The economics of open-source software

New business models have formed around open-source software, threatening the old ways of making money in the IT industry. At last count, I’ve tallied no less than 10 different approaches to improving profitability from open source. While there’s upside, vendors are being careful in selecting the best models and supporting the right projects that fit their objectives.

After all, there exists the threat of inadvertently planting the seeds that could grow into tomorrow’s competition.

Despite potential risks and uncertain consequences, investments in open source continue to increase. IT vendors and venture capitalists are anteing up in several ways: By outright acquisition (e.g., Red Hat buying JBoss, Oracle buying Sleepycat, IBM buying Gluecode, Novell buying SuSE Linux, etc.) or by supporting open source projects with developer time, free product or even cash

Moreover, vendors contribute back to open source — a kind of investing through divesting — by freely licensing previously proprietary software code (e.g., Sun releasing OpenSolaris, CA releasing Ingress, IBM releasing Eclipse, etc).

Like the many types of investment in open source, returns are as varied as the thousands of open source projects themselves. Vendors are simultaneously trying to build market share, generate revenue, reduce costs, build brand relevance, fill out a product portfolio, create a technology standard and/or block a competitor.

Successes of small players such as MySQL, larger players such as Novell and heavyweights such as IBM inspire more investment into projects such as SugarCRM, Pentaho (for business intelligence) and Aperi (for storage management).

Interestingly, the booty that hopeful investors could take in has less to do with open code and free software than it does with business fundamentals and community. Not to completely discount the significance of free (as in beer), but as it turns out, it is “community” that underlies success in a majority of open source business models.

To be sure, IT vendors are not fostering community for altruistic purposes driven by kumbaya feelings of sharing. Rather, it is a means to economic ends. Lower development costs, reduced marketing costs, smaller operating expenses and faster time-to-market count among anticipated returns to investment in open source community.

Shepherding an army of developers is no small feat and there are no guarantees on investment returns. But the big wins have proven to be out there. Linux shipped on over 20 per cent of servers in Canada in 2005, Red Hat earned global revenue of more than US$260 million in 2005 and Google has built its successful search and other services on top of open source (the services themselves being closed source, however).

The business models engendered by no-charge free software are the most common ones that come to mind when the subject of making money from open source is raised.

Whereas community is more about cost containment, free software is more about indirect revenue generation.

The vendor-agnostic nature of open source is important for investor optimism. Rallying support among a diverse group of players is challenging, especially as they may be running into each other in the trenches.

But open source takes a lot of competitive risk out of the equation. It accelerates acceptance for a project and can establish it as a de facto standard across vendors. This can take the form of something as innocuous as the Xerces XML parser supported by Sun Microsystems, IBM and others — essentially to build XML usage.

Or open source can be brought in to stave off a large competitive threat. The Eclipse development framework stands out as an open source project that has garnered the backing of Java vendors such as IBM, BEA and Borland to unite Java development in opposition to .Net.

With time, effort, money and the right conditions, open source models can be replicated by proprietary closed source vendors.

With more and larger investments backing open source software, business models will continue to evolve. Determining how they will evolve and their impact on the future of the IT market landscape involves a good crystal ball that will pay big if accurate.

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–Senf is the manager of IDC Canada’s Canadian Software Research Service. He can be reached at [email protected].

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