|
|
As Weill et al. point out, an observation shared by many, few concepts in business, especially those related to Internet- or IT-related ones, are as widely discussed as “business models” but as poorly explicated.[1] Their analytical study of 1000 US companies also showed that business models are a better predictor of financial performance than industry classifications and that some business models do, indeed, perform better than others. Specifically, selling the right to use assets is more profitable and more highly valued by the market than selling ownership of assets. Using a similar approach, Zott and Amit also found that the business model matters, with novelty-centered ones important to the success of new firms.[2] The consensus seems to be emerging that business model innovation may be more important than any other source of new venture success.
Unfortunately, what even constitutes a “business model” has little agreement and frameworks that attempt to organize these concepts extend from the global to the minutely absurd. Most bandy the term about imprecisely. However, let it suffice to define a business model as the “why, how, and what means for a business to generate revenues and achieve profit objectives.” [3] [4] A business plan includes both an explication of the business strategies and the business models underlying the business. A company’s business models, of which there may be a few, combine as a means to achieve profitability goals under the direction of an overall strategy, which itself also concerns itself with positioning and the competition. Joan Magretta argues that a good business model is essential to every successful organization, that business models are in essence stories that explain how enterprises work, and an effective business model needs to be supported by numerical analysis about how the organization will make money.[5]
From this big picture (and sometimes preceding or leading it), many have attempted to define or organize business models associated with the open source phenomenon. John Koenig most recently presented a view of seven open source business strategies to generally positive reviews.[6] Other recent commentators have been Matthew Asay[7] and Steve Walli from Optaros[8] among others.[9] There have been quite a few academic studies, most well presented.[10] Earlier, the Open Source Initiative[11] presented four business models, deriving from the seminal open source paper on the Cathedral and the Bazaar by Eric Raymond;[12] these four were later expanded by another five by Frank Hecker.[13]
The Internet, and now open source, are challenging traditional views as to how businesses make money. These challenges, in turn, are the genesis I suspect for this recent attention into business models.
A Taxonomy of Open Source Business Models
Three new terms are now cropping up surrounding open source business models, and a fourth is suggested in the taxonomy I present below:
It should also be noted that new ventures that embrace these models are also now being referred to as “second generation open source” companies or ventures. Recent venture capital money is going most strongly to the dual license model, though subscription for services has been strongest the past couple of months.
Nonetheless, synthesizing the various views and writings on open source business models has caused me to derive my own taxonomy, presented in the chart below.
|
Open Source Role |
Business Model |
Revenue/Cost Model |
AKAs |
| Create | ‘Pure’ OSD* | ‘Pure’ OSD* | |
| Mixed Source | Mixed Source | ||
| Delayed Release | Sell it, Free it | ||
| License Choice | Dual License | Hybrid Model | |
| Commercial Use | |||
| Non-”viral” Commercial | |||
| Other Variants | |||
| Commercial Extensions | Commercial Extensions | ||
| Service | Support Service | Consulting | Support Sellers |
| Maintenance | |||
| Training | |||
| Certification | |||
| Compliance | |||
| Publication/Documentation | Accessorizing | ||
| Deployment Service | Integration | Professional Open Source | |
| Custom Development | |||
| Packaging | |||
| Hosting | |||
| Use | Service Enabler | Transaction | |
| Subscription Service/ASP | |||
| Advertising | |||
| Direct Use | Embedded Device | ||
| Internal Use | |||
| Market Leverage | Hardware Benefits | Hardware Sales | Loss Leader |
| Drivers and Interfaces | Widget Frosting | ||
| Software Revenues | Awareness Revenue | ||
| Modular Revenue | Optimization | ||
| Sponsorship | Patronage | ||
| Standards Adoption | |||
| Competitive Effects |
First, the chart distinguishes the four ways in which open source may be involved in an organization (the no involvement option is not presented): creating open source software, servicing it in some manner, using it to generate revenue or to lower costs, or gaining marketing leverage by associating with it. Within these roles, the taxonomy then presents 10 discrete business models, each described below. Then the chart presents about 30 revenue or cost streams associated with these business models (note using open source to lower internal IT costs, for example, is a legitimate business model). The last column (’AKAs’) presents some of the labels given by others to these business models.
