The Single-Vendor Commercial Open Source Business Model

Dirk Riehle
SAP Research, SAP Labs LLC

Updated 2010-11-09: Renamed “com­mer­cial open source” to “single-vendor (com­mer­cial) open source” to be clear about the dif­fer­ence to dis­trib­u­tor mod­els.

ABSTRACT

Single-vendor com­mer­cial open source soft­ware projects are open source soft­ware projects that are owned by a sin­gle firm that derives a direct and sig­nif­i­cant rev­enue stream from the soft­ware. Single-vendor com­mer­cial open source at first glance rep­re­sents an eco­nomic para­dox: How can a firm earn money if it is mak­ing its pro­duct avail­able for free as open source? This paper presents the core prop­er­ties of single-vendor open source busi­ness mod­els and dis­cusses how they work. Using a single-vendor open source approach, firms can get to mar­ket faster with a supe­rior pro­duct at lower cost than pos­si­ble for tra­di­tional com­peti­tors. The paper shows how these ben­e­fits accrue from an engaged and self-supporting user com­mu­nity. Lack­ing any prior com­pre­hen­sive ref­er­ence, this paper is based on an analy­sis of pub­lic state­ments by prac­ti­tion­ers of single-vendor open source. It forges the var­i­ous anec­dotes into a coher­ent descrip­tion of rev­enue gen­er­a­tion strate­gies and rel­e­vant busi­ness func­tions.

Keywords

Open source, open source soft­ware, com­mer­cial open source, com­mu­nity open source, com­mer­cial open source busi­ness model, dual-licensing strat­egy, open core busi­ness model, busi­ness model, go-to-market strat­egy, open source sales, open source mar­ket­ing, open source pro­duct man­age­ment, open source licens­ing, soft­ware engi­neer­ing, col­lab­o­ra­tive devel­op­ment.

TABLE OF CONTENTS

1. Intro­duc­tion
2. Prior and Related Work
3. Com­mer­cial vs Com­mu­nity Open Source
4. The Single-Vendor Com­mer­cial Open Source Busi­ness Model
5. Con­clu­sion

1. INTRODUCTION

Open source soft­ware is soft­ware that is avail­able in source code form, can be mod­i­fied by users, and can be redis­trib­uted even in mod­i­fied form with­out pay­ing the orig­i­nal own­ers.

Open source is chang­ing how soft­ware is built and how money is made. In 2006, open source soft­ware had a mar­ket share of 0.7% of the total pack­aged soft­ware mar­ket in terms of rev­enue [31] [21]. The pre­dic­tion for 2008 was a mar­ket share of 1.1%. This data is under­es­ti­mat­ing the usage of open source soft­ware as it accounts only for paid-for open source soft­ware. Accord­ing to a 2008 IDC report, less than 1% of all instal­la­tions had third-party atten­dant ser­vices [20], demon­strat­ing that open source is being used sig­nif­i­cantly more widely than it is being paid for.

The total amount of work invested into open source soft­ware projects is grow­ing at an expo­nen­tial rate and can be expected to con­tinue grow­ing at this rate for a while before slow­ing down [12]. In gen­eral, the size of indi­vid­ual open source projects tends to grow at a lin­ear or qua­dratic pace [23] [19]. The dri­ver behind the over­all expo­nen­tial growth of open source is the expo­nen­tial growth in the num­ber of viable projects. Viable open source soft­ware is now avail­able for any domain includ­ing busi­ness soft­ware, not just infra­struc­ture soft­ware.

In many ways, the eco­nomic suc­cess of open source appears to be a para­dox. How can com­pa­nies make money of soft­ware they are mak­ing avail­able for free? There are many answers to this ques­tion, as dis­cussed in the next sec­tion. This paper focuses on one par­tic­u­lar cat­e­gory of firms, called single-vendor com­mer­cial open source firms [29] [9]. Single-vendor com­mer­cial open source firms are firms that are the sole owner of a pro­duct they gen­er­ate rev­enue from. Exam­ples are MySQL, Sug­ar­CRM, Jasper­soft, and Alfresco. Accord­ing to a recent Gart­ner report, by 2012 more than 50% of all rev­enue gen­er­ated from open source soft­ware projects will come from projects under a sin­gle vendor’s patron­age, that is, from single-vendor open source [18].

The ben­e­fits of single-vendor com­mer­cial open source stem from the cre­ation of an active and engaged user com­mu­nity around the pro­duct while at the same time pre­vent­ing the emer­gence of com­peti­tors from that com­mu­nity. In a nut­shell, this com­mu­nity helps the com­pany get to mar­ket faster, cre­ate a supe­rior pro­duct, and sell more eas­ily, all at a lower cost than pos­si­ble for tra­di­tional com­peti­tors. In exchange, the com­pany offers a pro­fes­sion­ally devel­oped pro­duct of com­pelling value to the com­mu­nity that this com­mu­nity is free to use under an open source license.

