Research paper – September 2007
Business models of open source software and free
software: a few landmarks
faberNovel Consulting 2007
Public document

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2

Executive summary
The open source software industry is experiencing a strong growth that should
continue in the years to come
Open source companies have structured themselves around four business
models:
The service model
The distribution with value added model
The double license model
The mutualization model
These business models are profitable and sustainable over time
Beyond the diversity of business models, some key success factors are
common to all open source companies
Several factors, such as the intensified competition and the lingering distrust
towards open source solutions, could lead to strategy changes from
companies in the future
3

Summary
Context and objectives of the paper
Typology of different business models
Key success factors shared by all models
What are the strategies to come for open source software?
4

Summary
Context and objectives of the paper
Typology of different business models
Key success factors shared by all models
What are the strategies to come for open source software?
5

Before open source: the free software
movement
Free software appeared in 1985, when Richard Stallmand founded the Free
Software Foundation (FSF)
According to the FSF, free software must respect four freedoms:
The freedom to launch software for any use
The freedom to study the way software works and thus to freely access its
source code
The freedom to redistribute and sell copies
The freedom to enhance software and publish the results
The FSF grants several licenses, the most widespread being the General
Public License (GPL). In 2004, it accounted for 68,5% of the projects listed by
SourceForge
To avoid confusion between what is free of use/free of charge, the Open
Source Initiative, created in 1998, wrote up the Open Source Definition
1) Sur un panel de 52.183 projets
2) Sourceforge est la plus grande plateforme internet de développement et de téléchargement des codes et applications open source
6

Open sources licenses fulfill ten criteria
Free redistribution
Access to the source code
Right to change the source code and develop derived works
Respect of the integrity of the author’s source code: the license can require derived works
to be made available under a different name, or that the original version is distributed
along with the patches
Forbidding discrimination against persons and groups
Forbidding discrimination against fields of endeavor
Universality of the rights attached to the program. They must apply to anyone to whom it
is redistributed, without making it mandatory to obtain an additional license (that way,
programs which initially had the Open Source Definition license would not be closed up
using indirect means such as requiring a non-disclosure agreement)
Protection of the program, and not of the product
Lack of contamination of other products containing a protected source code
Technological neutrality. The license cannot discriminate against any technology or style
of interface.
Source: Open Source Initiative
7

Three kinds of licenses can be identified
according to their permissiveness
- permissive
They require that any modified software
and any program including this software
in a derived product must be placed
under the same license
Examples:
General Public License (GPL)
Mozilla Public License (MPL)
Extent to which licenses can be claimed
Free proliferate
copylefted
They contain a clause allowing users to mix
licenses
the software with proprietary software and
place it under a proprietary license, on the
condition that the free module remains under
a free license
Examples:
Lesser General Public License (LGPL)
Free copylefted persistent
Berkeley Software Distribution (BSD)
licenses
License MIT
Anyone can transform a source code under
this license without acknowledging its original
developer
Examples:
Xfree86 Free non-copylefted licenses
X Consortium
License Apache
+ permissive
8

Open source software’s growth should keep
up in the years to come
Open source solutions maintain a significant margin of progress
Open source solutions’ adoption in Europe* (2005) Open source solutions’ adoption in
Europe* (2005)
100%
100%
90%
90%
80%
80%
Not interested in
70%
70%
using
60%
60% Don't know
Potentially interested
in using
50%
50%
Plan to use
Very interested in
40% 40%
using
Already in
30% 30%
use
Will use in the 12
coming months
20% 20%
10% Already use 10%
0% 0%
Finance and
Manufacturing
Public sector
Business services
Media, entertainment
telecommunications
European average
Retail and wholesale
2004 2005
insurance
Utilities and
, leisure
trade
$59.9 million:
Red Hat’s net income in 2006
* : Sample group of 305 European companies and 104 US companies
9
Sources: Forrester, 2005, faberNovel analyses

Open source solutions’ attributes are
widely acknowledged today
A surer and more flexible use:
Money saved since open source solutions are in use*
Possibility to adapt the product to
[$ ‘000] (2005)
3500
one’s exact needs with the source
code
3000
Software’s transferability is less
binding (no lock-in phenomenon)
2500
Frequent updates
Patches’ emission is easy 2000
1500
A quality product, cheaper than
1000
proprietary software
500
Particularly likeable and adherence to 0
the open source movement’s values Middle income High income
organizations organizations Very high income
(<$50 M) (between $50 M organizations
and $1 Md) ( > $1 Md)
Nevertheless, many executives remain wary because they lack knowledge of the
open source companies’ economic models
*: Sample group of 502 American entities (companies, governmental agencies and other organizations) between August and September 2005
Sources: Optaros 2005, fabernovel analyses
10

