The right and best way to make money from open source

Eric Barroca, CEO of Nuxeo, has published an interesting take on commercial open source business strategies, highlighting that vendors that treat community edition products like a free demo are failing to make the most of open source.

The key themes of Eric’s post have been discussed before (although his analysis is no less valuable or interesting for that). To me, they are attempts to find solutions to two core questions:

1/ What is the best way to generate revenue from open source software?
2/ What is the right way to generate revenue from open source software?

There is a subtle difference between the two but I would suggest that 1/ is a practical question related to business strategy, while 2/ is a theoretical question related to community strategy.

There are those those that believe that the answers to those two questions are likely to be contradictory, but I think that many more would agree that not only are they complementary but also mutualistic.

That is to say that while there are good theoretical reasons for finding the right way to generate revenue from open source (i.e. one that does not damage the open source brand, or disrupt community projects, or result in disgruntled community users) these go hand in hand with good practical reason for finding the best way to generate revenue from open source (i.e. one that does not damage the company’s brand, or disrupt commercial relationships, or result in unhappy customers).

When it comes to finding answers to best way to generate revenue from open source you could do a lot worse than listening to Peter Fenton, who, as the WSJ reports, has made investments in JBoss (sold to Red Hat for $350m), Zimbra (acquired by Yahoo for $350m), and XenSource (bought by Citrix for $500m), not to mention SpringSource (sold to VMware for $420m).

Fenton tells the WSJ that the real advantage of open source is the distribution model. “Rather than ‘expensive sales efforts and negotiations with the upper management to get the most money possible,’ the people that will be using the software can easily download and try the product,” notes the WSJ.

As Eric pointed out in his post, however, the same effect can be achieved with a free demo. And if done badly, the approach does not result in any more customers, whether the software is open source or not.

The difference, as Peter Fenton explains, is that “if you don’t have the best product, you’re not going to make it in open-source.” There is no point trying to compel community users to become customers by providing them with substandard software and waving an enterprise version at them. It won’t build a community, and it won’t build brand. That is neither the best, nor the right way to generate revenue from open source.

As I previously stated the right way and best way involves being honest and transparent about licensing, avoiding marketing the benefits of open source while selling proprietary licenses, separating proprietary features attractive to paying customers from the requirements of community users, and looking after and understanding the needs of the community.

That guest post on Brian Gentile’s blog was specifically related to the Open Core model, although the general advice applies to any of the commercial open source business models.

As Eric writes, “There is nothing wrong selling proprietary software, especially when you’re contributing a lot of open source code (I’m a great fan of Atlassian and Day, in this respect). It is nothing to be ashamed of. Just be clear and focus on your software’s competitive advantage rather than its open source ‘nature’.”

Interestingly a similar statement was recently made to me by Open Source Initiative board member Andrew Oliver. While he is concerned about what he sees as the misuse of the term “open source” and the potential resulting damage for the open source movement, he accepts that proprietary software has its uses.

With that in mind Andrew has called for vendors to be more honest about the way in which they use the term “open source” with regards to business strategies and development projects, as opposed to licenses. I have previously noted that the Open Source Definition is somewhat limited in policing the use of the term. It seems steps are being taken to address that. But that’s a subject for another post entirely.

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5 comments ↓

#1 Jack Repenning on 08.12.09 at 3:52 pm

Got a link to the Andrew Oliver “call to be more honest”? Sounds interesting….

#2 Matthew Aslett on 08.13.09 at 1:54 am

I’m not sure he’s gone public, yet. Stay tuned though, as we’re expecting more details soon.

#3 Links 14/08/2009: Linux 2.6.31 RC6, Ubuntu 9.10 Alpha 4 | Boycott Novell on 08.14.09 at 8:09 am

[…] The right and best way to make money from open source Fenton tells the WSJ that the real advantage of open source is the distribution model. “Rather than ‘expensive sales efforts and negotiations with the upper management to get the most money possible,’ the people that will be using the software can easily download and try the product,” notes the WSJ. […]

#4 Sell ‘Good,’ Not ‘Open’ «Innovativ Insight on 08.25.09 at 12:09 pm

[…] ‘Good,’ Not ‘Open’ The folks at the 451 Group talked recently about “the right and best way” to make money from open source. The short version: don’t sell “open source”, sell good software. […]

#5 451 CAOS Theory » Open core is not a crime on 07.02.10 at 10:44 am

[…] we previously noted, “There is no point trying to compel community users to become customers by providing them […]