The con­tri­bu­tion of this paper is to com­pre­hen­sively present the core prop­er­ties of the busi­ness mod­els under­ly­ing single-vendor com­mer­cial open source com­pa­nies. Prior work typ­i­cally addressed open source in gen­eral with­out spe­cial con­sid­er­a­tion for single-vendor open source. This paper reviews every rel­e­vant busi­ness func­tion and how it works in a single-vendor com­mer­cial open source busi­ness model. Method­olog­i­cally, the paper is based on the recep­tion of inter­views and pre­sen­ta­tions by prac­ti­tion­ers of single-vendor open source as well as the author’s review of the behav­ior of open source firms in the mar­ket­place.

(Feel free to skip the related work sec­tion and go straight to the com­mer­cial open source busi­ness model descrip­tion.)

2. PRIOR AND RELATED WORK

Like the author of this paper, Capra and Wasser­man make a fun­da­men­tal dis­tinc­tion between com­mer­cial and com­mu­nity open source [9]. Com­mu­nity open source is open source soft­ware that is owned by a com­mu­nity or a legal entity rep­re­sent­ing the com­mu­nity. The com­mu­nity mem­bers typ­i­cally don’t derive direct rev­enues from the soft­ware but sub­si­dize it from ancil­lary prod­ucts and ser­vices. Single-vendor com­mer­cial open source, in con­trast, is open source soft­ware that is owned by a sin­gle legal entity with the pur­pose of deriv­ing rev­enues from the soft­ware. The next sec­tion dis­cusses this dis­tinc­tion in more detail.

Var­i­ous authors have pro­vided sum­maries of how com­pa­nies gen­er­ate rev­enue from open source soft­ware. Wat­son et al. dis­tin­guish five mod­els of soft­ware pro­duc­tion and dis­tri­b­u­tion [38]. Three of these they call open source busi­ness mod­els. The “cor­po­rate dis­tri­b­u­tion” model encom­passes the providers of soft­ware dis­tri­b­u­tions, for exam­ple, Red Hat or Spike­Source. “Spon­sored open source” is open source that does not gen­er­ate rev­enue for the con­tribut­ing com­pa­nies, for exam­ple, Apache Soft­ware Foun­da­tion or Eclipse Foun­da­tion projects. Finally, “second-generation open source” is open source where sup­port­ing com­pa­nies gen­er­ate rev­enue from com­ple­men­tary ser­vices. This last cat­e­gory puts all rev­enue gen­er­at­ing strate­gies into one bas­ket with­out draw­ing dis­tinc­tions between such dif­fer­ent mod­els as con­sult­ing and imple­men­ta­tion ser­vices, e.g. JBoss, or license sales, e.g. MySQL.

Brian Fitzger­ald intro­duces what he calls “OSS 2.0” [15]. He argues that prior to OSS 2.0 there were only two rev­enue mod­els: “Value-added service-enabling,” which cre­ated rev­enue from ser­vices around suc­cess­ful open source projects, and “loss-leader market-creating,” which cre­ated rev­enue by upgrad­ing users of a free open source project to a com­mer­cial more feature-rich ver­sion of the same soft­ware. OSS 2.0 now pro­vides a more dif­fer­en­ti­ated approach to the loss-leader strat­egy and adds two new strate­gies, “lever­ag­ing com­mu­nity soft­ware devel­op­ment” and “lever­ag­ing the open source brand.”

Many more clas­si­fi­ca­tions of open source busi­ness mod­els have been made. For exam­ple, the Euro­pean Union’s FLOSS­met­rics project ana­lyzed 120 firms which derive their main rev­enue stream from open source, and clus­tered these firms into six main cat­e­gories [17] [11].

Open source has been dis­cussed from an eco­nomic per­spec­tive before, for exam­ple, by Perens [28], Val­i­maki [34], and oth­ers [13]. How­ever, there is quite a gap between a gen­eral dis­cus­sion of the eco­nomic prop­er­ties of open source soft­ware and the specifics of com­mer­cial open source.

Per­haps the clear­est account of com­mer­cial open source has been pro­vided by Michael Olson in his dis­cus­sion of the “dual-licensing strat­egy” of com­mer­cial open source firms [27]. Olson focusses on intel­lec­tual prop­erty own­er­ship and the busi­ness strate­gies result­ing from such own­er­ship, most notably the right to provide the pro­duct under both a (free) open source license and a (paid-for) com­mer­cial license.

With the excep­tion of Olson’s work, none of the prior works focus on single-vendor com­mer­cial open source, and Olson mostly addresses its intel­lec­tual prop­erty aspects. In con­trast, this paper com­pre­hen­sively dis­cusses the key prop­er­ties of single-vendor com­mer­cial open source firms across all busi­ness func­tions.

