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Is Open Source as a Model for Business Really That Elusive?

Like most open-source companies, MySQL’s sales, tied to support deals, never matched the astronomical number of downloads for its product, about 60,000 a day. In January 2008, the founders decided to sell the company for $1 billion to Sun Microsystems. And this year, Sun agreed to sell itself to Oracle, which makes database software aimed at larger companies and tougher jobs, for $7.4 billion.

Now, disagreement over the value of MySQL — both as a stand-alone entity and as part of a big company — lies at the heart of a bitter public battle between Oracle and the European Union over the Sun acquisition. The fight illuminates a larger truth about open-source companies: their societal and strategic importance far exceeds their financial value as operating businesses.” – Ashlee Vance, “Open Source as a Model for Business Is Elusive

For four or five years now, those of us with experience running, analyzing or working with open source businesses both individually and at scale have been collectively debating the merits of open source in economic terms. Which is a testament to the strengths of open source, on some level: its strengths as a development model and distribution mechanism are more or less accepted as a given these days.

The difficulty that I have with much of the debate on the subject of open source economics is that it asks the wrong question: are open source and business concerns mutually exclusive, as the headline on Vance’s piece implies? This is the wrong question, in my opinion, because the evidence that open source as a model for business is anything but elusive is overwhelming.

If you want to explore whether open source is a reasonable foundation for a big business, on the other hand, that’s a better question. Still not the one I would ask, but better.

Me, in July of 2006: “At this point, however, I do not expect any of the major pure open source firms to challenge the billion dollar threshold any time soon.” Three and a half years later the largest open source pure play, Red Hat, is still three hundred plus million away from the billion dollar yardstick. And Red Hat is, in my view, a very well run company.

It is also, of course, a traditional software and services vendor – emphasis on the former. As are most of the other vendors mentioned in Vance’s piece: Citrix, Cloudera, Microsoft, MySQL, Oracle, Sun, VMware and so on. Mentioned only peripherally, both in this article and the broader debate, are those firms that make money with open source as opposed to from open source. Companies like Google, for whom the billion dollar threshold is a distant memory. But what if we didn’t artificially narrow our definition?

What if we weren’t just talking about those who sell and service open source software, but also those who’ve built businesses upon it? The 451 Group’s Matthew Aslett, an analyst colleague, quite efficiently articulates a number of open source models but omits the one that I personally consider most compelling: building other businesses on open source, businesses that may have nothing to do with selling software.

Or as Brian Aker more succinctly put it, “if you really want to make a lot of money from open source, then find a way to use it.”

Where you come down on the open source and business question, then, may simply depend on what you consider an open source business. At least until open source vendors begin aggressively realizing their next, largely untapped revenue source: data. Once that happens, we’ll all have to reexamine the economics of open source models.

Data is the next great revenue frontier, in my view. And I’ve long argued that open source is intrinsically differentiated in its ability to generate data, given its distribution and adoption advantages. Some will undoubtedly argue that privacy concerns will prohibit this practice: I am not one of those people. First because open source projects are already collecting data (Debian, Eclipse, NetBeans, Ubuntu, etc), but more because the data has value – potentially immense value – to users.

Will data power the software and service vendors to billion dollar revenue streams? Who knows. But it’ll be worth a lot. Just ask Google.

Categories: Business Models, Open Source.

  • Niraj

    Open source is ultimately a business strategy – specifically a sourcing strategy. consider offshoring, with India coming onto the global scene , New Companies were created (INFY, WIPRO etc) that challenged the cost model for incumbents(Accenture etc). but this does not change core business model. The business model is still outsourcing and consulting – rather than offshore development as the business model.

    A strategy should not be confused with a business model. A strategy will take you for say a billion and then you need do something else , while the model lasts significantly more than a strategy.

    In the case of offshoring – The strategy of offshoring is now adopted by Accenture and likes and the offshore players are moving to a more onsite model with client presense.

  • Damon Edwards

    My company produces open source tools but I find it frustrating when we are labeled an “open source vendor”. It implies that there is some sort of business model where we are “selling” the thing which we are also giving away.

    Open source is a marketing and community building strategy. It’s value is it’s ability to attract and hold the attention of a user community. The value is in the size and strength of the community, not the software itself.

    It’s up to the community’s stewards (i.e. the “vendor”) to figure out how to monetize that attention. Simply applying the old fashioned license plus support business model doesn’t cut it in most situations and is why there are so few large scale “open source vendor” success stories. Trying to fit the new open source world into a legacy enterprise software way of thinking is a dead end.

    The data angle is an interesting one. Not sure how that will manifest itself… but it’s an example of thinking in the right direction.

  • Arjen Lentz

    Catching a tiny chunk of the huge # of downloads/users of MySQL is pretty lucrative anyway.
    MySQL’s choice (or mistake, depends on perspective) has been to cream the market by going for the biggest deals. This left the vast majority of the userbase unserviced.
    I see no reason to view a billion as a magic target to either reach or to measure success, but either way there’s multiple ways to be very profitable and growing. The common approach is to aim for the “highest value customer”, but that has quite a few nasty side-effects. Other upcoming companies might wish to reconsider, and do better as a result.

  • Juergen Geck

    moving up the iso/osi stack was the old way of evolution in the it industry. open source made the API lock-in play attackable on so many layers. and now SaaS type offerings are making much of the above irrelevant. because it all happens behind the firewalls of your service provider, and does not concern you anymore as a user.
    now all those service providers need to integrate their services, and enable their customers to enable them. XML is to versatile to be useful for this, so we went for and we apply open source experience and approach to an integration play – based on pure data.
    good to have you convinced stephen!

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  • Tim Boudreau

    It seems to me that those claiming there is no business model for open source are stuck in the notion of selling software per-se. If you look beyond that, well…got a TiVO? 90% of the software on it is Linux. Got a Macintosh? Probably 80% of the OS is OpenBSD. And so forth.

    The economic model of selling support on open source software is one where probably only one vendor-per-product can be profitable – the total pool of customers who will actually need such a service is small but tends to be large organizations who require it for whatever they do.

  • Peter Yared

    Right on… I see Matt Asay is not puking all over you for saying this, so perhaps people are starting to come to terms with where commercial open source has landed. Peter

  • Peter Armenti

    When I look for a web script to use in a project.. I always try to find an open source project.. and it’s NOT because I’m cheap :) It’s because I know that there is going to be a large community to turn to for help, advice, AND that there are a lot of people relying on keeping the project alive.. that’s probably most important to me. There is nothing worse than building and idea based around software, or a script, that dies.

    -Peter Armenti