The objective of this paper is to analyse the different
open source business models
Broadly, a business model is made up of two elements:
The revenue model The cost structure
Value creation: definition of the offer Definition according to the cost
generating the highest willingness to categories (raw materials, marketing,
pay R&D, administrative) and their types
(fixed or variable)
Capture of the value created through:
Identification of the company’s
The sale of rights (sale of
specific skills which give a
patents, licenses or even client files)
competitive advantage
The sale of products
The sale of services
Determination of the capital sources
A feature of the open source business models is that their main difference lies
in their revenue models. For the sake of clarity, we will present a typology
centred around these models
11

Summary
Context and objectives of the paper
Typology of different business models
Key success factors shared by all models
What are the strategies to come for open source software?
12

Four business models can be identified
The services or indirect The value added
valorisation model distribution model
Business
Model
The double license or The mutualization model
commercial open source
license model
Whichever model is chosen, all the companies offer complementary
services for their products that can represent a quarter or half of their
sales figure
13

The service model
The service model takes two forms
Simple service model:
commercialization of services that have
no link to a specific product
« Our job is to be the Switzerland of
open source software components »
(M. Halsey, Alliances and international sales vice-president for
Spikesource)
A variant of this model involves
providing an application service without
any direct link to the open source
software used via an Internet network
using a standard protocol (ASP model)
Indirect monetization model:
commercialization of services
associated to software developed or
packaged internally
14

The service model
The services offered are of different types
Surveillance
Formation
•Algorithms control
•Bug detection
•Surveillance of security
problems coming from
other open source
software
•Help with the integration of
•Help
tested software
•Publication of support
•Guaranteed
documents
interoperability
•Creation of patches should
a problem occur
Tests and guarantee
Technical assistance
15

The service model
The simple service model relies on two
opposite levers
Growth levers
Specializing the services offered
Extending the number
to develop a competitive
of services offered
advantage
Segments of the market available: The competition’s level of intensity on
depending on the number of companies the services offered: the stronger the
commercializing open source solutions competition is, the more it is in the open
without offering complementary source company’s interest to develop
services of satisfying quality specific skills around a few products
The company’s faculty to offer services The consumer’s need and their
on a great number of software that it did willingness to pay: if potential clients
not develop itself have specific needs and are not very
sensitive to price, it would be better for
the open source company to specialize
around a few profitable services for
which the company can charge a lot
Evolution
Factors
16

The service model
The success of the indirect
monetization model relies on two levers
Levers of growth
Increasing the size of the market Increasing the monetization rate
by preferring a wide diffusion of by offering services to a maximum
the solutions number of users
The competition’s level of intensity on The competition’s level of intensity on
the software offered, which depends complementary services offered
on the forking1) risk
The choice of the product’s level of
The license’s choice: refinement:
If the products are made for a direct A product that is too sophisticated only
use, no other software will be developed needs a few complementary services
with the source code made by the A product that is not related enough to the
company. As a consequence, a copyleft operational product will be rejected by
type license is adapted because there is users and developers
no risk of contamination
If the products are modules
instead, meant to be inserted in other
Evolution
programs, it is imperative that the
company uses a copylefted persistent
license or a non-copylefted one
Factors
1): Use of the software’s source code (completely allowed since the code is free) to create a challenging product
17

The service model
An example of a company offering a
service model: Spikesource
The Spikesource company is specialized in the testing, the
certification and the integration of LAMP open source
software and the different applications that may use it. In
2005, its sales figure amounted to $76,000, and it had
raised $21 million to pursue its development
The company has two offers:
Spikelgnite Platform:
A set of open source guaranteed and integrated software and middleware
Updates developed using the platform, allowing the count of 25,000 patches and updates
for the software supported by Spikesource every week
A starting offer at about $1,890 a year
Spikenet: a technical help and maintenance system, which starting price is
$7,500 a year
Sources : Spikesource, faberNovel analyses
18