3. COMMERCIAL VS. COMMUNITY OPEN SOURCE

Open source projects can be cat­e­go­rized into either com­mer­cial or com­mu­nity open source projects [29] [9]. Com­mu­nity open source projects rep­re­sent by far the major­ity of projects. These two types of projects are dis­tin­guished by their dif­fer­ent con­trol and own­er­ship struc­tures.

  • Com­mu­nity open source is open source that is con­trolled by a com­mu­nity of stake­hold­ers;
  • Single-vendor com­mer­cial open source is con­trolled by exactly one stake­holder with the pur­pose of com­mer­cially exploit­ing it.

3.1 Community Open Source

Exam­ples of com­mu­nity open source projects with a diverse set of stake­hold­ers are the Linux oper­at­ing sys­tem, the Apache web server, and the Post­greSQL data­base. The source code of these projects is avail­able under one and only one license, and any­one can enter the mar­ket and gen­er­ate rev­enue from the project with­out being dis­ad­van­taged.

The con­trib­u­tors to com­mu­nity open source projects used to be the group of vol­un­teer soft­ware pro­gram­mers who devel­oped the open source project. In this case, con­trol is deter­mined by own­er­ship of copy­right to the code in the project and related intel­lec­tual prop­erty as well as social struc­tures such as hav­ing the com­mit (write) rights to the code repos­i­tory.

Today, the vol­un­teer com­mu­ni­ties of eco­nom­i­cally rel­e­vant projects are increas­ingly being rep­re­sented or replaced by non-profit foun­da­tions such as the Apache Soft­ware Foun­da­tion or the Eclipse Foun­da­tion [25]. Legally, many of the foun­da­tions have become the sole owner of the project; how­ever, since the foun­da­tions are being con­trolled by their mem­bers, they still rep­re­sent a com­mu­nity of stake­hold­ers that run the foun­da­tions’ projects.

As the pre­vi­ous sec­tion showed, there are many ways of gen­er­at­ing rev­enue from open source soft­ware, includ­ing com­mu­nity open source. The three dom­i­nant ones are

  • con­sult­ing and sup­port ser­vices around the soft­ware,
  • deriv­a­tive prod­ucts built on the com­mu­nity project, and 
  • increased rev­enue in ancil­lary lay­ers of the soft­ware stack.

More details are described in a related paper [29].

3.2 Single-vendor Commercial Open Source

Single-vendor com­mer­cial open source firms build their busi­ness around an open source soft­ware project that they fully con­trol, typ­i­cally by hav­ing devel­oped the soft­ware and never hav­ing shared con­trol with third par­ties. This is done by own­ing the full copy­right to the code and related intel­lec­tual prop­erty such as patents and trade­marks.

Accord­ing to Olson, the main­te­nance of full con­trol over the project is cru­cial to the func­tion­ing of single-vendor com­mer­cial open source [27]. One con­se­quence is that single-vendor com­mer­cial open source firms do not accept out­side con­tri­bu­tions to the code base. Or, if they accept them, they require a trans­fer of copy­right from the cre­ator to the firm to not dilute the firm’s rights to the project. Augustin, how­ever, argues that full own­er­ship trans­fer is not needed and that receiv­ing reli­cens­ing rights is suf­fi­cient [6].

Single-vendor open source firms dif­fer from tra­di­tional soft­ware ven­dors by not only pro­vid­ing the pro­duct for free as an eas­ily instal­lable binary but also by pro­vid­ing it in source code form. By pro­vid­ing the source code under an open source license, such firms qual­ify as open source firms. How­ever, because these firms own the copy­right to the pro­duct, they are not con­strained to only one license but rather they can reli­cense the soft­ware to cus­tomers as they see fit.

Typ­i­cally, the free open source form is pro­vided under a rec­i­p­ro­cal license like the GPL to drive adop­tion but stall pos­si­ble com­peti­tors. Paid-for ver­sions of the soft­ware are then pro­vided under a com­mer­cial license like tra­di­tional soft­ware ven­dors do. This is also known as the dual-license strat­egy of com­mer­cial open source [24] [27].

4. THE SINGLE-VENDOR COMMERCIAL OPEN SOURCE BUSINESS MODEL

In this paper, the term busi­ness model is defined as the com­bi­na­tion of rev­enue gen­er­a­tion strate­gies and sup­port­ing busi­ness prac­tices and func­tions. This def­i­n­i­tion is a sim­pli­fi­ca­tion over recent work defin­ing elec­tronic busi­ness mod­els, for exam­ple, Tim­mers or Clarke [33] [10]. The focus on tra­di­tional busi­ness func­tions, how­ever, lets this paper stay close to the struc­ture and behav­ior of real firms and leaves the cre­ation of a more gen­eral abstrac­tion to future work.

Prac­tices and func­tions include sales and mar­ket­ing processes, soft­ware pro­duc­tion processes, and cus­tomer sup­port processes. Thus, this paper first dis­cusses what cus­tomers pay for and then how it is being pro­duced and sold. It is under­stood that there is not just one but many com­mer­cial open source busi­ness mod­els. Hence, this sec­tion focusses on those key prop­er­ties that are shared across all or most com­mer­cial open source firms.

