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Making Billions with Open Source, Revisited

Every quarter or so, there’s an old can of worms that we with a foot or two in the open source business world open up and dump on someone’s head. Dave Rosenberg appears to be getting out the can opener:

Customers assume that open source is free and that commercial open source is cheaper, but most companies aren’t prepared to deal with the implications of having a lower cost product. Even when you can clearly demonstrate value, you run into a scale issue sooner or later.

So, the answer appears to be that you have to provide more value for the dollar, but how do you do in a way that makes a highly scalable, highly monetizable business?

This is the question of how someone gets rich off an open source business. Typically, the phrasing goes, “how does a business make money with open source,” but my rephrasing there gets at the first problem. First off, let’s pull the zombified dead-horse out of the ground and examine it:

Paying for “Free”

The issue with open source software business models is that your customers can get your software for free, without ever paying you or even (we hope) registering with you, giving you lead information to call them up and pester them. What do you sell them then?

Support & Services

Support and services is the first rung of “products” you can sell without muddling with the definition of open source. “Support” being answering the phone, email, or even being on-site to trouble shoot a customer’s problem using the software. Typically, people wrap metallurgical bands around this – Gold, Silver, Platinum (whither “Lead”?) – that scale up the response time (2 hours to days), availability (business hours, weekends, 24/7), named contact (“I talk to Jim about this, not some random call-center head-set”), and other features that don’t directly connect to the software itself. RedHat pulled a clever trick many years ago here: instead of selling you the source code, they sold the binaries, the compiled code. It was certified and approved by them and the first step in getting all those wonderful support options.

“Services” are butts-in-seats things like “make this open source software work with my SAP install.” That is, integrating and customizing the software to do whatever business function the customer needs. You could go and download JBoss App Server and the Spring Framework all day long for free, but you’ll need to actually code something if you want to start making money with them.

There’s tons of money in “services” like this, but they’re not typically what open source businesses go after. Margins tend to be bad (compare the cost of a living, breathing human to copying software), there’s tough competition, and there’s an overall distaste among ISVs to actually customizing their software per customer.

Dragons Be Here!

After this, things get a little tricky, and it’s when you cross The Tarus Line. Going past The Tarus Line means that Tarus Balog, noted, and more importantly, successful open source business person will start telling you you’re not doing open source.

Patches & Updates

First, open source vendors can be paid to supply patches and updates to software. All software is full of bugs, security problems, and other issues that need to be fixed. Shockingly, even open source applies here. Less glibly, new features are added to software all the time. In the closed source world, we’d call these new versions of the software. The open source world is a bit different than bundling up mega-released: there tends to be more incremental releases, or updates. Either way, customers want both bug fixes and new features.

Selling quick, easy, and even early access to those updates is another monetization point for open source businesses.

The philosophic “issue” here is that the underlying code for those updates should itself be open source as well, so why can’t the customer just get ahold of it, re-compile things, and deploy them? Certainly, there is value in paying someone to just do that for you – the vendor – but the value in that shouldn’t be high enough to get to the “highly scalable, highly monetizable business” goal that Dave’s can-opener is ripping away at. How much revenue can any given company depend on for simply providing the service of updating open source software?

Now, if you’re a clever company you start to wrap things together here: you’ll only get that support if you use those certified updates. If you went and re-updated yourself, we – the open source vendor – are going to hassle you with a sort of metaphoric “warranty void if removed” argument against helping you.

Again, the issue is not if this is good, bad, open, or closed source. Rather, the question is how much revenue any given company can get from such a service.

SaaS and Cloud

Another option is to charge for actually running the software for your customers. You put the software up in the cloud and charge for the service you’re providing instead of the software. Google is a sort of square peg in a round hole here – they don’t open source all of their code – and you’d think people like Sun would be a natural fit for, say, running identity services based on their open source software in the as a service (or, yes, “in the cloud”).

WordPress is, perhaps, a more perfect example. You can download WordPress for yourself and run it (as we do at RedMonk) or you can pay to simply have WordPress.com run it for you. The interesting part here is that the WordPress instance you get at WordPress.com – that you pay for – has less features than the one you’d run for yourself. The hassle of running your own blog (and elastically scaling up when you get lots of traffic) is worth not only paying for, but axing features and flexibility.

The problem (or pointer to what needs to change?) with the WordPress example is that it’s not purely “enterprise” or “business” software: it’s consumer as well.

