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the open source business model

The open source advocates say that open source companies can use the following business model:

1. give away the software for free, sell support

      or

2. give away the software for free, sell customization work

Doesn't this strike you as something very strange?

It's like an airline giving away the flight for free, but charging for staying in the airport building, or for the food in the airplane.

Robert Maine
Thursday, September 04, 2003

when I give a client the bespoke program they commissioned from me, I give them the sourcecode too.  Now in my experience this has only made them like/trust me more.  Because it is bespoke software designed to give them an edge, they aren't about to hand it out to their competitors nor anyone else in case it exposes their internal systems etc.  And they imagine they are buying developer independence from me, but infact I'm the guy who gets to write the next version because they like/trust me that much!  And as if the next programmer is going to pick up the software, however well written, and maintain it without a lead time..

i like i
Thursday, September 04, 2003

If its bespoke, unless there's a contract to the contrary, then its a work for hire and it belongs to them anyhow.

Simon Lucy
Thursday, September 04, 2003

that's pretty much what ryanair and easyjet do ...

Zealot
Thursday, September 04, 2003

you could add

3) Compile a collection of open source software and sell it like Red Hat et al

Matthew Lock
Thursday, September 04, 2003

When I go to Macdonalds or Pizza Hut I get the air in the restaurant for free, and they only charge me for extras like food and drink.

Pretty strange business model, giving me the core need for free!

Stephen Jones
Thursday, September 04, 2003

i like i, I suppose you charge, what $50 per hour? Of course they'll be happy with you. If you do anything useful though, and kept the source code, you could charge more and also to other companies, and hire people.

If you lick their boots, they'll like that too.

ab
Thursday, September 04, 2003

The more I look into this the more I find there isn't much difference in theory between OSS and other in terms of business models.
It is not because I give you the source that I allow you to compile and run it, right?
Look at the "Subscription Agreement for Red Hat Enterprise Linux" http://www.redhat.com/licenses/rhel_us_2-1.html . It reads exactly the same as any other EULA out there. Per server "services" *cough* licenses *cough* required, on site license compliance auditing (with even less upfront notification than the BSA) etc.etc.

extact:
"4. REPORTING AND AUDIT. If Customer wishes to increase the number of Installed System, then Customer will purchase from Red Hat additional Services for each additional Installed System. During the term of this Agreement and for one (1) year thereafter, Customer expressly grants to Red Hat the right to audit Customer's facilities and records from time to time in order to verify Customer's compliance with the terms and conditions of this Agreement. Any such audit shall only take place during Customer's normal business hours and upon no less than ten (10) days prior written notice from Red Hat. Red Hat shall conduct no more than one such audit in any twelve-month period except for the express purpose of assuring compliance by Customer where non-compliance has been established in a prior audit. Red Hat shall give Customer written notice of any non-compliance, and if a payment deficiency exists, then Customer shall have fifteen (15) days from the date of such notice to make payment to Red Hat for any payment deficiency. The amount of the payment deficiency will be determined by multiplying the number of underreported Installed Systems or Services by the annual fee for such item. If Customer is found to have underreported the number of Installed Systems or amount of Services by more than five percent (5%), Customer shall, in addition to the annual fee for such item, pay a penalty equal to twenty percent (20%) of the underreported fees. "

Just me (Sir to you)
Thursday, September 04, 2003

Compare the closed source business model:
Sell an infinitly copyable product and use every trick in the book and all the resources at your command to make sure no one actually does copy it.

To the open source model:
Give away an infinitly copyable product, don't worry about people copying it, and then sell the value add (customizations, support, intergration etc) that allows the user to make best use of that product.

bil
Thursday, September 04, 2003

Following on Stephen example:

A college  friend of mine worked in his dad's chinese resteraunt.  He told me that very little profit was made on the food, the money was all made on the drinks.

Ged Byrne
Thursday, September 04, 2003

I belive airlines should give absolutely free rides, and make their money from selling nachos!

Don't you belive there must be some middle ground, here?

John K.
Thursday, September 04, 2003

nachos are good, I _like_ nachos...