4.1 Revenue Sources

Gen­er­ally speak­ing, the prod­ucts and ser­vices that cus­tomers pay for are not new. Bear­den iden­ti­fied sev­eral cat­e­gories of prod­ucts and ser­vices that cus­tomers pay for [7]. Para­phrased by the author of this paper these are the four cat­e­gories:

  • Core pro­duct. Some cus­tomers pay for the soft­ware, sim­ply because they can­not accept the open source license. Mostly, this is for legal rea­sons. For exam­ple, com­pa­nies may pay for a com­mer­cial license to receive cer­ti­fi­ca­tion or indem­ni­fi­ca­tion or to embed the soft­ware into their prod­ucts with­out hav­ing their own code touch open source code.
  • Whole pro­duct. Com­mer­cial users pay for the util­ity derived from using the soft­ware. Increas­ingly, the free open source pro­duct does not provide the full util­ity, only a more com­pre­hen­sive non-free com­mer­cial ver­sion does, as sum­ma­rized by Asay [2]. To meet all require­ments, com­mer­cial users have to upgrade from the free to the non-free ver­sion.
  • Oper­a­tional com­fort. Cus­tomers also want to ensure that the soft­ware reli­ably ful­fills its duty. Thus, they may be buy­ing hot-line and tech­ni­cal sup­port, sub­scrip­tion ser­vices to bug fixes, or real-time sys­tems mon­i­tor­ing. There are many such non-functional require­ments that com­pa­nies may want to buy, many of which are speci­fic to the soft­ware at hand.
  • Con­sult­ing ser­vices. Finally, cus­tomers may want to pay for train­ing, doc­u­men­ta­tion, and imple­men­ta­tion ser­vices.

Dif­fer­ent names have been given to dif­fer­ent aspects of single-vendor com­mer­cial open source. The term “dual-license strat­egy” refers to sell­ing a com­mer­cial license to the project sep­a­rate from the open source license [27]. The term “freemium model,” a word play on “free” and “pre­mium,” refers to with­hold­ing fea­tures from a free ver­sion and mak­ing them avail­able only in a com­mer­cial ver­sion [14]. Lampitt coined the term “open core model” which com­bi­nes the dual-license strat­egy with a freemium approach [24]. Asay puts it together in what he calls a “phased approach” to cre­at­ing com­mer­cial open source busi­nesses [1].

Sell­ing a com­pre­hen­sive pro­duct and pro­vid­ing oper­a­tional sup­port for it is not really novel. What is novel is how the soft­ware is being built and sold.

4.2 Business Functions

Releas­ing a product’s source code as open source can cre­ate an engaged user com­mu­nity which can impact the var­i­ous func­tions of the com­mer­cial open source firm in mul­ti­ple pos­i­tive ways. This impact can cre­ate a sig­nif­i­cant com­pet­i­tive advan­tage over tra­di­tional (non-open-source) com­peti­tors. Thus, we first need to dis­cuss

  • Com­mu­nity man­age­ment: How to cre­ate and sus­tain an engaged com­mu­nity.

From the com­mu­nity then, the fol­low­ing ben­e­fits accrue, listed by busi­ness func­tion:

  • Sales: More and eas­ier sales due to customer-side cham­pi­ons.
  • Mar­ket­ing: More believ­able and cheaper mar­ket­ing through engaged com­mu­nity.
  • Pro­duct man­age­ment: Supe­rior pro­duct thanks to broad and deep user inno­va­tion.
  • Engi­neer­ing: Supe­rior pro­duct that is devel­oped faster thanks to fast and imme­di­ate com­mu­nity feed­back.
  • Sup­port: Lower sup­port costs thanks to self-supporting user com­mu­nity.

Open sourcing also has its down­side, for exam­ple, increased risk of get­ting sued for patent vio­la­tions or of leak­ing impor­tant intel­lec­tual prop­erty. Also, cater­ing to a non-paying user com­mu­nity and pro­vid­ing the pub­lic infra­struc­ture for the com­mu­nity increases costs. The biggest dan­ger, how­ever, is that the firm’s com­mer­cial pro­duct ends up com­pet­ing with its own free open source project. This chal­lenges pro­duct man­age­ment as dis­cussed below.

4.2.1 Community management

An engaged com­mu­nity is at the core of any work­ing open source soft­ware project [37]. In com­mu­nity open source projects, this com­mu­nity com­prises both users and devel­op­ers, as the devel­op­ment work is car­ried out by the com­mu­nity itself. In single-vendor open source, almost all of the core pro­duct devel­op­ment work is car­ried out by the com­mer­cial firm, with occa­sional con­tri­bu­tions from the com­mu­nity [26].

