451 CAOS Theory 
A blog for the enterprise open source community
Smashing the open source glass ceiling
Matthew Aslett, June 9, 2008 @ 9:53 am ETLast week I asked whether open source vendors face a glass ceiling, prompted by Savio Rodrigues’s suggestion that a pure open source support model will only get vendors so far.
While I remain unconvinced at this stage* Savio is in no doubt that such a ceiling exists and has continued his argument with a suggestion as to how to fix what he calls “the broken OSS business model”. The solution, according to Savio, is for a vendor to offer two products – one open source and the other, with additional features, commercially licensed.
Calling it the “Product Driven OSS Business Model”, Savio describes how the features previously only available with the commercial product will be added to version 2.0 of the open source product, while new additional features will be added to the commercial product in version 2.0, maintaining its differentiation.
“I know that all of this sounds like heresy to some OSS purists. It is. We need a dose of heresy to break through the glass ceiling that some of us see ahead,” he writes.
What strikes me about this model is that it is already being put into practice my a number of vendors. In fact, it is a subset of the “Split OSS/commercial products” category defined by Carlo Daffara as part of the FLOSSMetrics project.
For example, SugarCRM, Hyperic, and GroundWork all differentiate their commercial and community products based on features, while EnterpriseDB has also gone in that direction with its PostgreSQL Plus strategy.
While I don’t think any of these vendors are as regimented as Savio suggests about drip-feeding functionality from the commercial version into the community version, the line that divides the products certainly changes over time as new features are added.
As for whether this model can “fix” the problem, as Carlo points out “The model has the intrinsic downside that the FLOSS product must be valuable to be attractive for the users, but must also be not complete enough to prevent competition with the commercial one. This balance is difficult to achieve and maintain over time; also, if the software is of large interest, developers may try to complete the missing functionality in a purely open source way, thus reducing the attractiveness of the commercial version.”
Meanwhile in the comments section to Savio’s post, Damon Edwards raises other potential problems: “Your paying customers will immediately question the value of paying full price for something that they could have gotten 80% of for free. Additionally, you are going to run out of “feature carrots” to force upgrades pretty quickly. For example, lots of organizations would happily stick with Exchange 5.x (if it was free) and just ride out the wave until 7.x was free.”
Instead Damon suggests re-thinking support contracts to ensure that they provide value that potential customers will be willing to pay for, which brings us back to the point I made last week about the answer not necessarily being about features and functionality but the perceived value of the application in question.
*Savio’s argument relies on the assumption that a vendor has “saturated” Category C users (“those with cash and willing to spend it to save time”) and has to try and covert Category B users (“those with cash, but who have been trained by the OSS community to expect value for free”).
While this is probably theoretically sound I would argue that even the most successful open source vendor has an opportunity to sell more (valuable) applications into Category C accounts. In his original catagorization Savio wrote “There is likely an aspect of ‘how business critical is the application running on OSS’ that needs to be overlayed on this user categorization. But that’s for another post.” I’d like to read his thoughts on that before making up my mind.
Comments (9) Categories: Business strategies,Software
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Many thanks to Matthew and Savio for what is becoming a very interesting conversation. I would like to just add a few comments:
- first of all, I believe that the models and approaches that we are discussing now are still somewhat immature, and will flux (as the companies flux between the various models to maximize revenues). The situation is similar to the early days of internet commercialization, when business models were tested by the market and it took some years to find those that demonstrated real sustainability.
- the widespread talk about “communities”, “user classes” and such are somehow misleading, as not all projects cater to the same classes. In this sense, while for most projects the A-B-C distinction by Savio makes sense, it is not universally applicable, and for some vertical (but not economically small) areas like embedded systems the overall economics is totally different.
- In our EU research projects we have found one thing for sure: margins in OSS companies are smaller than the top 10 software companies like Microsoft or Oracle, so it may be a little ingenuous to expect that in just a few years those OSS vendors should reach 1B$ “easily”. On the other hand, apart from those 10 top vendors, profit margins for proprietary and OSS vendors are comparable, when matched for size and industry, so at least it cannot be said that OSS vendors are disadvantaged in terms of the business mode.
As for the market, simulation studies on OSS adoption show that incumbents with significant pricing power (the ability to alter pricing strategy to fend off competition) are not easily disrupted unless regulatory changes are introduced or a substantial technological change alters the overall economics of a sector. In this sense I agree with Savio that OSS will not likely dislodge proprietary vendors, but can alter the market so much that new forms of competition are possible (look at what happened in the IDE market with the introduction of Eclipse and Netbeans, for example).
In this sense, even without all the end-user and developer benefits, OSS has a great power in providing a balance to markets that are overpowered by a few controlling companies.
Thanks for the comments Carlo, some interesting points to follow up on.
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