Hell freezes over – Matt Asay on the problem of open source revenue models

The effects of global warming must be worse than were first thought. Matt Asay has admitted that it makes sense for software vendors to charge upfront license fees.

While I am being facetious, the recent post from Matt – titled “the problem with open-source revenue models” – is an interesting insight into the fact that open source software development does not have all the answers.

Matt’s post is a response to this article by Dennis Howlett in which Dennis maintains that the reliance of traditional software vendors is unsustainable and will eventually lead to a revolution in software support and maintenance contracts.

I commented last week that while traditional licensing is the problem, open source licensing is not necessarily the answer. Matt agrees, although for slightly different reasons.

“Open-source vendors start making money from their customer base precisely at the point that the customer base is least likely to renew,” he writes. “Howlett suggests that software vendors are right to charge a big upfront license fee as it helps to defray the high initial cost of supporting a customer’s deployment of the software. I hadn’t really thought of that before, but it makes sense. Open-source vendors chop off the license fee and only charge for maintenance and support, which means they assume pretty much all of the risk/cost in the first year of a contract.

“Open-source vendors get around this by pushing for multi-year agreements, which is a way of evening out risk and fairly apportioning it between vendor and buyer,” he continues. What Matt doesn’t add, but he has written about before, is that the annual subscription cost for open source software is likely to be higher than the annual maintenance cost for traditionally licensed software.

“On the IT buyer’s side, a subscription’s price is likely to be higher on an annual basis than the maintenance on a proprietary license. In the first year, a subscription is dramatically cheaper. But over five years…? Or how about just in the second year, or third? It’s no longer so clear-cut.” he wrote in May.

Another way to spread the risk on open source vendors, according to Matt, is “adding commercial extensions to help compel renewals”. As I noted the other day, however, “if Dennis is right and customers turn against enterprise software support and maintenance models then how many customers are going to be able to distinguish ‘commercial license plus support subscription’ from ‘commercial license plus maintenance contract’?”

Clearly there needs to be some middle ground that spreads the risk between vendor and customer and also enables open source vendors to ensure revenue generation without relying too heavily on traditional licensing strategies.

Matt is confident that middle ground can be found. Are you?

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10 comments ↓

#1 Hell freezes over - Matt Asay on the problem of open source … : thegameoflove on 08.28.08 at 4:47 am

[…] Original post by Matthew Aslett […]

#2 tweetSMS is back! : ultimate geek girl on 08.28.08 at 5:09 am

[…] Hell freezes over – Matt Asay on the problem of open source … […]

#3 Dennis Byron on 08.28.08 at 5:45 am

Yes, Matthew, it’s called SaaS these days. Used to be called Application Service Provider and before that–way before that–a service bureau.

About a quarter trillion dollars a year are now spent on software sold in the market (as opposed to written inhouse). It is paid for via license fees, maintenance subscriptions (be they for software whose source is open or otherwise), advertising support to the software developer, business service fees where the software is bundled in the service, and so forth. Only a fraction of that is license fees and only a fraction of those license fees relate to new business. Most license fee revenues are for upgrades, new users, etc. Actually the license fee business model is a relatively new method; only about 30 years old.

Dennis

#4 Matthew Aslett on 08.28.08 at 12:29 pm

Thanks for the comment Dennis. SaaS would appear to be a potential answer to the problem, although it doesn’t solve the issue Dennis Howlett identified about customers wanting to be treated as individuals.

#5 Andrew Lampitt on 08.29.08 at 11:18 pm

I started typing a response, and then it got too long. You prompted me to finally start a blog: http://alampitt.typepad.com/lampitt_or_leave_it/

#6 Matthew Aslett on 09.01.08 at 2:22 am

Welcome to the blogosphere. Nice first post. The model you refer to has also been referred to (not widely, although I use it in a forthcoming report) as Split Licensing (to differentiate from Dual Licensing). I’ll follow up with more discussion later.

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