The value added
The value added distribution model consists in selling distribution model
a standard version of an existing product
With this model, open source
software is not developed by
the firms that commercialize
their services: they already
exist and are packaged in a
standard version that can be
downloaded, pre-installed on
computers or sold on
physical bases
The « sale» is generally
made as a yearly
subscription to the product
and a set of attached
services*
*: the subscription accounts for 85% of Red Hat revenues in 2006
19
Sources : Red Hat, faberNovel analyses

The value added
This model offers a triple client distribution model
value
Client Value
Transfer of the risks
related to the use of open
source solutions, from the
client to the firm:
Saving time: the client • Tested, certified and
directly gets a packaged guaranteed versions Regular Obtention of new
and tested version of the
patches and updates for
software, which is • Indemnification in the length of the
immediately compatible case of serious subscription
with his computer and his problems
software
• Technical assistance
services integrated in
the packaging
20

The value added
An example of value added distribution: distribution model
Red Hat
Red Hat specializes in the distribution of Linux. It reported for the 2006
financial year a revenue of $401 million and a net income of $59,9 million.
In April 2006, the company took over Jboss, an open source firm
specializing in middleware solutions, for a sum of $350 million. In July
2007, its market capitalization on the NYSE was $4,1 billion and it
employed 1800 persons
Red Hat’s offer is made of two versions:
The Enterprise version, which is tested and whose interoperability is warranted
Red Hat Enterprise Linux, or RHEL, which allows only two users to have RHEL simultaneously
RHEL Advanced Platform, which allows an unlimited number of user to have it at the same time
The « community » version (Fedora)
The enterprise version offers 5 different modules:
For the RHEL version
Basic offer, $349 per year, 2 business answer s per day via email, unlimited for technical incidents
Standard offer: $799 per year, 12x5 phone assistance, unlimited via Internet
Premium offer: $1299 per year, 24x7 phone assistance
For the RHEL Advanced Platform version
Standard offer: $1499, 12x5 phone assistance, unlimited via Internet
Premium premium: $2499, 24x7 phone assistance
Even though Fedora does not provide any revenue, Red Hat is careful not to neglect its community
version and partipates actively in its animation
Sources : Red Hat, faberNovel analyses
21

The double license model relies on a The double license model
discrimination of the users
This model rests on a double license system:
An open source license for the standard product
A license that is more protected, which comes with a
guarantee and is generally linked to a product that
offers more functionalities
The open source license has to be proliferate
copylefted because every enterprise wishing to
integrate the source code to a larger set of
products and keep it under proprietary license
will then have to buy the commercial version of
the solution offered
Symetrically, the commercial version must be
under proprietary license to avoid forking risks,
or free non-copylefted or persistent to avoid
proliferation effects if the client company wishes
to integrate the source code in a larger system
This solution allows the combination of the free
licenses’ advantages (creating a community of
programmers, fast diffusion to benefit from
network effects) and those of the proprietary
license (stable and known revenue flow, no
contamination risk from open source licenses) *
22

The double license model
Open source companies using this double license
model have to arbitrate twice
Arbitration type
Percentage of the commercial
Level of finishing of the
version’s code included in the
commercialized products
community version
Role played by the community: the more The company’s internal resources and skills:
important its role is, the higher the commercial the double license model is perfectly suited for
version’s code should be included in the companies which develop their components.
community version Companies which make the choice to develop
finished products must have the internal resources
necessary to lead a community of developers,
convince corporate customers to buy the
Product renown: the better-known the product
commercial version, offer technical support for an
and the need it answers are, the easier users will
extended customer base, etc.
see its usefulness. The company will not have to
divulge much in the community version then.
Company renown:
The better-known the company is, the lower the
forking risk. The community open source version
can thus contain a very important part of the
commercial version’s code, without taking the risk
of seeing fierce competitors emerge
Factors
The better-known the comapny is, the less
dependent on the community version’s trial the
purchase of the commercial version is. For this
of choice
reason, the community version does not need to
be close to the commercial version
23

The double license model
The example of a company using the
double license model: SugarCRM
SugarCRM is one of the leading companies in the open
source CRM tools sector. In 2006, it reported a sales
figure of $6.6 million and employed over 100 persons
SugarCRM’s offer is divided into two versions:
The community version, which contains 85% of the commercial
version
The commercial version
Sugar Professional: $275 per year and per user
Sugar Enterprise: $449 per year and per user, which offers
more advanced functionalities (Oracle database
support, offline client synchronization, etc.)
SugarCRM also offers:
A set of services (technical assistance, online training, patches
sending, etc.) available on its platform Sugar Network ($119
per year and per user)
TheSugar Sales Professional Service, which allows the
definition of a personalized offer. It may contain an installation
assistance, a more advanced technical assistance and a
consulting offer to optimize SugarCRM sofware and adapt it to
the specific needs of the client. The cost of these services can
vary greatly (between $239 and $4,995)
24
Sources: SugarCRM, faberNovel analyses

