Business Models of Opensource and Free Software


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This first research paper, distributed under the Creative Commons license, helps us to think about the open source business and faberNovel Consulting’s contribution to this community. Voluntarily educational, “Business models of open source software and free software" offers a common reference, a “tool box" to communicate about these models and to understand and adapt them.

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Business Models of Opensource and Free Software

  1. 1. Research paper – September 2007 Business models of open source software and free software: a few landmarks faberNovel Consulting 2007 Public document
  2. 2. This work is licensed under the Creative Commons Attribution- NonCommercial-ShareAlike 3.0 Unported license. To view a copy of this license, visit or send a letter to Creative Commons, 171 2nd Street, Suite 300, San Francisco, California, 94105, USA. 2
  3. 3. 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
  4. 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? 4
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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 $59.9 million: Red Hat’s net income in 2006 * : Sample group of 305 European companies and 104 US companies 9 Sources: Forrester, 2005, faberNovel analyses
  10. 10. Open source solutions’ attributes are widely acknowledged today A surer and more flexible use: Money saved since open source solutions are in use* Possibility to adapt the product to [$ ‘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
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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
  15. 15. 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
  16. 16. 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
  17. 17. 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
  18. 18. 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
  19. 19. 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
  20. 20. 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
  21. 21. 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
  22. 22. 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. 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
  29. 29. 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
  30. 30. 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
  31. 31. 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
  32. 32. 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
  33. 33. 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)
  34. 34. 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
  35. 35. 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
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. 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
  40. 40. 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
  41. 41. 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
  42. 42. 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
  43. 43. 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
  44. 44. 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
  45. 45. 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
  46. 46. 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
  47. 47. 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
  48. 48. 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
  49. 49. 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
  50. 50. 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
  51. 51. 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
  52. 52. 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
  53. 53. 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
  54. 54. 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
  55. 55. 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
  56. 56. 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
  57. 57. Allow us now to introduce ourselves… 57
  58. 58. faberNovel’s activities are split into 3 units XP Venturi Consulting Strategy and organization for Experimentation and project Internal project development growth and innovation management and investment Assisting large groups on Strategic experimentation Venture capital, “excubation” 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 Organization and innovation Functional specification Change management Outsourced project Knowledge management management R&D portfolio management Conception and business validation Evaluation and identification of partners C4Mprod Timuzo Piloting and feedback Stimulate innovative genes Carry out quickly Remain entrepreneur 58
  59. 59. faberNovel oversees projects from their positioning to their realization 59
  60. 60. 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 Participative innovation(Idea Sharing best practices Management System) Communities animation Collaborative innovation Knowledge design (Customer Relationship Technology transfer Innovation ®) Intrapreneurship development 60
  61. 61. 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: Email: 61
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