In theory, there’s good revenue here. Closed source SaaS’s like SalesForce are stand-up businesses. There aren’t a whole lot of open source SaaSes out there.

On a related note, we here at RedMonk have been trying to develop a theory of how you can monetize the community around open source stacks via telemetry and collaborative IT management (or “social business software” to generalize it) for sometime now. Ask us for more info (check me out: monetizing free content!)

There’s another trick, of course, as well here: often, to run software at large scale as a SaaS you need some additional code to help out. Be that code to manage it, balance out databases and web servers, whatever. The code that Google, for example, would be insane to open source. When looking at an open source SaaS, you have to make sure to ask them if all of the code is open.

Lump It: Sell Closed Source

Finally, getting to the buried lead, an increasingly popular open source business model is to sell closed source. This closed source software typically comes in two forms: additional software used to manage the open source software or “plugins” and “extensions.”

In both cases, typically, the closed software is being sold to someone other than developers. And this, I believe, is key: developers will not tolerate paying for software (except Microsoft developers), pretty much of any kind. The people who run the software day-to-day – admins and operations people – will pay for software.

My pet software category, “The Little 4″ (tho, now there’s just 3, really) fit into both of these categories.

Zenoss, Groundwork, and Hyperic are all open source businesses of varying types. In each case, though, when you pay those vendors money, you get closed source software. In the case of Zenoss, you get additional functionality in the form of “ZenPacks” that allow you to monitor and manage more things in your data center (like VMWare). In the case of Groundwork, you get the pulling together and polishing of all of the open source project they amalgamate, and also additional functionality. Hyperic is the same.

Additionally, Hyperic is an interesting example because they’ll license white-labeled versions of their management software to other open source vendors. For example, if you “buy” Mule from MuleSource, you’ll also get a version of Hyperic’s HQ tuned to monitor and manage your Mule install.

Compare this to, for example, what you get from another outfit in the business of IT management, the OpenNMS Group (home of The Tarus Line): all of their software is open source. All you get from them are services and support.

More People Selling Closed Source

Other examples of selling closed source exist in outside of the IT Management category and I’m increasingly seeing more of it. Personally, I see no problem with it. If customers will pay for closed source software, bully for them and the vendors. Software is valuable, after all. Getting email and instant messaging working for your 10,000 employees has value, as does munching over 1,000′s of money making transactions an hour.

Far from running around waving a flag of “open source is dead!” I’m suggesting that vendors should start feeling (less bad) about selling closed source software. Certainly, there’s an ethics to trying to hide that fact (something that The Little 4 people above do not tend to fall into the trap of doing) and benefit from the marketing glow of being “open source.” No one wants hucksterism here, folks.

But, making a Big Buck off open source is hard. Closed source tends to be easier.

But what about MySQL?!

Indeed, Sun bought MySQL for some Big Bucks. RedHat bought JBoss, and so on. In general, I don’t consider “getting bought by another company” a business-business model. It may be an investment and personal wealth building model, but a 20, 50, 100 year business model it ain’t. Clearly, an open source startup with the goal of cashing out after several years is a viable business model for the people who own a lot of equity in that company. But that’s not the kind of business we’re talking about here. There is no “cashing out” for Sun, IBM, Microsoft, or Oracle: just the quarter-by-quarter game of growing a few ticks or taking a beating from Wall Street (love those Street guys! Kisses!).

It should also be noted that the owners of previously independent open source companies tend to use all of the money extraction techniques above, esp., the grand-daddy example here, IBM. IBM sells plenty of closed source software, hardware, services, and just about everything but mercenaries. And yet they do plenty of work with open source as well.

What Should I do?

As a customer, you should get ready to start paying for more open source software. As a vendor, you should start thinking about selling closed source software in addition to your open source offerings. These rules of thumbs don’t apply to all categories: when you get to more middle-ware, developer-centric software stacks, it’s an extremely tough sell to get people to pay for software. Then again, someone managed to invent the bottled water market which looked like insanity – charging for “free” water.

Open source will never go away as a method of production or a business model. In fact, you’d be insane not to use it as a core part of your software business model now-a-days; don’t confuse the above with me saying otherwise. Indeed, as the OpenNMS Group and other “small” outfits have shown, you can build a fine business of “pure open source.” It’s those “highly scalable, highly monetizable business” that are a tougher nut to crack and a little help from closed source can look like a big mallet.

