Free software for a price

Bowen%2C%20James-120X210.jpgThe most significant, all encompassing and long-term trend that the industry has seen since the early 1980s.

By James Bowen
From SCAN's Print Edition

Given its unassuming origin as free software, open source software (OSS) has come a long way. In 2001, IBM invested (all figures in $US) $1 billion in Linux and put 1,500 programmers to work full-time developing Linux software. Today, thanks in part to the efforts of people in Ottawa’s technology community, various OSS business models have sprung up. Business, paradoxically, is now driving the creation of open source software, once beyond the purview, and interests, of mercantilism. Much has happened with OSS in the last eight months. After several years of resistance, SUN Microsystems made parts of Java available as OSS. Then market analyst IDC weighed in with a strong endorsement: “IDC believes that open source software represents the most significant, all encompassing and long-term trend that the industry has seen since the invention of the fundamental data storage architectures and SQL APIs in the early 1980s. IDC believes that open source will play a role in the life cycle of every major software category at some time and that open source will fundamentally change the value proposition for packaged software for software customers.”

In 2005, US venture capital company Highland Capital Partners said it expected to see many open source companies decimated because of a lack of due diligence. Businesses are well advised to consider six factors before embarking on an OSS-based enterprise: 1) market size; 2) the vigor of community developing the software; 3) the number of potential users; 4) income from product support; 5) in-house knowledge of the product and its market; and 6) the wait time attendant to software adoption.

Despite the concerns of firms like Highland, venture capitalists are currently increasing their commitments to OSS, according to a Feb. 2007 article in Computer Business Review. The article reports that VCs invested $475.2 million in Linux and other open source vendors in 2006, up 61.6% from $294 million in 2005. While the amount is small, considering the vast size of the market, VC investment in OSS is clearly growing at a good clip. At the same time, 2006 investment in traditional software vendors decreased to $1.6 billion from $1.66 billion a year earlier, according to the article.

Carleton University professor Peter Hoddinott’s research on open source has found some 570 million lines of available code. Hoddinott asserts that while better end-user control with OSS gives it a marked advantage over other software, its greatest strength lies in the fact that it requires only a small expenditure on marketing and sales before it becomes widely adopted. Hoddinot describes several OSS business models:

Support Sellers or “Give Away the Recipe, Open A Restaurant”: In this model, one effectively gives away the software product, but sells distribution, branding, training, consulting, custom development, and post-sales support instead of traditional software licensing fees. This, for example, is what Red Hat does.

Loss Leader: Here one gives away an open-source main product in order attract customers to other products and services. This is what Netscape is doing.

Widget Frosting: This model has a hardware company, like Silicon Graphics, which supports and ships Samba, going open-source in order to get better and less costly interface tools.
Accessorizing: This approach sees companies publishing books, computer hardware and other items associated with and supportive of open-source software. O'Reilly Associates, SSC, and VA Research are representative of the “accessorizing” model.

Service Enabler: Open-source software is created and distributed primarily to support access to revenue-generating on-line services.

Brand Licensing: A business model wherein a company charges other companies for the right to use its brand name(s) and trademark(s) for derivative products.

Sell It, Free It: This is where a company begins with a commercial software products and then converts it to open-source when there is an advantage in doing so.

Software Franchising: A combination of several of the preceding models (in particular brand licensing and support sellers), in which a company authorizes others to use its brand names and trademarks to create associated organizations doing custom software development, then supplies training and related services for a fee.

According to Tony Bailetti, director of the Technology Innovation Management (TIM) program at Carleton University, there are stages of maturity that a company transitions through in the actual usage of OSS. Beginning as a denier of the potential and value of OSS, proceeding to try it, and then collaborate with others to enhance an OSS code base. Then it’s on to become a vocal champion of OSS and finally we see the company using OSS strategically, and as an aggressive user. The strategic and aggressive companies are so in tune with OSS that they adjust their business models to harness the open source software ecosystem. They put their own software in the OSS space. Bailetti emphasizes that OSS companies need to have a successful commercial ecosystem around the OSS project right from the start. Today, in terms of OSS ventures and revenue generation for those more mature OSS users, Bailetti divides the pie generated by existing companies into 50% subscription services (Google and Redhat business models); 25% professional services and 25% other.

Asked about the advantages of using OSS in business, Peter Carbone, chief architect at Nortel, says that OSS should only be adopted when it performs a valuable function, not just to lower costs. Nortel turned to OSS when designing a wireless LAN PBX system for the communications needs of emergency responders deployed during the Hurricane Katrina disaster. The company has used Linux for various needs, making contributions to the code base. It has also embraced the OSS concept of community-developed software when creating its own software.

While the drive to design solid business models around OSS continues to push its development, user groups are asking questions. Whose source code requests will be approved? How will improvements be prioritized? And perhaps most importantly, How can the interests of individual OSS users be protected from those of big business?
James Bowen, PhD, PMP, CMC is an Ottawa technology entrepreneur and adjunct professor at the University of Ottawa’s School of Management.

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