How do you make money if you give your software away for free? That's the classic question asked of Open Source software vendors and the expected reply is that they charge customers for software customization and support. That's not the way it works anymore, though, according to a report published today by analyst firm The 451 Group.
Titled "Open source is not a business model," the report challenges some long held beliefs about the technology business. Not everyone is happy with the 451 Group's conclusions, either.
451 says in writing the report it "analyzed the business strategies of 114 open source-related vendors, including open source specialists such as Red Hat and Alfresco, and those for which open source is used more tactically, such as IBM and Oracle."
The resulting 71 page report is being sold for $3750 and our requests for press access have not been replied to by press time. (Perhaps writing in complete sentences would have helped, we hadn't seen the price tag when we sent that email!)
However, there is a lengthy summary available on the blog of 451's Matthew Aslett where we can glean some of the report's conclusions.
The analysts found that while the majority of open source vendors now use some kind of commercial license (meaning it's not free anymore) when they distribute their software, half of them develop at least some code as "out of sight" property. And although both of those steps increase development costs - they are making more money in the long run as a result.
While people often discuss a limited number of open source business models, like support, hardware sales, etc. the report discovered "over 80 different combinations of development model, vendor licensing strategy and primary revenue trigger being used today by the vendors we analyzed."
While 70% of the companies surveyed offer support services to their customers, that's only a primary revenue stream for 8% of responding firms.
The open source business world sounds very different from what many of us on the outside of it have thought. In fact, Aslett writes that "There is very little money being made out of open source software that doesn't involve proprietary software and services." Aslett concludes that open source is a business tactic, not a business model.
The very definition of open source has been up for debate for some time, but these numbers put an interesting spin on that discussion.
But What About the Dream of Free and Open Software?
Aaron Fulkerson, founding CEO of the fast-growing open source enterprise wiki provider Mindtouch, says that the 451 report is right on the money. Open source has been essential in Mindtouch's efforts to build a community of developer evangelists, but it's no longer the be-all-end-all. Because the company's code is open to developers to work with, discuss and more sophisticated bug reports on, Fulkerson says, it has build a loving community that spreads awareness of the company's software for it.
In the end though, while Mindtouch used to sell only support contracts - now it sells software. "In the end, everyone is selling software," he told us. "[But] You have to create product pull. Open Source Software is the easiest way to do that. I entered this all ideological 3 years ago swearing that what I'm saying now is bullshit. But it's true." Three years ago Fulkerson was hiring a Bono look-alike to draw attention to the company at DEMO, so he's really tried a wide range of things to create that "product pull."
Not everyone sees it that way, or is willing to accept the 451 Group's conclusions. Marcus Estes of open source development shop OpenSourcery contests the report's premise and says that a long tail of purists is doing serious business.
"I question their use of the term vendor. It's certainly untrue that 'The majority of open source vendors utilize some form of commercial licensing to distribute, or generate revenue from, open source software.' Every time a freelance Drupal hacker makes a copy on a web server of the codebase, they're a vendor. And that means that in terms of numbers, small vendors outnumber the enterprise vendors by perhaps 10,000 to 1.
The long-tail of open source vendors is a force to be reckoned with - there are now thousands more opportunities for small businesses to provide software services around open source software than there were 5 or 10 years ago. And together, they're taking a bite out of the bigger, proprietary vendors.
The model is clear: custom development and support. No proprietary licensing necessary. We're a purist open source shop and we're growing 100% year upon year. Looks like a business model to me."
Estes has certainly got the religion and in absolute terms he may very well be right. His is a small design-centered shop, though, and enterprise scale vendors may be a different animal and a different conversation.
What do our readers think? Is pure open source a viable business model or have those heady days largely passed, replaced by a more complex time of blended business strategies for monetization?