Thursday, June 16, 2005

Open Source Business Models

Opensource business models have always fascinated me. So, how do companies make money out of open-source products? Well, here's a pretty concise explanation from

  1. Support Sellers (otherwise known as "Give Away the Recipe, Open A Restaurant"): In this model, you (effectively) give away the software product, but sell distribution, branding, and after-sale service. This is what (for example) Red Hat does.
  2. Loss Leader: In this model, you give away open-source as a loss-leader and market positioner for closed software. This is what Netscape is doing.
  3. Widget Frosting: In this model, a hardware company (for which software is a necessary adjunct but strictly a cost rather than profit center) goes open-source in order to get better drivers and interface tools cheaper. Silicon Graphics, for example, supports and ships Samba.
  4. Accessorizing: Selling accessories – books, compatible hardware, complete systems with open-source software pre-installed. It's easy to trivialize this (open-source T-shirts, coffee mugs, Linux penguin dolls) but at least the books and hardware underly some clear successes: O'Reilly Associates, SSC, and VA Research are among them.

Frank Hecker cites four additional ways:

  1. Service Enabler: where open-source software is created and distributed primarily to support access to revenue-generating on-line services
  2. Brand Licensing: in which a company charges other companies for the right to use its brand names and trademarks in creating derivative products
  3. Sell It, Free It: where a company's software products start out their product life cycle as traditional commercial products and then are continually converted to open-source products when appropriate
  4. 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 in creating associated organizations doing custom software development in particular geographic areas or vertical markets, and supplies franchises with training and related services in exchange for franchise fees of some sort.

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