Open source is not a business model

(Or “freedom of speech won’t feed my children”)

Last month I noted that Matt Asay, one of the highest profile proponents of open source software, had changed his position on the use of proprietary extensions as a means of attracting paying customers to software based on open source code.

Having previously advocated a 100% open source approach, Matt conceded that “If adding a hint of proprietary software to a solution is done in such a way to encourage a purchase but not compel long-term lock-in, I’m no longer convinced that this is wrong. If it puts food on the table without putting anyone out, where is the harm?”

Matt is not the only open source advocate to have accepted that proprietary and open source software are not mutually exclusive, as has been proven by the findings of The 451 Group’s latest CAOS report, “Open Source is Not a Business Model“.

With this research report we were trying to answer the age old question “How do vendors generate revenue from open source software?”. In order to answer it we 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.*

Some of the more interesting findings are as follows:

  • The majority of open source vendors utilize some form of commercial licensing to distribute, or generate revenue from, open source software.
  • Half the vendors assessed are using hybrid development models — combining code developed via open source projects with software developed out-of-sight of open source project members.
  • Vendors using hybrid development and licensing models are balancing higher development and marketing costs with the ability to increase revenue-generation opportunities from commercially licensed software.
  • The license used for an open source project (reciprocal or permissive) has a strong influence on development, vendor licensing and revenue-generation strategies.

In order to assess the business strategies used by open source-related vendors it was necessary to categorise the business models used by open source vendors. We therefore assessed each vendor’s strategy related to license choice (reciprocal or permissive), development model, vendor licensing strategy (e.g. dual licensing, open-core licensing) and revenue generation triggers (e.g. commercial licensing, subscription, support services, other products).

While it had been previously thought that there are a handful of business models related to open source, our research indicated that this is an over-simplification. There are over 80 different combinations of development model, vendor licensing strategy and primary revenue trigger being used today by the vendors we analyzed.

The report also busted some other open source-related myths, such as the idea that open source vendors are reliant on ad hoc support services, and that open source eliminates the need for direct sales. We found that:

  • Ad hoc support services are used by nearly 70% of the vendors assessed, but represent the primary revenue stream for fewer than 8% of open-source-related vendors.
  • Most vendors generating revenue from open source software are reliant on direct sales staff to bring in the largest proportion of revenue.

There are plenty of other juicy statistics in the report, which examines the influence of license, development model, vendor licensing strategy, and revenue triggers on each other, as well as the strengths and weaknesses of the various strategies, and how the use of revenue generation and sales strategies will change over the next two years.

There is also room for a bit of history, examining the origins of open source-related business models, and the evolution of business models over time to accommodate hybrid development and licensing strategies.

As for the overall conclusion. I have already hinted at the findings in a couple of posts, noting that:

  • “Open source is a business tactic, not a business model. Open source is not a market in and of itself, nor is it a vertical segment of the market. Open source is a software development and/or distribution model that is enabled by a licensing tactic.”
  • “The cat is already out of the bag when it comes to open source related business models and there is no way it is going back in.”
  • “There is very little money being made out of open source software that doesn’t involve proprietary software and services.”

The line between proprietary software and open source software is becoming increasingly blurred as open source software is embedded in broader proprietary hardware and software products and proprietary extensions are used to attract more customers.

Some open source purists will no doubt be dismayed that so much software distributed using open source licenses finds its way into commercially licensed products. More pragmatic observers will no doubt be encouraged by the widespread adoption of open source development and distribution principles.

Either way, the fact is there are few vendors generating revenue from open source software that are following a pure open source approach when it comes to developing all of their code in the open and licensing all of their software under open source licenses.

The report was released on Friday to existing subscribers and is also available for purchase. An executive summary (Pdf) is also available. Look out for future details on a live webinar where I’ll discuss the findings in more detail.

*We were aware that the inclusion of (mostly) proprietary vendors such as these might disproportionately influence the results so we also filtered the findings to include only those vendors that could be considered “open source specialists”. We found that over 40% of these specialists are developing some software out-of-sight of open source project members while more than 50% are using some form of commercial licensing strategy. Full details in the report itself.