Com­mer­cial open source firms are inter­ested in cre­at­ing an active and self-supporting user com­mu­nity. Such a user com­mu­nity is key to achiev­ing the desired busi­ness ben­e­fits. Com­mer­cial open source firms are also inter­ested in cre­at­ing an ecosys­tem of devel­op­ers and ser­vice com­pa­nies that extend the core pro­duct to increase its over­all value propo­si­tion.

The main prob­lem with seed­ing and grow­ing a user com­mu­nity is the sup­port cost. With closed source soft­ware, only the firm devel­op­ing the soft­ware can provide the sup­port. With a rapidly grow­ing user base, the sup­port cost can quickly out­grow any exist­ing rev­enue or cash reserves.

Com­mer­cial open source firms address this prob­lem by lead­ing the com­mu­nity to become self-supporting. For this, they provide not only an eas­ily avail­able pro­duct, they also provide the source code to the pro­duct under an open source license. From a user per­spec­tive, this has the fol­low­ing ben­e­fits:

  • Free use. Pro­vid­ing the pro­duct under an open source license grants free irrev­o­ca­ble usage rights; thus, users do not have to worry about hav­ing to pay down the road if they don’t want to.
  • No lock-in. Because the source code is avail­able under an open source license, users can become inde­pen­dent of the com­mer­cial firm and hence (some­times naively) think are not locked into the firm’s future deci­sions.
  • Self-support. Because the source code is open source, users can solve their prob­lems them­selves with­out hav­ing to resort to ask­ing the firm, which might not want to provide that sup­port to non-paying users in the first place.

From the firm’s per­spec­tive, pro­vid­ing the pro­duct as open source accel­er­ates adop­tion with­out increas­ing sup­port costs. Specif­i­cally, it reduces hur­dles to adop­tion as poten­tial users per­ceive no or lit­tle lock-in, and it makes it pos­si­ble that the com­mu­nity becomes self-supporting once it reaches crit­i­cal mass.

Walker as well as Capo­bianco provide some insights into how com­mer­cial open source firms seed and grow such com­mu­ni­ties [37] [8]. On the most basic level, com­mu­ni­ties need a place to gather, and they need tools of com­mu­ni­ca­tion. For this rea­son, most com­mer­cial open source firms host a soft­ware forge with inte­grated or ancil­lary tools like wikis, forums, and mail­ing lists. Much of the gen­eral advice on com­mu­nity build­ing on the web applies, like aid­ing the con­struc­tion of explicit social struc­tures and reward­ing mem­bers for good behav­ior [22].

More speci­fic to single-vendor com­mer­cial open source is the appli­ca­tion of tra­di­tional mar­ket­ing tech­niques: Firms need to under­stand the dif­fer­ent sub-communities and their sig­nif­i­cance and tar­get and sup­port them accord­ingly. Speci­fic pro­grams aimed at dif­fer­ent seg­ments may become nec­es­sary. In gen­eral, com­mu­nity man­agers try to cre­ate win/win sit­u­a­tions, which are easy to achieve as each con­struc­tive con­tri­bu­tion by a com­mu­nity mem­ber not only ben­e­fits the pro­duct and the firm but increases that member’s buy-in and his or her rep­u­ta­tion within the com­mu­nity.

Each of the fol­low­ing busi­ness func­tions (sales, mar­ket­ing, pro­duct man­age­ment, engi­neer­ing, sup­port) has its own require­ments and best prac­tices of engag­ing with the com­mu­nity, and they are dis­cussed in turn.

4.2.2 Sales

Augustin pro­vides an account of the com­mer­cial open source sales fun­nel, as depicted in Fig­ure 1 [5]. An even­tual cus­tomer goes through a process of down­load­ing, installing, and using the soft­ware, before they are rec­og­nized as a lead, become a prospect, and finally are con­verted from user to cus­tomer.

Fig­ure 1: Com­mer­cial open source sales fun­nel accord­ing to Augustin [5].

Com­pared with the tra­di­tional sales fun­nel,

  • com­mer­cial open source has a dif­fer­ent lead gen­er­a­tion model, and
  • it replaces the tra­di­tional pre-sales-to-sale activ­i­ties with a user-to-customer con­ver­sion process.

Because the open source pro­duct is avail­able for free, poten­tial cus­tomers can down­load, install, and use the pro­duct with­out ever get­ting in touch with the com­mer­cial firm behind the pro­duct. At the same time, the firm can track via (typ­i­cally vol­un­tary) down­load reg­is­tra­tion and com­mu­nity forum activ­i­ties who is actu­ally using the pro­duct. Some prod­ucts also provide usage infor­ma­tion back to the firm.

A lead analy­sis can then deter­mine which of these users might be poten­tial cus­tomers. More often than not, how­ever, the firm will wait until a non-paying user steps for­ward and asks for a sales con­tact to pur­chase any of the ser­vices out­lined in the rev­enue gen­er­a­tion sec­tion. Thus, leads emerge from the exist­ing user com­mu­nity, either vol­un­tar­ily or by analy­sis. Of course, the com­mer­cial firm can still engage in a tra­di­tional sales cycle with non-using prospects as well.