FullNameRequired
Thursday, September 04, 2003

Why exactly must there be some middle ground?? Why this need to only have one right way of doing things??

The more diverse business models the better. Lets innovate and differentiate rather than all do the same (*yawn*)

Yanwoo
Thursday, September 04, 2003

Yes, seriously!

Why don't the airlines offer free rides, and make their profit selling nachos to the people in the planes?

Those airline execs must be really stupid!

John K.
Thursday, September 04, 2003

John,

Go build an aeroplane.  Go on. Unless this is one of those embarassing forum moments where you turn out to be a guy who build planes in his garden shed, you can't.

Now go build me some software.  No problem.  Heres my 12 year old nephew.  He can produce software too.

The thing with building software is that the barriers to entry are so low.  Once you have a computer you only need two things to produce software: time and knowledge.

Ged Byrne
Thursday, September 04, 2003

Or maybe the expectations are so low.

People actually expect airplanes to stay in the air and not crash unexplainably and unexpectedly.

Whereas software ...

Practical Geezer
Thursday, September 04, 2003

"that's pretty much what ryanair and easyjet do ..."

Good comparison actually. By the time you have your but on the seat you have found out that:
- the only thing that actually was available at the "free" price was an unsecured option on just one seat, no return, 5 months from now to another destination
- the ticket you now ended up buying was actually as expensive than the virgin-express flight that gave you all the costs in detail upfront, and it did not even include airport charges
- the plane was 4 hours late, the service sucks you are going to be stuck in a cabin full of drunken louts for the next 3 hours.

Just me (Sir to you)
Thursday, September 04, 2003

I think it all boils down to one thing. 

The open source advocates do not see software as a tangible item that can be patented or kept secret by the developer.  The non-open source developer sees just the opposite. 

This is why each party failing to understand the other's basis of opinion trys everday analogies (free airlines, pay for food, etc) that the other person than picks apart using there own open source or non-open source basis of opinion.

It is like people arguing about what color something is when they see colors differently.

We don't have to debate about it though, the market will decide.  There will be large migrations to linux (Munich et al).  Will those migrations stick?  Maybe, maybe not.  Again the market will decide.  It is silly to debate and argue about this. 

Mike
Thursday, September 04, 2003

Yeah, the market will decide. In the meantime, I have come to expect that everything is free. I can build myself a decent (but not great) system at home using an old computer, Linux, Firebird, etc. and surf the web all night long downloading P2P programs, free games, and the like. This whole free/open movement is great on the wallet.

Until I start to realize that I'm in the second half of my life and understand that my BSEE and MSCS are becoming more worthless every day. My experience in designing systems has been cheapened by an order of magnitude because everything is either free or being developed in Asia for 10 cents on the dollar.

I used to spend $2K on a new computer every few years and make six figures. Now I can get a new computer for a few hundred but am faced with a 50% cut in pay if the trend continues. Perhaps this is why a college student invented Linux rather than someone older. They just don't see where the free market will take them.

Like Joel pointed out so eloquently...

http://www.joelonsoftware.com/articles/StrategyLetterV.html

... a smart business will commoditize its complements. By making software cheap, programmer expect to make themselves the valuable asset. Unfortunately, management never saw IT as an asset, only an expense. Now that they can get software for free, why the heck do they even need "engineers" any more. Thus, both sides of the equation have been commoditized.

Go on, tell me I'm wrong! If a bunch of high-schoolers can create the next big thing in a few months, why is anyone going to pay someone in their 40s or 50s a pile of dough to develop something less exciting.

StickyWicket
Thursday, September 04, 2003

It's not so strange or unique.  Whenever Gillete comes out with a new razor, I generally get a free one in the mail, then pay for the razors as I need them.

Walmart and Best Buy don't give things away for free, but will sell things at a loss in the hopes you will purchase other items where they make a profit.  Same goes for grocery stores.

But free as in beer software isn't event the point.  Open Source is the point (having nothing to do with cost, really).