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70 comments ↓

#1 451 CAOS Theory » Open source as a strategic competitive weapon on 11.05.08 at 5:51 am

[…] assert that it is also a way of explaining why open source vendors are increasingly turning to hybrid development and licensing strategies to generate revenue from open source. More on that another day. Permalink | Technorati Links | […]

#2 Report: Pure Open Source No Longer a Viable Business Model | Techno Portal on 11.10.08 at 6:56 am

[…] “Open source is not a business model,” the report challenges some long held beliefs about the technology business. Not everyone is […]

#3 451 CAOS Theory » How “why” is the most important question open source vendors should ask themselves on 11.19.08 at 3:51 pm

[…] answer to the question “why?” has the capacity to explain which business strategies an open source vendor should be following, whether it is likely to gain a share of what little […]

#4 451 CAOS Theory » If it ain’t broke… on 12.03.08 at 9:27 am

[…] fairly obvious. It is essentially the underlying conclusion we came to with our recent report Open Source is Not a Business Model (mind you, I didn’t think the title of that report was controversial so maybe I can’t see the […]

#5 CRM Outsiders » Blog Archive » Open Source is Not (Just) A Business Model on 12.03.08 at 7:22 pm

[…] That is why I was glad to see my old firm the 451 Group put forth a new report called “Open Source is Not a Business Model.” You can learn more about it the report here. […]

#6 The future of software: Opensource, but where’s the profit? « Nickpoint on 12.05.08 at 6:25 am

[…] with GPL licencing but had to restart his business twice, racking-up $43m in debt. A recent report form The 451 Group entitled “Open source is not a business model” concludes,“There is very little […]

#7 451 CAOS Theory » Open source in 2008 in pictures on 12.18.08 at 12:35 pm

[…] Open source is not a business model […]

#8 PR + Digital Marketing + Branding» Blog Archive » How to use the ‘mixed economy’ model in online PR on 01.05.09 at 1:44 pm

[…] economy’ model is also the basis of the profit in the Open Source movement — companies can use Open Source profitably by using part Open Source, part proprietary […]

#9 Open Source Executive Strategy Summit at EclipseCon « Ian Skerrett on 02.04.09 at 4:55 pm

[…] Near the same time, Matt Aslett from 451 Group published a very topical research note called ‘Open Source is Not a Business Model‘.  In the report, Matt presents a framework for an open source strategy and then a survey of […]

#10 Back to Reality | Odd Ramblings from a Superfly Gaming 3.0 Start-Up on 02.08.09 at 8:33 am

[…] got to accept it and deal with it.” We know that the boundaries between is becoming blurred. As Matthew Aslett states: The line between proprietary software and open source software is becoming increasingly blurred […]

#11 Open source social web content management questions — Too much information on 06.22.09 at 12:46 pm

[…] changes.  Open source certainly fits into the disruptive business model category (though, I know, open source is not a business model).   Open source can impact how technology in a particular sector is developed, distributed, […]

#12 The Changing Nature of Open Source Companies « Ian Skerrett on 11.10.10 at 3:41 pm

[…] studying the business strategies of companies related to open source.   His 2008 report ‘Open Source is Not a Business Model’ correctly pointed out that companies did not just use open source but used a number of […]

#13 Open Source – not a Business Model | Goldfish Chronicles on 04.20.11 at 2:02 am

[…] 2011 Red Hat article and through it Glyn Moody’s 2010 Red Hat article. Also quoted is Matt Aslett’s 2008 451group article. Open Source products do not make […]

#14 Quora on 05.10.11 at 10:32 am

What are the main pitfalls of monetizing open-source software?…

Licensing isn’t out of the question. MySQL AB made a ton of money by dual-licensing, in effect charging companies for a get-out-of-GPL-free card. BTW, googling for ‘open source business model’ will get you lots of relevant links, but here is one in …

#15 Report from the 451 group: How software vendors generate revenue from free products | Behind the Curtain of OSS on 08.12.11 at 4:15 pm

[…] Aslett’s recent blog entry, Open Source is not a Business Model, garnered some strong comments, and I had a chance to read the entire report over the […]

#16 An outbreak of open mindedness at FOSS4G! | Kortste Routes on 09.20.11 at 2:00 am

[…] Ramsey’s talk was intriguing and a bit <sarcastic>. I know the 2008 report he quoted. I don’t mind calling a model a tactic (or vice versa). I like to use a definition I once found […]

#17 An outbreak of open mindedness at FOSS4G! - Jw. | Jw. on 07.15.12 at 3:46 pm

[…] Ramsey’s talk was intriguing and a bit <sarcastic>. I know the 2008 report he quoted. I don’t mind calling a model a tactic (or vice versa). I like to use a definition I once found […]