In a tra­di­tional set­ting, a soft­ware firm’s pro­duct is unknown to the poten­tial cus­tomer except through mar­ket­ing mate­rial. In the com­mer­cial open source set­ting, the poten­tial cus­tomer is some­times already using the pro­duct and hence is famil­iar with it. Thus, from the buyer’s per­spec­tive, the open source project has sig­nif­i­cantly less risk asso­ci­ated with it. In this sit­u­a­tion, there is likely to be an inside cham­pion in the buyer’s orga­ni­za­tion who down­loaded and installed the pro­duct and is using it. These fac­tors make a sale sig­nif­i­cantly eas­ier than pos­si­ble if the soft­ware firm had no prior rela­tion­ship with the buyer.

As free open source soft­ware, com­mer­cial open source can make it into poten­tial cus­tomer com­pa­nies under the radar screen of the CIO. IT orga­ni­za­tions may have strict rules in place not to install arbi­trary soft­ware, how­ever, in prac­tice these rules are fre­quently cir­cum­vented [26]. Such early footholds in poten­tial cus­tomer com­pa­nies drive cus­tomer acqui­si­tion cost down sig­nif­i­cantly [39]. Whether a sig­nif­i­cant per­cent­age of poten­tial cus­tomers is already using the pro­duct typ­i­cally depends on the type of pro­duct. For some it is the case, for oth­ers it is not.

One role of the com­mu­nity is to sup­port the poten­tial buyer dur­ing the lead gen­er­a­tion phase. For eco­nomic rea­sons, the com­mer­cial firm can­not provide this sup­port on a broad scale, since only a small and hard-to-identify per­cent­age of users might actu­ally turn into cus­tomers. Accord­ing to Tay­lor, con­ver­sion rates of 0.5–2% are com­mon for single-vendor com­mer­cial open source firms [32]. Since the user is not pay­ing at this stage, vol­un­tary com­mu­nity sup­port is typ­i­cally accept­able. As soon as the user is con­verted into a pay­ing cus­tomer, pro­fes­sional sup­port becomes avail­able.

4.2.3 Marketing

Most single-vendor com­mer­cial open source soft­ware firms engage in tra­di­tional mar­ket­ing: They adver­tise, they exhibit at trade shows, and they give talks [8]. What is new is that an engaged user com­mu­nity aids these mar­ket­ing efforts. More specif­i­cally, the com­mu­nity makes mar­ket­ing more effec­tive and cheaper than pos­si­ble with­out this sup­port.

Mar­ket­ing is more effec­tive because non-paying users are cred­i­ble sources of good tes­ti­mo­ni­als. Thank­ful for a good pro­duct and the pos­i­tive engage­ment in the com­mu­nity, users evan­ge­lize and mar­ket the pro­duct them­selves with­out much sup­port nec­es­sary from the com­mer­cial firm [39].

Free mar­ket­ing can sig­nif­i­cantly reduce the mar­ket­ing cost of a soft­ware firm, and hence cre­ate a com­pet­i­tive advan­tage over a com­pet­ing tra­di­tional firm. Accord­ing to Augustin, the ratio of sales and mar­ket­ing (S&M) expenses to research and devel­op­ment (R&D) expenses in tra­di­tional soft­ware firms is 2.3 (and some­times much higher), while it can be much lower for com­mer­cial open source firms [4]. In the CRM space, for exam­ple, the S&M / R&D ratio of non-open-source firm Sales­force is 6, while Augustin esti­mates the S&M / R&D ratio of a hypo­thet­i­cal open source CRM ven­dor to be 0.6, sug­gest­ing sig­nif­i­cant sav­ings in sales and mar­ket­ing expenses [3]. From a star­tup per­spec­tive, such a reduced cash burn rate increases the like­li­hood of sur­vival for the com­mer­cial open source firm over the tra­di­tional firm.

4.2.4 Product management

Von Hip­pel has shown how user inno­va­tion can be a sig­nif­i­cant source of pro­duct inno­va­tion for any com­mer­cial firm [35] and Shah has shown how this applies to open source soft­ware [30]. Mickos dis­cusses how user inno­va­tion has aided the MySQL data­base [36] [26]: By pro­vid­ing the source code, firms encour­age vol­un­teers to inno­vate and con­tribute to the pro­duct for free. As men­tioned, no such con­tri­bu­tions will be accepted unless the rights are trans­ferred to the com­mer­cial firm. Nev­er­the­less, such user inno­va­tion can sig­nif­i­cantly improve the pro­duct, and if only through ideas rather than code.

