What is the open source business model?

I am wondering about this. Where do the revenue come from? What can we learn from companies around us that we deal with?

WordPress.org gives away it's source code (they have had over 1 million download that they make nothing from) and makes no advertising money from the enormous number of blogs they host for free. Their site says:

Services

There has been quite a bit of demand for professional services around our projects, and we’re happy to provide them for select clients.

Enterprise Support

We can provide enterprise support, priority updates, training, and consulting for WordPress, WordPress MU, and bbPress. Contact us with your needs and someone will get back to you shortly.

Swapping job security for a startup – an interview with Toni Schneider

Why did Toni Schneider leave a good job at Yahoo to dive back into the fray with blog-software maker Automattic?

You've joined Automattic to help it capitalize on WordPress. Why?

"WordPress is an interesting new challenge because it's not like most startups, where the world still hasn't heard of you. WordPress is way past that stage. On the other hand, there is no business yet. Until Automattic came along, there was nobody working for it. It was all volunteers. So taking that product momentum and somehow turning that into a business will be really interesting.


So what is the business model?

"We're looking at a number of things. WordPress as a blogging platform is already open-source. If you want to run your own blogging service and host other people's blogs, great. Take it. We want lots and lots of people to become serious bloggers. Then we can offer add-on services to those people.

If a blog starts to have so much traffic that you start making some money, once you get to that point, you're ready to spend meaningful money. For people who just casually blog, it should be free.

We're starting to license add-on services like Akismet, which blocks Web spam, to other people who are running corporate blogs, for example. If you're, say, an About.com, and your business is on blogs, you can't have spam on there."

What is the open source business model?

The open source business model relies on shifting the commercial value away from the actual products and generating revenue from the 'Product Halo,' or ancillary services like systems integration, support, tutorials and documentation.) This focus on the product halo is rooted in the firm understanding that in the real-world, the value of software lies in the value-added services of the product halo and not in the product or any intellectual property that the product represents.

Seven open source business strategies for competitive advantage

Individual and enterprise users of software today have many options for satisfying their computing and networking needs. Open source software (OSS) is one of them, and it is often selected because of the broader choices OSS can deliver. For instance, OSS offers enterprises the opportunity to be more self-reliant through source code modification. It allows incremental project and upgrade schedules, free rein in integration decisions, and direct interaction with the OSS community. It creates the opportunity to implement projects in a way that is consistently mindful of enterprise goals, rather than the goals of a proprietary software vendor. OSS allows enterprises to select from a broader range of hardware and software vendors and service providers than proprietary solutions. For these and other reasons, the pace of Linux and OSS adoption continues to accelerate.

The companies in the graphic … illustrate some of the OSS strategies being used to create product value, attract customers, and generate revenue. Each of these strategies and models is explained in greater detail in the following pages.

The Optimization Strategy – one layer of a software stack is "modular and conformable," allowing adjacent software layers to be "optimized."… Winners … are the adjacent, interdependent layers of the software stack, the layers where applications are optimized to achieve greater value, and where, correspondingly, better pricing power exists.

The Dual License Strategy – offers free use of its software with some limitations, or alternatively offers for a fee commercial distribution rights and a larger set of features … So what is the incentive for dual license vendors to license software without charge? A free option facilitates new business in a number of ways, including improved customer awareness and faster adoption, stronger competitive positioning, and a large base of users to find bugs and recommend improvements to the software.

The Consulting Strategy – … in 1999, Clay Shirky said: open source suggests an almost pure service model, where the basic functionality costs nothing, and all the money is in customization…

The Subscription Strategy – According to Culpepper, "revenues from services — both maintenance and consulting — increase in proportion relative to revenues from licenses. Move out to the 20-year mark, and the typical software company will have $2 of services for every $1 of licenses." … Unlike the NetWare software product from Novell, the Red Hat Linux distribution generates no license revenue for Red Hat. But clearly Red Hat maintenance revenue is increasing at a faster rate than Novell maintenance revenue…

The Patronage Strategy – When a company contributes open source software to an independent organization, it anticipates that a de-facto standard and supporting community will converge around that contribution… To succeed with a patronage strategy, the patron must deliver more than just source code. There must also be leadership and consistency… The Mozilla project continued to deliver buggy, late releases, and by January 2004, Microsoft had gained 95% market share… Eclipse – by commoditizing the framework, IBM can add value higher up the development tool chain… but in the relatively near future open source will infringe on those domains, and IBM… will have to look to other areas to add value.

The Hosted Strategy – In a January 2004 interview with Java Developer's Journal, Scott McNealy gave the following prediction: Software licensing and deployment models will be radically simplified. 2003 was the year we saw a bunch of companies finally get the service provider model right. Companies like Salesforce.com, eBay, and Google, are in the software business, but they don't sell their software, they let you use it or rent it. You're going to see a lot more activity in this space in 2004.

The Embedded Strategy – Hardware vendors should utilize standards and commodities, including Linux, as a platform strategy, and move up the chain by developing software that actually creates value. Set-top vendors, for example, might be more viable businesses today if they had pursued truly open platforms and standards.

Open Source As A Business Model

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