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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#14 Quora on 05.10.11 at 10:32 am

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

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