An engaged com­mu­nity actively dis­cusses strengths and weak­nesses as well as future prospects of the open source pro­duct. Almost every com­mer­cial open source soft­ware firm pro­vides the means to such dis­cus­sions in the form of mail­ing lists, forums, and wikis on a company-run soft­ware plat­form. Thus, pro­duct man­agers can eas­ily observe and engage with the com­mu­nity and dis­cuss cur­rent and future fea­tures. This in turn brings pro­duct man­agers close to users and cus­tomers, aid­ing the pro­duct man­age­ment process, for exam­ple, by help­ing fea­ture def­i­n­i­tion and cre­ation of a pro­duct roadmap.

In com­mer­cial open source, this com­mu­nity does not only include cur­rent cus­tomers but also cur­rent non-paying users and pos­si­bly even researchers and stu­dents. Thus, com­pared with a tra­di­tional com­mu­nity of cus­tomers, the breadth of per­spec­tives in such dis­cus­sions is much higher. This breadth of per­spec­tive in turns helps pro­duct man­agers under­stand new fea­tures and issues that have kept non-users from becom­ing users as well as exist­ing users from con­vert­ing to cus­tomers.

Many single-vendor com­mer­cial open source firms dis­tin­guish between a free com­mu­nity ver­sion of the pro­duct and a paid-for enter­prise edi­tion. Pro­duct man­age­ment faces the chal­lenge of moti­vat­ing enter­prises to pur­chase a com­mer­cial license with­out annoy­ing the non-paying com­mu­nity by with­hold­ing impor­tant fea­tures. Smart pro­duct man­agers address this prob­lem by deter­min­ing which enter­prise fea­tures are irrel­e­vant to the open source com­mu­nity and by tak­ing a time-phased approach to mak­ing fea­tures avail­able that are needed by both com­mu­ni­ties.

Pro­duct man­age­ment ben­e­fits greatly from the imme­di­ate con­nec­tion with the com­mu­nity, which pro­vides ideas and feed­back and keeps the pro­duct focused on its needs. Thus, the com­mu­nity helps the firm cre­ate a supe­rior pro­duc

4.2.5 Engineering

Obvi­ously, vol­un­teer con­tri­bu­tions can speed up devel­op­ment. Also, an engaged tech­ni­cal com­mu­nity rep­re­sents a potent pool of pos­si­ble future employ­ees that proved them­selves before being hired, tak­ing risk out of the hir­ing process.

More impor­tantly, how­ever, and sim­i­lar to pro­duct man­age­ment, are the ben­e­fits of direct and imme­di­ate feed­back from the com­mu­nity. A single-vendor com­mer­cial open source com­pany is likely to provide the lat­est release, some­times a daily release, to the com­mu­nity, includ­ing poten­tial bugs. An engaged (and fear­less) com­mu­nity picks up the lat­est release and pro­vides feed­back to the com­pany about bugs and issues they found, some­times together with a bug fix. While such com­mu­nity behav­ior may appear as coun­ter­in­tu­itive, it is nev­er­the­less what prac­ti­tion­ers expe­ri­ence [26] [36].

The dis­tinc­tion between an exper­i­men­tal com­mu­nity edi­tion and slower-paced but more sta­ble enter­prise edi­tion in turn lets the com­mer­cial open source firm sell oper­a­tional com­fort, that is, the sta­ble enter­prise edi­tion, more eas­ily. Still, engi­neer­ing man­age­ment may not want these two ver­sions to become too dif­fer­ent from each other to avoid (re-)integration prob­lems with out­side con­tri­bu­tions as well as unnec­es­sar­ily redun­dant devel­op­ment on both ver­sions.

4.2.6 Support

An engaged com­mu­nity sup­ports itself by and large. Users who are not cus­tomers typ­i­cally don’t expect pro­fes­sional sup­port from the com­mer­cial firm and are will­ing to uti­lize (and con­tribute to) com­mu­nity sup­port. The com­mer­cial firm needs to aid in the sup­port, but does not have to per­form the bulk of the work. It would be pro­hib­i­tively expen­sive for the com­mer­cial firm to provide sup­port to all users, includ­ing those that don’t pay. Thus, a self-supporting com­mu­nity is nec­es­sary to grow a large (non-paying) user base that might be con­verted into pay­ing cus­tomers later. Pay­ing cus­tomers can then receive full sup­port from the com­mer­cial firm as part of their main­te­nance con­tracts.

The self-support activ­i­ties of the com­mu­nity ben­e­fit the sup­port activ­i­ties of the com­mer­cial firm as well, reduc­ing its cost. Specif­i­cally, engaged com­mu­ni­ties fre­quently develop and man­age their own doc­u­men­ta­tion, or at least con­tribute to and expand com­pany doc­u­men­ta­tion. User-maintained wikis and knowl­edge bases have become com­mon. Thanks to the power of Inter­net search, many users, includ­ing pay­ing cus­tomers, find it eas­ier and faster to browse for prob­lem solu­tions before turn­ing to paid sup­port in the form of phone calls or emails. Thus, the com­mu­nity takes some of the sup­port bur­den of the com­mer­cial firm’s shoul­ders, reduc­ing the over­all sup­port expenses.