The double license model
A variant of this model: the commercialization of
an associated product
This variant consists in
commercializing associate
software, instead of selling almost
identical products under two
different licenses
The complementary monetization
rests on the conversion of users
into clients:
The user base cannot be seen as a
revenue source
This base must be monetized with
the adoption of a complementary
model
Until 1999, the company Roxen was an excellent example of this principle
Focused on the development and the improvement of its web server, the only way to measure
its success then was the number of daily downloads and the total number of users
Things have changed with the renewal of the management team and today, to quote one of the
managers: “We have constantly moved away from the OSS concept towards a more traditional
approach of selling proprietary software. We felt that something had to be done in order to
survive. The original approach which was strongly influenced by ideas within the free and open
source software movement was impossible to combine with profits in our case.”
Sources: L. Dahlander [2005], faberNovel analyses
25

The « mutualization » model rests on the The mutualization model
successive development of several modules…
The mutualization model consists in the development of a relatively simple
version of the product and the subsequent development of modules on
demand
26
Sources: Muselli [2007], faberNovel analyses

The mutualization model
… and generally results in the creation of
a community of clients
To make the development of
expensive modules easier, the
open source company can create
a community of clients, pooling
their resources to fund the
module’s development
This community can become
durable and turn into an investors’
club, which regularly orders new
modules
27

A variant of this model consists in the The mutualization model
mutualization of modules by developers
A model frequently used by
open source companies is to
develop the modules a
distributor-integrater has asked
for
Several developers will
participate in the development
of the finished product which,
once packaged, will be
distributed to the integrator’s
clients
28

The mutualization model only applies to The mutualization model
very specific conditions
Solutions for very
targeted needs
allowing the fast pre-
emption of the market
and the curbing of the
competition
Mutualization
model
Complex product
High rhythms of
that can occasion the
development of obsolescence of the
solutions developed
numerous additional
modules
29

The revenue configuration of companies The mutualization model
that follow this model varies
Open source
Costs for client Costs for client Costs for
company’s
1 2 client 3
revenue
(1) (2) (3)
(1)+(2)+(3)
The basic module
is internally
Basic module
developed and is
0 0 0 0
not charged
(free)
Client 1 pays for
the development of
Development 1 development+ 3
Integration Integration
module 1, the
Module 1
+ integration integrations
others only pay for
its integration
The three clients
pool their
1/3 of the 1/3 of the
1/3 of the 1 development +
resources to pay
development development
Module 2
for the
development 3 intégrations
development of
+ integration + integration
+ integration
module 2, they all
pay for a third of
the development
and the
integration
Club entry fee Club entry fee Club entry fees
Club entry fee
+ yearly + yearly + yearly
+ yearly
contribution contribution contribution of
Module 3
contribution
Clients gather
+ integration of + integration of clients 1, 2 and 3
in an investors’
+ integration of
club
module 3 module 3 + 3 integrations
module 3
30
Sources: Muselli [2007], faberNovel analyses

The mutualization model
The example of a company using the
mutualization model: Open Trust
Open Trust is an open source company
specialized in information security software,
which employed 60 persons and had a $6.7
million sales figure in 2004
It internally develops a basic Public Key Infrastructure module:
The module is presented to potential clients
The client community takes form
Each client will pay for the development of a new module which answers his specific
needs
The modules funded this way will be packaged into unique products
These products are distributed to all members of the client community, without other
clients having to pay for modules they have not funded
This upgraded version is later made publicly available through free
downloads, after a duration of 6 to 18 months
Open Trust also created a « contributors’ club » with an entry fee varying from
€50,000 to €100,000 and a yearly contribution varying from €15,000 to
€25,000
Sources: Open Trust, faberNovel analyses
31

