Another Take on Explaining Open Source Business Models

Open source remains popular and I find myself explaining the economics of it to ever broader audiences. Rather than talking legalese or philosophy, I’ve been wondering about a pitch that focuses on the high-level strategic objective of the companies that are paying for open source. Here is a short summary; let me know if you think it works.

I’ll start out with disclaimer:

Open source is a tool, not a philosophy. Open source licenses are a legal tool, open source foundations are a governance tool, and open source processes are better ways of developing software. As a consequence, these tools can be used to create very different business models, not just one.

I’ll then launch into the examples:

Open source serves a purpose for the company sponsoring it. We see three particularly important purposes and associated business models. Open source lets you …

  • Win sales more easily (the single-vendor open source business model). Here, a for-profit software vendor open sources some or all of its software to get potential customers to use the software. Once the customer realizes they need warranties and services, the vendor will already be known to the customer, have created trust, and is more likely to win in a competitive sales situation.

    The canonical example is MySQL the company, with the product of the same name. By providing its database to the world for free, MySQL was able to get its foot in the door in an otherwise highly conservative market. This foot in the door helped MySQL to sell more effectively by building on the early trust it had gained. MySQL was bought by Sun Microsystems for $1B.

  • Prevent a monopolist from taking the market (open source developer foundations). Here software vendors join forces to build a viable alternative to the software of a budding monopolist. They create an open source (developer) foundation, because it has proved to be a well-working tool for working together effectively, establishing good project governance, and managing conflicts of interest.

    An example is the OpenStack Foundation. Amazon has been leading the charge in cloud computing, trailed only by Google and Microsoft, with everyone else being left behind. OpenStack is an attempt by everyone but Amazon to build software that can run data-centers of any size, irrespective of capitalization of the provider. This way, there will be viable alternatives to an otherwise dominant Amazon.

  • Take charge of your software destiny (IT user foundations). Here, users of software join forces to sponsor the development of a viable alternative to the software of their current software supplier. They create an IT user foundation (consortium), similar to how software vendors join forces to create a developer foundation.

    An example is the OpenKonsequenz consortium of energy companies that I helped found. Through the open source software this consortium sponsors, its member will be able to avoid or keep down license fees, innovate faster than possible before, and procure services from suppliers of their choice.

Open source is multi-faceted, so picking one particular motivation may not do justice to the others. However, I have found these motivations to communicate clearly, which is what I want to achieve.

In my current work, the software developer and user foundations are of highest interest, because they are changing our industry (for the better). If you have any questions or comments, let me know!

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