5. CONCLUSION

Open source is chang­ing how soft­ware is built and how money is made. Indus­try ana­lysts pre­dict that by 2012 more than half of all open source rev­enue will accrue to single-vendor dom­i­nated open source projects, called single-vendor com­mer­cial open source. This paper com­pre­hen­sively presents the core prop­er­ties of single-vendor com­mer­cial open source firms as well as their main busi­ness func­tions. Through a review of inter­views and pre­sen­ta­tions by prac­ti­tion­ers of com­mer­cial open source as well as other sources, this paper shows how at the core of the suc­cess­ful com­mer­cial open source firm is an engaged and self-supporting user com­mu­nity. From this user com­mu­nity, many ben­e­fits accrue, touch­ing almost every busi­ness func­tion of the firm: Sales are eased and increased through inside cham­pi­ons and reduced cus­tomer risk, mar­ket­ing becomes more effec­tive through bet­ter tes­ti­mo­ni­als and active com­mu­nity sup­port, pro­duct man­age­ment more eas­ily meets cus­tomer needs and ben­e­fits from user inno­va­tion, engi­neer­ing cre­ates a supe­rior pro­duct faster and cheaper, and sup­port costs are reduced. Thus, first order of busi­ness for a com­mer­cial open source firm is to cre­ate and sus­tain this com­mu­nity, a busi­ness func­tion fre­quently non-existent or neglected in tra­di­tional soft­ware firms.

ACKNOWLEDGMENTS

I would like to thank Eliot Miranda, Wes­ley Mukai, Mar­tin Stein, Jens Strücker and Christof Wit­tig for feed­back on an early ver­sion of the paper. Then, I would like to acknowl­edge and par­tic­u­larly thank Jacob Tay­lor for help­ing me refine this paper fur­ther. Last but not least, I would like to thank Larry Augustin, Craig Hughes, Andrew Lampitt, Mike Moody, Mike Olson, Julio Tof­foli as well as the anony­mous review­ers for feed­back in the final stages of the paper.

REFERENCES

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3.  Larry Augustin. “The Next Wave of Open Source: Appli­ca­tions.” Pre­sen­ta­tion given at GOSCON 2005.
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13.  Chris DiBona, Danese Cooper, Mark Stone (edi­tors). Open Sources 2.0. O’Reilly, 2005.
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15.  Brian Fitzger­ald. “The Trans­for­ma­tion of Open Source Soft­ware.” MIS Quar­terly, Vol. 30, No. 3 (2006).
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20.  IDC. “2007 Indus­try Adop­tion of Open Source Soft­ware, Part 2: Project Adop­tion.” IDC, 2007.
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28 thoughts on “The Single-Vendor Commercial Open Source Business Model

  1. Pingback: Every License has its Time and Place

  2. Brett

    Hi Dirk,

    Great arti­cle. A ques­tion: have you seen any sta­tis­tics about the esti­mated mar­ket value of the entire com­mer­cial open source mar­ket? If you have and could point me to a ref­er­ence, I would greatly appre­ci­ate it.

    Thanks,

    Brett

    Reply
  3. Peter Leventis

    Nice Arti­cle. An excel­lent exam­ple of a Com­mer­cial Open Source com­pany would be Microsoft with its excel­lent “Express” range of prod­ucts.

    Reply
  4. Dirk Riehle Post author

    @Brett: Ref­er­ences [20] [21] provide some data. The real ques­tion, how­ever, is what per­cent­age of the total pack­aged soft­ware mar­ket open source (prod­ucts) would take. Who knows? Some will tell you it will peter out at 20%, some will tell you it will take over the total mar­ket. I’m work­ing on some esti­mates, but it is too early to talk about it.

    Reply
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  7. Gustavo Dore

    It is just a thanks for the arti­cle. I am start­ing to work in a project with open-source fur­ni­ture design devel­op­ment, and your arti­cle gave me really nice insights.

    Thanks

    Reply
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  15. Gilad

    WOW what an arti­cle! I mean, great one!

    A ques­tion arise from this arti­cle?
    Can star­tup with almost zero com­mu­nity, and lets say a pro­duct in the alpha-beta stage, and most impor­tant, no bud­get for pay­ing inter­nal employ­ees! (devel­op­ers, sales, mar­ket­ing…)
    Can such star­tup with no bud­get use the “com­mer­cial open source” model to rise up and cre­ate the early adopters com­mu­nity?

    While this model seems to solve many of CEO’s block­age for going into open source model, it seems to be good for already sta­ble and well financed com­pany, not for star­tup. But maybe I am wrong?

    What do you think?

    Reply
  16. Dirk Riehle Post author

    Hi Gilad, I think you’ll need out­side invest­ment to start a single-vendor com­mer­cial open source firm. That should work as a star­tup, as firms like Jasper­soft, Alfresco, and Sug­ar­CRM showed. –Dirk

    Reply
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