company site. Creative, eh?
Thanks for the good post.
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