Synthesis of the different business models
Model Products offered Value proposition Main companies
Spikesource, SourceLabs,
Tests, certifications, software
Support for all types of open Optaros, Bearstech,
integration (LAMP), patches
Service offered source software or internally Openlogic, Open Cascade,
offer, updates and adaptable
developed software Altic, Nuxeo, Core-Techs,
technical support
Pilot Systems
Integration of different source
Tests and guarantee, patches
Value added codes, patches offer and Red Hat, Novell’s SUSE,
offer and adaptable technical
Mandriva, Mostick
distribution updates only for the
support
distributed software
Commercial version of the
software containing part or the
totality of the community
Development of enterprise version’s code, adaptable MySQL,, JBoss, SugarCRM,
Double license software (CRM, ERP, CMS, technical support, patches Optaros, Alfresco, Sun,
…), patches and updates Wengo, ExoPlateform
sending and updates and/or
personalization of the software
to fit the client company’s
needs
Specific services, totally suited
Development of enterprise
for the company’s needs,
Mutualization OpenTrust, AF83, Emencia,
software and its complements
adaptable and at a far cheaper
for a pool of clients
cost than the market’s prices
32

The business models distinguish themselves by the extent to which
their licenses can be claimed and their monetization model
Proliferating product
(GPL license)
Direct monetization Indirect monetization
(revenues stemming (revenues stemming
from the sale of from the sale of
products) services)
Product that can be
33
claimed (BDS license)

Summary
Context and objectives of the paper
Typology of different business models
Key success factors shared by all models
What are the strategies to come for open source software?
34

Four key factors must be taken into account in the
success of an open source company
Established
market
Key Alleviation of
Community of
success the managers’
developers
fears
factors
Stable
commercial
infrastructure
35

The community of developers of an open
Community of developers
source company represents an essential
resource
Price competitiveness
Development and
improvement of software
for a small cost or none at
all
Lead users*
Non-price
competitiveness
Rapid identification ofbugs
and production of patches
The community of and updates
developers fulfills
two roles
Prescription to other
Early adopters users
* Lead users distinguish themselves from other users by being one step ahead and having other needs on some market trends. The answers to these
precocious needs have a strong value for these specific consumers. It gives them the incentive to develop solutions themselves.
36

The realization of an open source project does Community of developers
not guarantee the creation of a community
Community of developes are “scale free networks”, which means they are organized around a
few hubs and develop according to the “preferential attachment” principle stating that the more
connections a hub has, the more likely he is to gain new ones
Example of a scale free network
Example of a random network
Given these conditions, though some communities will grow quickly, a majority of projects are
doomed to stagnation if they do not reach a critical size of approximately 100 people
Composition of the projects developer community on Sourceforge in 2003
Size of the Number of Regular Occasional
Administrators Active users*
community projects developers developers
≤ 88 64847 80329 (47.8%) 34659 (20.6%) 33275 (19.8%) 19941 (11.8%)
88< ≤ 279 193 590 (2.1%) 1703 (5.7%) 17334 (60.3%) 9124 (31.7%)
>279 70 798 (0.9%) 2576 (2.7%) 53030 (55.8%) 38593 (40.6%)
* : Active users report bugs, suggest improvements but do not change the source code
37
Sources: Jin Xu, Scott Christley et Gregory Madey [2005], faberNovel
analyses

Three levers exist to unite a community of Community of developers
developers
Levers Actions
•Regularly publish helpful documents and be as
transparent as possible (a key value for the open
source community)
Adhesion •Develop different tools to interact with the
community (mailing list, forum, meetings with the
community members)
•Send a newsletter on a regular basis to community
members (Pentaho sends a monthly newsletter with
the upcoming events and different technical tips)
•Give community members an incentive to share
Animation patches they developed (e.g. Sourcefire)
•Take part in projects coming from the community
(developers working for Sun take part in numerous
projects and have an indirect influence on their
development)
•Involve the community by having it take a part in
the definition of the features that must be included
in future versions (Sun uses the community to
Monetization conduct focus groups and marketing research)
•Encourage the firm’s employees to do public
interventions in conferences or events (e.g. MySQL
or Alfresco)
38

Nevertheless, the community’s contribution to the Community of developers
development of the source code must not be
overestimated
The community of developers takes an active part in the improvement of a
product but only rarely develops the core program
Among the 50 developers who contributed the most to the development of
SugarCRM, 95% were associates of the firm while the company only boasts
5,000 members working on some 220 extensions. Broadly, less than 15
developers create more than 85% of the basic program used in software
distributed by open source companies
The participation of users abides by the 1000/10/1 rule: 1000 use the
software, 10 report bugs and 1 develops patches
Users’ activity
10 1
Simple use
1000
Bugs reporting
Patches development
Sources: Matt Asay, 2006, faberNovel analyses
39