Thus, this taxonomy suggests 10 business models that may involve open source, which may also be combined or not with one another within an overall strategy. These are, with example organizations using them at present:
Note that a separate distinction was not made above for subscription fees. That is perhaps arbitrary, since market acceptance may be promoted or not by a pay-as-you-go model.
[2] C. Zott and R. Amit, “Business Model Design and the Performance of Enterpreneurial Firms,” Dec. 4, 2004, 38 pp.; see http://www-management.wharton.upenn.edu/amitresearch/documents/New_Folder/Business%20Model%20Design%20120504.pdf
[3] For two additional starting points, look up ‘business model’ on Wikipedia (http://en.wikipedia.org/wiki/Business_model) or refer to an article such as from H. Chesbrough and R.S. Rosenbloom, “The Role of the Business Model in Capturing Value from Innovation: Evidence from Xerox Corporation’s Technology Spin-off Companies,” Industrial and Corporate Change, Vol. 11(3): 529-555, 2002; also found at: http://www.cvn.columbia.edu/jl/readings/Chesbrough_ICC_2002.pdf
[4] http://www.theecademy.com/downloads/Strategy+Business.pdf
[5] J. Magretta, “Why Business Models Matter,” Harvard Business Review, May 1, 2002, 6 pp. See http://harvardbusinessonline.hbsp.harvard.edu/ for ordering information.
[6] J. Koenig, “Seven Open Source Business Strategies for Competitive Advantage,” see http://www.riseforth.com/images/Seven%20Strategies%20-%20Koenig.pdf. David Pool later suggested another 3 models for a total of 10 on this baseline; see D. Pool , “Business Strategies for Free and Open Source Software Companies and Communities,” http://nakedape.cc/info/Adopt_OSS_or_Die.doc
[7] M. Asay, “Open Source and the Commodity Urge: Distruptive Models for a Distruptive Development Process,” November 8, 2004, 17 pp.; see http://www.open-bar.org/docs/matt_asay_open_source_chapter_11-2004.pdf
[8] Stephen R. Walli, “Under the Hood:Open Source Business Models in Context,” Optaros Corpany; see http://stephesblog.blogs.com/my_weblog/2005/04/usenix_talk_ope.html
[9] See also Bruce Perens, http://perens.com/Articles/Economic.html, or L. Hohmann and M. Olson, “Making Open Source Make Money,” Cutter IT Journal, Vol. 16, No. 5, May 2003.
[10] See, for example, S. Krishnamurthy, “An Analysis of Open Source Business Models,” see http://faculty.washington.edu/sandeep/d/bazaar.pdf
[11] See http://www.opensource.org/advocacy/case_for_business.php
[12] E. Raymond, The Cathedral and the Bazaar, see http://www.catb.org/~esr/writings/cathedral-bazaar/
[13] F. Hecker, “Setting Up Shop: the Business of Open-source Software,” last revised June 20, 2000, 23 pp.; see
Excellent article, thanks
Making revenues from free & open source software is one of the most frequently asked questions these days. While there have been a few successful examples of companies (like MySQL, Red Hat etc) which are making money, I'd surmise that these are still very early days for open source revenue & profit models.
While open source as an operational paradigm certainly has been having exceptional success against proprietary and closed-software models in the recent past, in my opinion, a lot more thought need to be given and experimentations done before the emergence of viable revenue models for the free & open source models that can successfully compete with the current proprietary software revenue model. Some specifics of the business models are emerging fast, but it will take a few years for the market to test each of these out and hopefully, the fittest will survive.
A site that focuses exclusively on revenue models from open source is Follars.com – Free, Open-source Dollars!
Ec @ IT, Software Database @ eIT.in
[...] Newton is obviously well placed to comment on these trends within ECM. But similar trends can be seen in every major enterprise software space. For virtually every component one can imagine, there is a very capable open source offering. Many of the newer open source ventures are indeed centered around aggregating and integrating various open source components followed by either dual-source licensing or support services as the basis of their business models. At its most extreme, this trend has expanded to the whole process of enterprise application integration (EAI) itself through offerings such as LogicBlaze FUSE with its SOA-oriented standards and open source components. Initiatives such as SCA (service component architecture) will continue to fuel this trend. [...]