Oren Miller
Thursday, September 04, 2003

When discussing open source, always keep in mind that there are behind-the-scenes vested interests that drive a lot of the open source momentum. IBM, for instance, talks about spending billions on Linux, yet what they've really spent the money on is on _marketing_, spending only a token amount on actual development. This is similar to many of the other big name hardware vendors that enthusiastically put their clout behind Linux (such as HP)--This is an absolute _dream_ situation for them because suddenly other people, often for nothing, are building the software and featureset necessary for them to sell multi-million dollar hardware (which they sell at a huge markup).

"But the barriers to entry for that hardware is much higher than othe things!" you might say. Well, actually most of that hardware is actually fabricated by third parties that receive a data file designating, for instance, the processor fab layers, where they then print a bunch and send them back ("infinitely copyable", if you will). Why isn't IBM behind open sourcing their processors?

Dennis Forbes
Thursday, September 04, 2003

Not sure what you mean in this post. Does the company create the code, or are we talking about the company using available code that they did not create? My opinion would be if the company created and controlled the code, then fine give it away for free (don't think I would do that). If the company just sells services around code they did not create, sounds like a lousy business model as you essentially put the marketability of your product in the hands of volunteers.

I guess I should read up on the reasoning behind free software, but if I don't like the concept of people giving away their skills for free.

m
Thursday, September 04, 2003

how about selling books or auctions?

Tim O'Reilly:

Nobody is pointing out something that I think is way more significant: all of the killer apps of the Internet era: Amazon, Google, and Maps.yahoo.com. They run on Linux or FreeBSD, but they're not apps in the way that people have traditionally thought of applications, so they just don't get considered. Amazon is built with Perl on top of Linux. It's basically a bunch of open source hackers, but they're working for a company that's as fiercely proprietary as any proprietary software company.

What's wrong with this picture? Well, one thing is that one of the fundamental premises of open source is that the licenses are all conditioned on the act of software distribution, and once you're no longer distributing an application, none of the licenses mean squat.

...

fool for python
Thursday, September 04, 2003

"Whenever Gillete comes out with a new razor, I generally get a free one in the mail, then pay for the razors as I need them."

Gillette razors are both patented and sold in the quantities of hundreds of millions of units. If either of these were not true, Gillette would not have a business model.

So if the complement to the thing you are giving away free is  patented and you are selling enough of those complements to pay for both the research and development and the free items you give away and the marketing and all your other expenses, then sure, giving it away makes sense. But if you haven't come up with such a plan to somehow make a living by working for free, giving it away is just foolish.

Dennis Atkins
Thursday, September 04, 2003

On the original post: Don't forget that as the copyright holder of a work you are allowed to dual-license your software, i.e. you can provide an OSI-approved license which means anyone can download and use your software for free, PLUS you can offer commercial (or "proprietary") licenses for the same package. Why? Most OSI-licenses require you to distribute your modifications or adaptations of an open-source package under the same license conditions, which is not an option for most commercial enterprises. So they can obtain a different license which allows them to use the same open-source package in a closed environment without need for open-sourcing their whole system.

Examples for dual-licensed software:
- the Qt library
- MySQL

Johnny Bravo
Thursday, September 04, 2003


"People actually expect airplanes to stay in the air and not crash unexplainably and unexpectedly."

-Geezer

But thats cause airlines don't let the passengers fly the planes. In fact airlines don't even trust their users to get up and get a drink!  Also, most software programs dont generate 50 dollars of  revenue per hour of usage!

I wonder what the typical ratio of IT to Users is vs the ratio Pilots, Mechanics etc ... to passengers in airports

Daniel Shchyokin
Thursday, September 04, 2003

Getting back to the OP, and ignoring John K's hysterics:

"The open source advocates say that open source companies can use the following business model:

1. give away the software for free, sell support

      or

2. give away the software for free, sell customization work

Doesn't this strike you as something very strange?"

Who cares if it's strange, if the model works and the company is profitable?  The market will decide.  If an airline could make money by offering free flights and selling the accessories and accoutrements of a good flight, would you object to it?