It is best for open source companies ro Established market
work on an already established market
Working on an established market ensures:
That consumers are educated. Potential customers have precisely identified
their needs, which makes the monetization of the service sold by the open source
company easier
That a benchmark exists. Open source companies are plagued by confidence
issues from users, which tend to decrease if one or more proprietary software
have already proven their efficiency. The existence of a benchmark also
highlights the pros of an open source product (price, quality of service, etc.)
Open source’s main successes emerged on a market that was under the
sway of a proprietary software seller:
Database: MySQL et PostgreSQL vs. Oracle, IBM and Microsoft
ERP: Compiere vs. Oracle and SAP
CRM: SugarCRM et Compiere, vs. Siebel o Oracle
OS: Red Hat vs. Microsoft
40

Managers distrust open source Alleviation of the
managers’ fears
companies
Main reasons for refusing to adopt open source Main problems identified among companies which
solutions 1) (2005) have adopted open source solutions and whose
costs have not decreased significantly 2) (2005)
100%
100%
90%
90%
80%
80%
70%
70%
60%
60%
50%
50%
40% 40%
30% 30%
20% 20%
10% 10%
0% 0%
Lack of skills Lack of Lack of Immature Lack of Lack of Lack of Fear of issues
or habit applications* supports* products support from support from support from related to
the CEO or the executives the head of the intellectual
head of the IT department property
commercial management
unit
* : Fearing a lack of applications or supports for the implementation of open source solutions can be equally attributed to the
reality of some situations and to the prejudice and mistrust managers nurture towards open source solutions. These fears
show what little knowledge managers have of open source solutions.
1) On a sample of 140 companies, several answers possible
2) On a sample of 350 companies, several answers possible
Sources: Optaros 2005, Forrester 2005, faberNovel analyses
41

Open source companies must adopt a Alleviation of the
communication policy focused on addressing managers’ fears
the managers’ distrust
Reassure about intellectual
Reassure about the provider
property
Targeted actions towards managers Targeted actions towards managers
and business units directors and business unit directors
Goal: to contradict existing Goal: to contradict common
prejudice on the quality of the prejudice on the risks linked to the
product and show how serious the management of intellectual property
company is about its work Highlight the low legal risks that
effectively come with the use of open
Put forward the security of the
source solutions
solutions and the guarantees offered
by the open source company Insist on the fact that companies are in
fact more likely to be prosecuted by
Prove that the provider is viable and
proprietary software companies for
will last over time, present the business
licenses’ account management
model
problems, than by open source
companies for any problem that has to
see with intellectual property
Sources: Forrester 2005, faberNovel analyses
42

Open source companies must provide their clients Commercial infrastructure
with a stable commercial infrastructure
Most non-specialist users and client companies
have yet to really comprehend how the open
source world functions and fear they will have
no one to talk to if problems arise
47%
Percentage of US
The only way to alleviate this fear is through the
organizations that could not
existence of an apparent commercial entity, find internal or external
committed to the guarantee of commercialized resources to maintain and
improve their open source
products and able to provide an after sales
system
service
The necessary creation of an after sales service
represents an important cost center for open
source companies
Sources: Optaros 2005, faberNovel analyses
43

Companies that already use open source solutions Commercial infrastructure
are plagued by a lack of follow-up and support
Main fears of IT managers using or planning to Main disappointments after having adopted open
use open source solutions* (2005) source solutions* (2005)
100%
100%
90%
90%
80%
80%
70% 70%
60% 60%
50%
50%
40%
40%
30%
30%
20%
20%
10%
10%
0%
Lack of follow-up Immature product Lack of skills
0%
No Operating is costlier Quality (code,
disappointment and more complex documentation, support)
than planned does not meet expectations
Open source companies must make their solutions less complex to use. This must be
accomplished through an improvement of the customer relationship management.
* : On a sample of 95 IT managers, multiple answers possible
Sources: Forrester 2005, faberNovel analyses
44

Summary
Context and objectives of the paper
Typology of different business models
Key success factors shared by all business models
What are the strategies to come for open source software?
45

Open source companies’ strategies could go through major
changes in the coming years
• What marketing model should be adopted?
Marketing strategies • What importance should be given to
marketing and distribution?
• How can one deal with the competition of
proprietary solutions giants setting a foot in
Fiercer competition on the open source market?
the open source solutions • How can one avoid the intensification of the
market competition from other open source
companies?
46