Update: see this addendum on models that involve using, or “embedding” open source.

Disclosure: IBM, Hyperic, Groundwork, Zenoss, Microsoft, Sun, and RedHat are clients.

Categories: Marketing, Open Source.

Comment Feed

15 Responses

  1. What about embedded uses of open source, independent of monetization? Look at Eclipse. It's there for anyone to take and reuse (e.g. embedded in IBM Lotus products, Adobe products, Wall Street trading apps) though none of them package/sell Eclipse itself that you download for free. You can get "rich off open source" without focusing on selling a compiled version of that source code. Take for instance building a tax preparation application on say Google Gears and Chrome. The users aren't looking for a browser or offline availability – but your product uses the open source components to expose those features. Slightly different take on your Google/cloud hosted business example.

  2. Cote,

    Great post! A clear, objective summary of the open source business landscape. Helped me in clarifying my own thoughts as we are also struggling to figure out the best path.

    Thanks!

    Berkay

  3. Oh my, "The Tarus Line". Do my knickers get bunched up that easily? (grin)

    It is a pet peeve, but just because as a small company that is trying to differentiate itself, it is no longer possible to use the term "open source" to describe what we do. The market is too confused.

    Instead of "The Tarus Line" I prefer "The CentOS Test" to determine if a software offering is truly open source. CentOS, as most people know, takes the Red Hat sources and builds their own differently-branded binaries, without support of course. I don't believe that CentOS takes much business away from Red Hat, but the fact that they can exist means that Red Hat's software is open.

    This is not possible with the commercial "closed source" hybrid model where a portion of the code is closed. Without the freedom to see, modify and distribute the software it can't be considered "open".

    I think the main problem with the term "open source software" is that people are trying to fit it into the old software business model and it just doesn't work. Software has always been about sunk costs: almost all of the cost of software is in its creation – the distribution is basically free. So each time you sell the software it is almost pure profit (media and marketing costs not withstanding). The focus with commercial software is move more units.

    But if the source is free and open, there is no way to monetize the code. Thus you have to find other ways to make money, such as services (which is what we do). It *is* possible to build a scalable services company, but it will never scale or be as profitable as a successful commercial software company.

    The upside (from a services standpoint) is that open source is making examples of successful software companies more rare. As you mention, closed source companies are going to have to open up more and more of their code to stay competitive, or to adopt a more services oriented approach to their software (such as SaaS). Software will either become a low margin commodity or truly open and supported by services.

  4. Insightful and timely. Makes the little grey cells work. Viva la Revolucion.

  5. Isn't it great. We can now work for the rest of our lives instead of working for a few and getting rich.

    viva la revolution!

  6. Really interesting! Having worked a company that produced a GPL piece of software and sold commercial extensions, I'd have to say getting the license right and the free vs extension split are the most important things you are going to decide. If your product is successful, other companies can sell your software and provide support and services thus cutting your income possibilities. If you give too much away people don't want to buy it or resellers stuggle to sell it.

Continuing the Discussion

  1. [...] would agree with the comment from Mike Dolan that Coté’s assessment overlooks the role of embedded uses of open source, [...]

  2. [...] when writing up the “how do you make mega-money off of open source?” note, I left out an explicit discussion of the “uses” open source angle. Both Mike Dolan and [...]

  3. [...] Approach.  There are thought provoking comments about the subject on Michael Coté’s People Over Process pages at Red [...]

  4. [...] open source business strategies had reared its head again thanks to posts by Dave Rosenberg and Michael Coté (twice) – not to mention Matt Asay and Tarus [...]

  5. [...] People Over Process » Making Billions with Open Source, Revisted [...]

  6. [...] Rosenberg discussing the economics of open source entities, followed by my RedMonk colleague Cote weighing in on a variety of open source models – bundling closed source in the so-called hybrid model among them [...]

  7. [...] People Over Process » Making Billions with Open Source, Revisited (tags: opensource business pricing redmonk michaelcote) [...]

  8. [...] are talking about the ‘billion dollar opportunity‘, but the brightest example of Open Source business success, that everyone references, [...]

  9. [...] gets covered quarterly by the usual suspects (myself included), open source has been proven to work extremely well to boot-strap a business (and for fantastic [...]