Justin Johnson
Thursday, September 04, 2003

More tactics for free/opensource business models:
- GPL the code, license a version that grants exemptions from GPL
- release free software to gain market acceptance, then sell proprietary add-ons
- invest in BSD code when it's not a differentiator, if others are willing to improve parts of it
- undermine cost structure of entrenched competitor, if yours is lower

Tayssir John Gabbour
Thursday, September 04, 2003

Ugh,

Once again.  Open Source != Free (as in cost).  Not in any way shape or form.  Where in heavens name are people making this association?

Oren Miller
Thursday, September 04, 2003

> If an airline could make money by offering free flights and selling the accessories and accoutrements of a good flight, would you object to it?

Actually, yes I would. This scenario reminds me of a day cruise my family took in the islands. Reasonably cheap but as soon as the ship left dock, everyone was plied with expensive alcohol and yuk food.

The trip was spent surrounded by messy food all over the benches and increasingly boorish yobboes.

So, I, for one, would certainly prefer to pay for what I want and not be duped into having to tolerate redundant crap.

ab
Thursday, September 04, 2003

The open source business model is described well in this CNET article:

"Companies like IBM, Hewlett-Packard and Electronic Data Systems love to trumpet computer services contracts worth hundreds of millions or even billions of dollars. But what's hiding behind the big numbers are the costs involved in following through on those megadeals--costs that can be substantial. "

http://news.com.com/2100-1011_3-5071128.html?tag=fd_lede2_hed

ab
Thursday, September 04, 2003

People pay real money for a bunch of 1's and 0's that cost absolutely nothing to duplicate from a working copy of the software.

Don't you find that strange?

I commented on this before.  The entire idea of selling software is artificial.  Supply is infinite, demand is finite, therefore cost should be zero.  We use copyright law to artificially limit supply. 

People, by in large, recognize the value of perpetuating this artificial system.  You pay for the zero-cost-to-manufacture copy because that pays for the initial production.  But this requires a lot of good faith on the consumer's end.  When you photocopy a book, it takes a lot of effort.  You have a lot of time to realize what you're doing is "wrong".  Copying software is easy (even necessary for backup purposes).

Open Source and $0 software is just a response to the growing realization that in a completely natural state, software woudl be free.  When you pay for commercial software, you pay for your copy because that pays for the initial copy to be made (and future support).  The legal system exists to gaurantee that this business model is possible. 

Open Source business models simply put the cost exactly where it makes sense.  You pay for the initial work and you pay for maintenance and support.  Duplicating binary data costs nothing.

I am **NOT** saying that copyright should be abolished or that anyone should stop making closed-source or non-free software.

People trying to make money off of Open Source and Free Software are just trying to succeed by selling software in a way that makes more natural sense.

(Note, there is also the other group of people who believe that some software is so important to the common good that it should be open, free, and community-owned.  This is a valid argument in many cases as well.)

Richard Ponton
Thursday, September 04, 2003

Richard, you've got it wrong. What people are paying for is the time that the programmers put into developing the software.

ab
Thursday, September 04, 2003

Richard and the other Open Source people must live in the magic land of Leprechauns if they think software should be free.

Do you watch cable TV ? Do you pay for it ? Isn't cable TV simple to scale out to millions of people ? Why isn't cable TV free ? (Let's assume that the laying of the cables is similar to the initial development of the software.)

If you don't pay for cable or software, you are a pirate.

Kentasy
Thursday, September 04, 2003

TV shows are copyrighted, just like software.

T. Norman
Thursday, September 04, 2003

I guess I should clarify what I meant. You should pay for software much in the same way you pay for cable TV, or any other product offered for sale.

If some people want to work for free, that's great - I'll download their free software if they don't want any money for it.

But not all software is free, nor should it be.

Kentasy
Thursday, September 04, 2003

Kentasy: your cable TV analogy only works if we were going to watch the same programs over and over.  New shows = maintenance programming, which has to be paid for too.

If there was just one show being broadcast, then the marginal cost would approach zero, and yes, once the initial build-out was paid for, then the cost of redelivering that one show would drop over time, if there were any competitive pressure.

