Open Source Software Business Models

In preparation for the MOST Workshop in Moncton tomorrow, I thought I’d provide some links to business models that are being used with open source software (OSS).

At the KMDI conference this Summer, Matt Asay described three business models for OSS (Commodity, Brand & Service, Pragmatic) .

John Koenig, in the IT Manager’s Journal discusses seven business strategies for OSS:

1. The Optimization Strategy (where one layer of a software stack is “modular and conformable,” allowing adjacent software layers to be “optimized.”)
   
2. The Dual License Strategy (offering free use of software with some limitations, or alternatively offering for a fee commercial distribution rights and a larger set of features.)
3. The Consulting Strategy (reduce or remove licensing costs and sell services)
   
4. The Subscription Strategy (selling OSS maintenance on a yearly basis)
   
5. The Patronage Strategy (where original equipment manufacturers support OSS in order to create an environment for other products and services)
   
6. The Hosted Strategy (using OSS to provide your services, e.g. Google)
   
7. The Embedded Strategy (using OSS in hardware to increase market acceptance)

The Open Source Initiative states that there are “at least four known business models for making money with open source”:

1. Support Sellers (otherwise known as “Give Away the Recipe, Open A Restaurant”): In this model, you (effectively) give away the software product, but sell distribution, branding, and after-sale service.
2. Loss Leader: In this model, you give away open-source as a loss-leader and market positioner for closed software.
3. Widget Frosting: In this model, a hardware company (for which software is a necessary adjunct but strictly a cost rather than profit center) goes open-source in order to get better drivers and interface tools cheaper.
4. Accessorizing: Selling accessories – books, compatible hardware, complete systems with open-source software pre-installed.

Frank Hecker, has added to these four models with:

1. “Brand Licensing,” in which a company charges other companies for the right to use its brand names and trademarks in creating derivative products.
2. “Sell It, Free It,” where a company’s software products start out their product life cycle as traditional commercial products and then are continually converted to open-source products when appropriate.
3. “Software Franchising,” a combination of several of the preceding models (in particular “Brand Licensing” and “Support Sellers”) in which a company authorizes others to use its brand names and trademarks in creating associated organizations doing custom software development in particular geographic areas or vertical markets, and supplies franchises with training and related services in exchange for franchise fees of some sort.

Much of what is written about OSS is from the perspective of those who develop and support the software. I think that a greater potential, especially for small businesses, is to use OSS in order to significantly reduce costs. With Mancomm, we reduced costs for a pilot project by using open source. The client saved about $1M over previous estimates. The same approach is used by another of my partners, PSI, to keep costs down and focus on developing the right models before investing in any new technology. In each case, the client does not incur license fees and can even decide not to implement after a pilot project and not worry about getting a return on the license fees. OSS is lower risk, especially for test and pilot projects, thereby encouraging innovation.