No such thing as Open Source business model

I started my open source project, ModSecurity, back in 2002. It was initially just a hobby, something I did in my spare time. ModSecurity grew in popularity, so in 2004 I decided to form a business around it. Thinking Stone was born. I sold Thinking Stone to Breach Security in 2006, and that was the end of my first start-up. (But not the end of ModSecurity, which continues to flourish.)

I will freely admit that I didn't have a business plan. I knew instinctively that the product was good, and I generally focused on improving the product while supporting the growing user base. Everything else I let happen organically. This "strategy" worked out all right in my case, but, in retrospective, I should have invested more effort into commercialising the user base. My luck could have went the other way just as well.

In researching how Open Source relates to business today, I've discovered a very peculiar fact: there is no such thing as an Open Source business model. There are a few companies promoting themselves as open source, but if you dig deeper you uncover that, if they are making any money, it is coming from the proprietary bits, not from open source. If there are any companies making money today from supporting their open source products, chances are they are just in a transient phase moving away from that model because there's essentially no money in it.

A typical lifecycle of an open source company looks like this:

1. Build a product people want to use. Make it free and open source, because you want to grow the user base as quickly as possible.
2. Perfect lead generation and nurturing, which is the key skill you need to have in order to be able to convert users into customers.
3. Sell training and support, because that's easy to start with.
4. Sell subscriptions, because support does not scale well and is just not sticky enough.
5. Create proprietary versions/add-ons/tools, because everything else you did so far failed to make you any real money.

It seems to me that companies are now open sourcing products because it's an effective distribution strategy, and also because they have to—everyone else is doing it. However, because there's no money in true open source, they end up selling proprietary versions, and we (the consumers) are essentially back where we were prior to the open source revolution.

Comments

[nikolas]

I am not so sure that there's no business model possible to build around the Open Source. Far away from the development process, you can make money from consultancy services, customization, implementation, configuring security...

For example, let's look at the piece of CMS software released as OSS. There's a wealth of business opportunities laying in customization and modification of the CMS software. Then there's implementation and configuring (turning modules on or off, setting up preferences), and then there's business of securing the whole thing. Afterwards, there's documenting and making procedures. Then there's training. During the whole process you can add project management, and performance tracking. I can think of SEO optimization after that, and even more consulting for outsourcing...

[nikolas]

I've just read an interesting report on IDC's study, quoted partially bellow.
http://www.idc.com/getdoc.jsp?containerId=213010

The majority of revenue from OSS (59 percent on average) is from subscriptions. In fact, 10 of 21 respondents generated 100 percent of their OSS revenue from subscriptions.

Almost 80 percent of OSS company's revenue on average is generated directly by the vendor as opposed to selling through partners.

The average OSS-related revenue from Windows-based products (35 percent) is less than OSS-related revenue from Linux-based products (54 percent), which is not reflective of the installed base in mainstream enterprises.

On average, revenue from North America represents 62 percent of total OSS-related revenue, while Europe represents 23 percent.

Financial services and the public sector represent the top two vertical sectors by revenue for the respondents, with 34 percent and 20 percent of total OSS revenue on average, respectively.

[Ivan Ristić]

Nikolas,

In response to your first comment: consultancy services, customisation, training, etc.--those are all services that can be provided equally around commercial software (and, in fact, they have been for years) and open source software. Companies don't have to have their own CMS products in order to provide services around them. They can simply take someone else' product. Consultancies will undoubtedly find it easier to work with open source products, because they can do anything with them and combine them with other open source products, but the key question in my mind is this: who is going to write the open source product in the first place? Consultancies derive revenue from services, so there is little incentive for them to invest into product development.

I think your second comment supports this view. IDC claims that 80% of OSS vendors sell directly. This is because OSS product vendors almost always compete with their partners, but they can't win in that game if everything they do is open source. If their product is really good you will see the consultancies flocking to support it, eventually killing the company that started the product.

In the currently dominant OSS model the proprietary bits bring revenue to the "OSS" vendor even if the implementation is carried through a partner. The idea is that some customers will want to upgrade to a better product, irrespective of the status of the source code.