In truth, simple competition in *any* marketplace pushes profits to the minimum level that the competitors will accept.  If switching between word processors were as trivial as changing channels on your TV set, the revenue to be made in selling a word processor would drop closer toward the cost of actually writing and distributing the word processor.  (Well, actually, word processors would end up being free

Software's ability to sustain prices high above the marginal cost of producing additional copies, is *all* about external switching costs: learning, data format lock-in, etc.  (And one important switching cost: knowing the alternative is available and whether it's suitable for your needs!)

Phillip J. Eby
Thursday, September 04, 2003

No, Mr Eby, it's not. Did you ever use WordPerfect for Windows? Know why people changed? It's because Microsoft Word was better.

The reasons for this go back to the way WordPerfect was run and the way they approached the conversion to Windows. It always gets back to understanding software development.

Television, and film, are classic examples. How many oss zealots believe all films should be free. And the actors, writers, crew and producers should donate to the community.

What a laugh you open source guys are.

.
Thursday, September 04, 2003

Not everyone is polarized by this topic.  Open Source has its place.  I use it all the time.  I also write software that is sold in the 6 figures/year.  I see the merits of both models.

christopher baus
Thursday, September 04, 2003

"Once again.  Open Source != Free (as in cost).  Not in any way shape or form.  Where in heavens name are people making this association?"

Maybe because this is the slogan most OSS companies use to get the punters in the door? I fully agree with you  that these are fraudulent advertizing practices.

A quick comparison of the licence costs assuming a 5 year OS usage:

RedHat Enterprice Linux WS: 5 x 179$ = 895$
vs.
Windows XP Professional: 299$

RedHat Enterprice Linux ES: 5 x 349$ = 1.745$
vs.
Windows Server 2003 Standard Edition: 999$ + CALs

RedHat Enterprise Linux AS: 5 x 1.499$ = 7.495$
vs.
Windows Server 2003 Enterprise Edition: 3.999$ + CALs

I took prices directly from the company catalogs, cheapest sku's possibe. In reality I know that for Microsoft these prices are very much higher than what customers actualy pay due to volume discounts, and I assume the same will be true for RedHat.

(sources http://www.redhat.com/software/rhel/purchase/ , http://www.microsoft.com/catalog/navigation.asp?subid=22&nv=2 )

It is not so that RedHat is always more expensive than Microsoft. Depending on the scenarios one has in mind one option could be cheaper licencing wise than the other.

Just me (Sir to you)
Friday, September 05, 2003

Deaaar Just me! Try a bit of Maths.

The Red Hat enterprise is equivalent to win XP x 5 so the price comparison is $895 to $299 x5 = $1495.

But with that MS price you don't get the support, which you have to pay for separately after the first sixty days.

The truth is the comparisons are impossible to make without knowing the need for support for the respective OS's. In general you could deploy Linux on the desktop for free and not bother with support, just as most people install Windows on the desktop and use the usegroups and Knowledge Base. The cost of deploying any Linux distro on the desktop without support is precisely nil.

Stephen Jones
Friday, September 05, 2003

"The Red Hat enterprise is equivalent to win XP x 5 so the price comparison is $895 to $299 x5 = $1495."

Unless this was meant to be a joke, you will have to explain that to me, since I do not get it.

"But with that MS price you don't get the support, which you have to pay for separately after the first sixty days."

The basic RedHat pricing that I gave includes just 90 days of Installation and Configuration support. If you want anyhing else you will have to pay far more.

Just me (Sir to you)
Friday, September 05, 2003

Sorry, I hadn't realized that the 5 was for the number of years. Many Linux distirbutions sell you a five user package, and I thought that was what you were referring to.

The one year support you get with the next version up seems better if you are concerned about support. Pay $299 annuallyfor the standard editon and you get permanent support. How much would you pay for this from MS?

Moreover you are presuming that you are going to pay for a license for every Red Hat desktop like you do with Windows. You can do but it is poor economics. If you have identical desktops then your configuration problems are likely to be identical. So buy one license, get their support on configuring that one machine, and then do the same thing with all the other machines you haven't paid a license for.

And remember that there are plenty of other distros apart from Red Hat. You are making an unfair price comparison.

