I wrote yesterday that Christensen’s law of Conservation of Attractive Profits could be used to explain why open source vendors are increasingly turning to hybrid development and licensing strategies to generate revenue from open source.

Before I could think about doing so Arjen Lentz wrote a comment that did a lot of the explaining for me.

To recap, “The Law of Conservation of Attractive Profits”, articulated by Clayton Christensen in his book The Innovator’s Solution, states:

“When attractive profits disappear at one stage in the value chain because a product becomes modular and commoditized, the opportunity to earn attractive profits with proprietary products will usually emerge at an adjacent stage.”

Arjen wrote:

“OSS vendors turn to hybrid development and licensing strategies (or in some cases, not turn to but cling to even though other newer revenue streams have emerged successfully) because their sales organisations a) don’t always understand how the OSS market place works - they should indeed read a good dose of Clayton Christensen’s works! and b) it is a known path for revenue, and since sales people’s income and job is directly related to this month’s performance, they won’t naturally experiment with that. Sales people will do what’s been successful in the past, for a long as it remains succesful.

The fact that other avenues *might* be more successful (or nicer to the clients and the ecosystem) is in this context, irrelevant. They won’t go for it. Can’t. It’s one of the basic innovator’s dilemma factors.

The point is that being a vendor that publishes OSS, does not make it a non-traditional company. The vast majority are really very traditional in the way they do business. Which is quite understandable, given the above aspects.

In the long run, of course, these vendors will find their “safe” and known market disrupted, even if they once considered themselves a disruptor. Yes, the disruptor can and will be disrupted. It’s happening all-over the place in our business.”

This explains the initial attraction of hybrid licensing in my view, but doesn’t go the whole way. Yes, a lot of these vendors are continuing to think like traditional companies and perhaps, as Dave Neary recently suggested, they shouldn’t.

However, given that these vendors are attempting to maximize profits it is understandable that they will look to traditional licensing methods to achieve that.

In the context of Christensen’s law open source specialists are engaged in commoditizing their own stage in the value chain. Unless they make money from other stages in the value chain such as other products (e.g. HP, Oracle) and/or embedded open source in commercial hardware and software (e.g. IBM, Cisco) then those vendors face a problem.

It is of course possible to generate profit from support (whether it be ad hoc or subscription based) but that arguably does not scale, presents problems in terms of balancing community and commercial requirements, and is unlikely to provide the sort of profit margins most vendors will be looking for (especially as hybrid development models maintain higher development costs, as opposed to pure open source community development models).

This explains why the likes of Matt Asay and Savio Rodrigues have recently argued that Sun and MySQL should return to the idea of closed source extensions to the open source software in order to close the gap between large but declining proprietary revenue and small but increasing open source revenue.

One of the problems this Open-Core Licensing approach has, however, is identifying value-add features that will persuade users to becoming paying customers and maintaining the balance over time (to stretch Arjen’s point, the open source disruptor is disrupted by its own disruption).

In the context of Christensen’s law it is probably easier in the long-term to generate profit from adjacent proprietary products than it is to generate profit from proprietary features deployed on top of the commoditized product.

This is why I would agree with former Sun employee Rich Sands and his view that the better long-term model for Sun lies in using open source to generate revenue from other products and services.

Which isn’t to say that one model is intrinsically better than the other, but that each has its place depending on the stage of commoditization and the short- and long-term goals of the individual vendor. I think I’ll come back to that later.