As recently as two years ago, the dominant question we fielded in connection to commercial entities founded around open source projects was this: how will they make money? Why would anyone pay for something that is free?
Regrettably, we still field that one more than we may like, but in the face of the ongoing operation – not to mention the growth – of entities such as MySQL and Red Hat, it’s far less common than it once was. Investors and other parties with significant interests seem to have finally digested the fact that a certain portion of the addressable software market will not only pay for freely available open source software, but that they insist on paying for freely available open source software. It’s a prerequisite for adoption, in many if not most cases.
As could have been predicted given their profession, shortly after determining that open source firms could in fact make money, investors wished an answer to a slightly more complicated question: how could the open source firms make even more money.
Open source businesses, after all, while often profitable and largely sustainable on an ongoing basis, displayed few signs that they would repeat the trajectory of the proprietary software firms that preceded them. A trajectory that made these same investors the preferred “even more” money; the kind of money that’s necessary to subsidize their numerous failed investments.
Open source has immense advantages in distribution, true, but significant and ongoing disadvantages in achievable profit margins and customer conversion percentages.
This question, then, happens to be a good one. Or at a minimum, a better one than its “how will you make money?” cousin. How are open source firms going to make even better money?
There’s no one answer to this any more than there was one answer to how open source firms would make money. The commercial open source world can be seen in that context as one of the larger and more interesting public economic experiments imaginable. What will people pay for? Where can commercial entities add the most value? All these questions and more are asked and answered, after a fashion, on a daily basis.
What is increasingly clear to me, however, is that the traditional support and service models will be augmented – and perhaps replaced, in some cases – by network services and offerings.
Much of the revenue directed open source firms way thus far has been related to their willingness to pick up the phone when things go awry. In that respect, it’s remarkably like insurance. And though insurance is a fine, profitable business to be in, it’s not likely to be quite as rewarding or profitable in the software business as it is elsewhere. Nor are the ISVs needs aligned particularly well with the customer. If the ISV does a perfect job with the software, after all, why would the customer pay for support?
Network services, for the most part, do not suffer from these failings (though they may, of course, suffer from others). If customers share some data and telemetry back with providers, both parties may benefit. And that service will prove to be more compelling, I believe, for customers skeptical of the value to traditional support and service.
Consider the examples we’ve seen to date: MySQL Enterprise includes “MySQL Network Monitoring & Advisory Services,” Red Hat’s Exchange seems to be a first step towards marrying the Linux ecosystem with network efficiencies, and most recently Canonical’s Landscape, a lightweight network enabled systems management service for Ubuntu customers.
These are each interesting in and of themselves, and certainly distinguished from traditional break/fix type support services, but it’s their potential impact that I find most fascinating. These could compel even businesses such as ours to engage commercially with the providers in question. Commercially, as in we’d pay them.
Not great sums of money, it’s true, but something. Unlike the big guys, I have little intention of paying merely for support and service fees, because frankly little goes wrong and what does I can usually fix. But would I be able to justify expenditures for metrics on performance, comparisons with other similarly loaded machines, online security assessments, transparent patching, query optimization, problem application identifications, and so on? You bet.
And while we’re about as far out the tail as you can get, significant merely in aggregate, think of the opportunities for monetizing the quote unquote Web 2.0 players. Every single one of them has had difficulty at one time or another scaling or tuning or merely keeping growing server farms up and running. Some of their problems will doubtless require the attention of people, might not many of them be addressed proactively via a network connection? I can’t see why not.
If I were an investor, then, one interested in how open source firms can make even more money, I’d investigate the possibility of delivering value added services online. It may not be the only answer to the question, but it’s the one with the most promise as far as I’m concerned.
Disclosure: MySQL is a RedMonk customer and Canonical has expressed an interest in becoming one, while Red Hat is not a RedMonk customer.
Niraj J says:
August 21, 2007 at 5:48 pm
I think the distinction between product companies and services companies is going to diminish as a result of two major trends
2. Open source
Going to what jonathan s has been saying. All mature markets move towards being utilities and computing , network and software are the three pieces that will that need to intersect to make this happen.
Here are two posts that are relevant to the above discussion.
1. Comparing open source and tranditional business models
2. The inevitible change that will take place for Systems Integrators as a result SaaS and open source
Niraj J says:
August 21, 2007 at 6:04 pm
Actually , on reading again. I failed to make one more point.
Open source in my view will always remain a component of the final service delivered to the consumer.. Yes Linux is Open source , but in a pure SaaS world Linux would really be a component of the appliance you buy from a vendor OR the say the operating system for someone like Salesforce.com.
I view open source products like SugarCRM as transitionary when SaaS really takes up and vendors like Salesforce are defacto.
August 22, 2007 at 7:59 am
good posting. I think this is exactly the right model for companies to think about. How do you make open source easier with add-on automated services? That is definitely the idea with MySQL Enterprise and the monitoring service.
Javier A. Soltero says:
August 22, 2007 at 8:14 am
Great post, Stephen.
Management technology happens to be a tremendous value add to open source companies. As I discussed with Cote and James back in Java ONE, Hyperic has seen a lot of success with companies who build management services into their subscription offerings. Two more examples come to mind which have proven to satisfy the revenue scale requirements of software companies (as opposed to insurance companies ;): JBoss with the JBoss Operations Network, and MuleSource with Mule HQ. Both of these companies (along with MySQL) have licensed Hyperic’s management technology to build out highly successful subscription offerings which bring real value to their customers and serve as a natural complement to the more traditional support and services offerings.
Scott Collison says:
August 22, 2007 at 9:55 am
Nice post Stephen,
It reflects what some folks are beginning to contemplate. Instead of monetizing my technology with support and/or consulting. I think about enabling businesses and communities to create or expand their value based on services provided by me and a variety of other companies.
Michael Dolan Dot Com » Thank you for your patronage Microsoft; I’m using Windows Vista (for now). says:
August 22, 2007 at 2:04 pm
[…] rarely check my web stats, but reading Stephen’s post on network services for whatever reason prompted me to look at my website stats. So one view I can see is the most […]
Stephen R. Walli says:
August 22, 2007 at 2:27 pm
Well said as always. One of the business model innovations that often goes unsung is the network model. The traditional software companies have dreamed of “subscription revenues” for at least the last 7-8 years. Companies using FOSS in their solutions are delivering on it.
It also becomes something that might scale well DOWN to enable more community users to become customers.
Once More unto the Breach says:
August 22, 2007 at 3:26 pm
Open Source Business Innovation and the Subscription Model…
Stephen O’Grady has a great post (as always) on how companies using free and open source software in their customer solutions can make more money for their investors. Companies like MySQL, JBoss, and Red Hat, and now Canonical have all…
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Niraj J says:
September 17, 2007 at 11:37 am
here are a few more thoughts to the collective wisdom on this topic
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