Frankly though, the main reason for companies considering Linux on the desktop is fear of lockin. Companies might be able to afford MS now, but they don't trust it; even if Red Hat costs the same or more, they can simply change distro, or forget about the paid licenses.

Stephen Jones
Friday, September 05, 2003

"If you have identical desktops then your configuration problems are likely to be identical. So buy one license, get their support on configuring that one machine, and then do the same thing with all the other machines you haven't paid a license for."

This is explicitly forbidden by the licence contract, and enforced through onsite audits. see the licence agreement section I.4 and section II.2.2 at http://www.redhat.com/licenses/rhel_us_2-1.html You are obliged to buy one licence for every machine you install.
You also sign an implicit NDA so you can't just inform your firiends of how to solve without explicit permission.

"And remember that there are plenty of other distros apart from Red Hat. You are making an unfair price comparison."

Since RedHat owns the independant enterprise Linux distro market (>70%), I'd say this is the most reasonable comparison. You will need a distribution like this to qualify for support of any major app you will be running on this.

For the support, also note that you will be disqualified if you do break "binary compatibility" (so no recompiling) or use non RedHat Hardware Compatibility List (HCL) hardware.
Please read the RedHat licence and support info on their site. I guess you will find that all the things you fume about wrt Microsoft have an equivalent (many times even more restrictive) in RedHat licencing.
The only difference is that yes, everyone is allowed to LOOK at the sourcecode, and even there I am not sure this goes for the whole system.

Just me (Sir to you)
Friday, September 05, 2003

"Frankly though, the main reason for companies considering Linux on the desktop is fear of lockin. Companies might be able to afford MS now, but they don't trust it; even if Red Hat costs the same or more, they can simply change distro, or forget about the paid licenses. "

Let us listen to Hans Reiser of the ReiserFS filesystem:

"You do all understand that while the GPL doesn't permit tying by license, distros have now moved to using threats of invalidating support contracts to achieve the market leverage they need to exclude competitors, yes? By doing this they can exclude mainstream official kernels from being used, exclude rival filesystems, exclude whatever might lead to less customer lockin..... "

(extract from http://interviews.slashdot.org/article.pl?sid=03/06/18/1516239 )

Just me (Sir to you)
Friday, September 05, 2003

Dear Justme,
                    Why don't you read the license agreements. If you fail the audit all they can do is withdraw support, because SUPPORT IS ALL YOU ARE PAYING FOR.

                    I can sell you purified air, and draw up a contract that says you have to buy a purifier from me for every room in the house. But if you say, sod it, and simply open the windows, there is no way I can charge you for the free air you are using.

                      Muddled thinking on your behalf at best; FUD at worst.

Stephen Jones
Friday, September 05, 2003

"Richard, you've got it wrong. What people are paying for is the time that the programmers put into developing the software"

That's what I was saying.  People pay for software because they want to pay for the programmers' time.  In the case of CSS, they pay when the get the software in a box.  In OSS, they pay the programmer or a support company directly and they get the software for free.


"Richard and the other Open Source people must live in the magic land of Leprechauns if they think software should be free.

Do you watch cable TV ? Do you pay for it ? Isn't cable TV simple to scale out to millions of people ? Why isn't cable TV free ? (Let's assume that the laying of the cables is similar to the initial development of the software.)

If you don't pay for cable or software, you are a pirate."


Can't you people fucking read?  Did I say all software should be free?  No.  Did I say, "I don't think all software should be free"?  Yes.

Copyrights on digital medium are a way to artifically limit supply.  Yes, I used the word "artificial".  Artificial != bad in this case.  Grow some reading comprehension.

I understand that you're paranoid that all the college students working in their free time are going to put you out of business, but please try and keep some intelligence about you when discussing these things.

Richard Ponton
Friday, September 05, 2003

Touchy, touchy.

"When you point a finger at me, you're pointing three back at yourself."

Perhaps it is a combination of our poor reading comprehension combined with your inability to write in a clear and unambiguous manner.  :)

(The smiley is just to be clear that my arrogant and nit picky response is similar to your blast - minus the swearing...)

Kentasy
Saturday, September 06, 2003

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