Two marketing models go up against Marketing strategies
each other
Adoption
through use Marketing
campaigns
Trial versions relatively close to the
commercial one are available through Companies devote an important part
free download of their resources to their marketing
The community version of SugarCRM department
contains 85% of Sugar Professional’s MySQL and SugarCRM are strengthening
code their marketing department
Alfresco’s trial version contains 100% of SugarCRM and JBoss are studying the
the commercial version’s code possibility of using Google Adwords and
launch advertising campaigns on web
After a trial period, the user needs
banners
support and additional functionalities
In 2005, Firefox asked its user community
to contribute to the elaboration of video
Marketing expenditure is limited, the
ads, in prevision of future televised and
company’s resources being focused
web campaigns
on product development
Companies do not rely solely on viral
adoption and develop their
communication capacity
This strategy allows companies to
better target their clients and gives
them more control on their image
47

Marketing strategies
Most open source companies’ managers
underline the low marketing and distribution costs
The marketing model of open source companies would be of pull type, with
the objective of getting the maximum number of downloads of the free version
and monetizing this base
Open source companies do not have to push for the adoption of their products
with massive marketing campaigns
Acquisition cost of a client [% of the
Marketing and distribution expenditures revenue coming from the maintenance
[% of the sales figure] (2005) activity] (2005)
100% 250%
90%
80% 200%
70%
60% 150%
50%
40% 100%
30%
20% 50%
10%
0% 0%
SugarCRM Proprietary software Jboss Proprietary software
48
Sources: Goldman Sachs, SugarCRM, Jboss, faberNovel analyses

Marketing strategies
However, the marketing expenditure of open source
companies increase with their development
Marketing and distribution spendings are cost items that are not important when the company is created
but that are bound to grow with its development
The “adoption through use” process does not perform well for transactions dealing with high amounts of
money, but is nevertheless vindicated when it comes to the ones dealing with low amounts
Thus, the business model of an open source company can:
Not integrate high marketing and distribution costs in the first place, freeing resources the company can use to
focus on the development of its product. The product by itself must bring in the first clients (constitution of a
community of users)
Plan at some point in the future high marketing expenditure to control its corporate image
Add commercial action expenditure, focused on the corporate customers
An intensified communication policy is all the more important that the access to the source code is not a
reason to adopt open source solutions in its own right
Use of the source code by the companies* (2005)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
The source code is seen The source code The source code is changed No one has
but not changed is changed and the community of seen the source code
developers is informed
* : On e sample of 95 IT managers
49
Sources : Forrester 2005, faberNovel analyses

Communication strategies could become Marketing strategies
more targeted
The cost of IT tools is rarely supported by the departments who use them, but
is allocated either *:
To the IT department
To the company as a whole
Members of a company’s different departments would rather order a
proprietary software, because:
They find it more “secure” and are used to working with it
They do not have to bear the cost of using a proprietary software, as it is
allocated to another department
Open source companies must consequently have an active communication
policy towards companies’ general management, insisting on the overall
reduction of the costs should open source solutions be extended to the whole
of the companies’ departments
* : The purchase of a CRM software license by the marketing department is not a cost that can be directly attributed to the department’s
operations. As such, it is more likely to be attributed to the company as a whole or to the IT department’s budget.
50

Open source companies must deal with the Fiercer competition on the open
competition that proprietary software firms source solution market
represent
Proprietary software companies have recently made massive investments in the open source
sector:
IBM 2001 : announcement of a $1B investment program in Linux
IBM 2005 : $4.5B estimated revenue coming from open source
This orientation corresponds to a change in strategies from proprietary software companies,
more than to a simple effort to improve their image:
1)
On a sample of 50 open source projects having a real activity in 2005 , 18 received 99,99% of the
investments made between 1995 and 2005
This high concentration reveals an internal selection process of the investments and highlights the
strategic nature of these activities for the proprietary software companies
100% Companies that contribute the most to the improvement of open source
90% solutions according to IT managers* (2005)
80%
70%
60%
50%
40%
30%
20%
10%
0%
Red Hat IBM The Apach Sun Free Software Oracle
Software Microsystems Foundation
* : on a sample of 95 IT managers
Foundation
1) : i.e. projects where the contribution of the community represents 7 people working full-time in number of hours
51
Sources: Marco Iansiti et Gregory L. Richards [2006], IBM, Forrester 2005, faberNovel analyses

Open source software companies remain the Fiercer competition on the open
source solution market
biggest contributors to open source codes yet
Open source firms keep investing extensively in source code develoment
Top contributors to open source code development* [M€] (2006)
350
300
250
200
150
100
50
0
Sun IBM Red Hat Silicon SAP ag MySQL ab
graphics corp.
However proprietary software companies are integrating the development of
open source codes into their strategies. The amount spent on open source by
these firms should increase in the near future
*: on a sample of 960 companies which represent a total of €1,2B cost development
52
Sources: UE 2006, faberNovel analyses

Proprietary software companies now use Fiercer competition on the open
open source solution to monetize their source solution market
proprietary solutions
Proprietary software companies resort to the complementary monetization
model and to a users locking policy:
The free or at a very low cost distribution of open source solutions grants
influence in determining which standards will be used by the user community and
leads them towards proprietary solutions on different segments
Once this influence has been exerted, users are more likely to pay a high price
for the proprietary solutions offered
IBM and Oracle are a perfect example of this strategy:
The two firms are in direct competition with open source solutions on their core
business, especially middleware solutions and company applications
They develop open source projects on market segments that do not correspond
to their core business. Thus, Oracle contributes to the development of
Apache, Eclipse or PHP on the middleware tools development segment
53

The open source world could be led to Fiercer competition on the open
source solution market
evolve along 3 axes
Sector integration
Intensification of the Threshold effect
competition
Costly skills (marketing,
commercial, distribution, etc.)
Arrival of proprietary software
are required for the development
companies
Niche seeking strategy Increased cooperation with
proprietary software
companies
54

A trend towards the integration of open Fiercer competition on the open
source solution market
source companies is appearing
Sector integration is one of the standard outcomes of an increased competition
In the open source sector, there are two different forms:
Vertical integration: the companies of the same industry (application
server, database management) integrate the elements of the value chain as a
whole, from the production to the distribution, to the sale of complementary
services, e.g. Novell Bull and Open Trust signing a partnership regarding technical
support for Novell solutions in September 2004
Horizontal integration: companies keep the specificity of their business model
and try to reach a sufficient critical mass, e.g. Alliance Open Trust HP and Atos
Origin collaborating to create a unique and centralized support platform
55

Niche seeking or cooperating with proprietary software Fiercer competition on the open
source solution market
companies are riskier solutions at first glance
Niche strategy Cooperation
The relatively low development costs The cooperation with proprietary
of open source products software companies
Allow the adoption of a niche Allows open source firms to
strategy (amortization of the benefit from precious skills (e.g.
investment on a scaled-down user marketing and commercial)
base) Can result in a provider/client type
Limit the sector’s barriers to entry of relationship (a catalog of small-
(constant threat posed by size providers for a global client)
newcomers)
56

Allow us now to introduce ourselves…
57

faberNovel’s activities are split into 3 units
XP Venturi
Consulting
Strategy and organization for Experimentation and project Internal project development
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methodology, analysis and Reduction of innovation risks Investment and development
decision making of internal projects
Fast acquisition of key know-
how and skills Company creation assistance
Capital shares offering
Innovation consulting Conception and development
additional action leverage
of innovative products and
Innovation strategy
services
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Functional specification
Change management
Outsourced project
Knowledge management
management
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Conception and business
validation
Evaluation and identification of
partners C4Mprod
Timuzo
Piloting and feedback
Stimulate innovative genes Carry out quickly Remain entrepreneur
58

faberNovel oversees projects from their positioning to their
realization
59

faberNovel Consulting heads all of faberNovel’s
consulting activities
faberNovel consulting’s mission: stimulate firms’ innovative genes
Prospective intelligence Strategy Implementation
Technologies Growth strategy Competitive benchmark
Markets Innovation platform Functional specifications
Uses Project portfolio management Partnerships/Monetization
Innovation management
Organization
Change management
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(Customer Relationship
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60

If you want to know more on this subject,
do not hesitate to contact us…
42, boulevard de Sébastopol I 75003 Paris I France
Tel: +33 1 42 72 2004 I Fax : + 33 1 42 72 2003
Web: www.fabernovel.com
Email: stephane.distinguin@fabernovel.com
pierre-yves.platini@fabernovel.com
61

62

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23th 2007
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