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Open source business models:
      myths, realities,
     practical examples



                                 Carlo Daffara
           European Working Group on Libre Software
                                  Conecta Research
●
    “Open-source software is deliberately developed
    outside of market mechanisms... fails to contribute
    to the creation of value in development, as opposed
    to the commercial software market ... does not
    generate profit, income, jobs or taxes … The open-
    source licenses on the software aim to suppress any
    ownership claims to the software and prevent prices
    from being established for it. In the end, the
    developed software cannot be used to generate
    profit.” University of Muenster, Muenster Institute
    for Computational Economics “Open Source-
    Software: An Economic Assessment”
●
    … yet OSS represents 25% of the total sw+services
    market
●   Where does this overall value comes from?




● firms contributing code to FLOSS projects have in
  total at least 570 thousand employees and annual
  revenue of 263 billion € (FLOSSPOLS study, 2005)
● Adapted to 2008: 890 thousands employees, 315


  B€ total annual revenue
OSS Vendor         Dual Licensing
  Business model
  Vendor example       MySQL
 Number of covered     single or few
      products
Economic advantage     Dissemination for the product with reduced costs,
   for the vendor      creation of external ecosystem of add-ons (outside the
                       source), visibility, self-segmentation of the market
Economic advantage The adopter may opt for the open source edition if it is
   for the adopter    deemed sufficient; for the proprietary part, reduction in
                      cost may give better price/quality ratio
      Potential       Low external participation (limited code contributions)
disadvantages of the
        model
   Sale condition     Integration of the product with non-OSS components in
                      externally distributed products
Freeriding protection license choice
External ecosystem     Limited (very little external contributions, mainly debug
                       activity and external products)
OSS Vendor        Open Core
  Business model
  Vendor example      Zimbra
 Number of covered    single or few
      products
Economic advantage    Reduction of R&D, reduced maintenance costs, visibility,
   for the vendor     increased dissemination, external ecosystem of add-ons,
                      self-segmentation of the market for the proprietary add-
                      ons
Economic advantage The adopter may opt for the open source edition if it is
   for the adopter    deemed sufficient; for the proprietary part, reduction in
                      cost may give better price/quality ratio
      Potential       Difficult to estimate the right balance between open and
disadvantages of the closed parts, external groups may create substitutes for
        model         the proprietary parts
   Sale condition     Need for the proprietary additions or need of support
Freeriding protection license choice, segmentation on features
 External ecosystem Potentially large, depending on the balance
                      open/proprietary
●   Open Core is actually a combination of different
    models:
                      Open source
                      modules


                                    Proprietary
                                    modules


             Open source
             components
                                       Dually-licensed
                                       wrapper



●
    So, we can infer from our research that the wrapper
    will receive little or no contributions from the
    outside (no moral judgment – a practical one..)
OSS Vendor         Product Specialist
  Business model
  Vendor example       Acquia, OpenCascade
 Number of covered     single or few
      products
Economic advantage     Reduction of R&D, reduced maintenance costs, visibility,
   for the vendor      increased dissemination, external ecosystem of add-ons

Economic advantage Reduction in cost may give better price/quality ratio for
   for the adopter    the adopted software, stability, integrated support reduces
                      external costs
      Potential       Low barrier of entry for third-parties
disadvantages of the
        model
   Sale condition     Need of support or specialized modifications, lack of
                      internal expertise
Freeriding protection License choice, segmentation on features
External ecosystem     Yes
OSS Vendor         Platform Providers
  Business model
  Vendor example      RedHat, Novell (partially)
Number of cov. prod.  many
Economic advantage    Reduction of R&D, reduced maintenance costs, visibility,
   for the vendor     increased dissemination, external ecosystem of software
                      and additions
Economic advantage Reduction in cost may give better price/quality ratio for
   for the adopter    the adopted software, stability, integrated support reduces
                      external costs, legal protection is included, easy to find
                      trained personnel, availability of long-term options
 Potential disadv. of Platform engineering requires large R&D efforts even
      the model       with shared resources
   Sale condition     Value perceived by user must be higher than the cost of
                      going to an unsupported recompilation (eg. CentOS);
                      usually mission-critical environments, need of support or
                      lack of internal expertise
Freeriding protection License choice, copyrighted and trademarked elements
                      included in the product
 External ecosystem Yes
OSS Vendor         Software Selection
  Business model
  Vendor example   Navica
Number of cov. prod.
                   many
Economic advantage Cost of software certification and selection can be
   for the vendor  partially shared across customers, as most adopters have
                   a large share of common needs
Economic advantage Reduced selection costs; reduced risk of wrong choice
  for the adopter

Potential disadv. of   Limited market, difficulty in following rapid evolution of
    the model          the products covered (evaluation costs)
  Sale condition       Complex requirements, many areas or strict vertical
                       requirements to match, possibly large company size
Freeriding protection Selection documents are usually proprietary; selection
                      requires human intervention (non-replicable)
 External ecosystem No
OSS Vendor         Aggregate support providers
  Business model
  Vendor example       OpenLogic
Number of cov. prod.   many
Economic advantage     Cost of support can be partially shared across customers,
   for the vendor      economies of scale
Economic advantage A single point of control and cost for a large number of
  for the adopter    project, reduced negotiation efforts for large number of
                     individual vendors, simplified management and
                     governance
Potential disadv. of Limited market, may be perceived as in partial
     the model       competition with existing specialists
  Sale condition     Large number of managed projects, use in mission-critical
                     infrastructure
Freeriding protection Inherent in the non-transferability of support contracts
External ecosystem     No
OSS Vendor         Legal certification and insurance
  Business model
  Vendor example       Palamida, Black Duck
Number of cov. prod.   many
Economic advantage     Cost of legal certification and secondary-level insurance
   for the vendor      can be shared across the most used OSS projects

Economic advantage Equivalent to insurance; provides a materialized and
  for the adopter    stable costs against uncertain, difficult to quantify
                     negative events
Potential disadv. of Limited market, difficult to estimate risk probabilities,
     the model       need to cover separate legal frameworks across the world
                     with different rules
  Sale condition     Potential legal risk
Freeriding protection Inherent in the non-transferability of certification and
                      insurance contracts
 External ecosystem No
OSS Vendor         Training and documentation
  Business model
  Vendor example      GbDirect
Number of cov. prod.  many
Economic advantage    A significant portion of training development costs can be
   for the vendor     shared across customers, economies of scale, reuse of
                      community-developed material
Economic advantage Lower cost for training compared to self-managed
   for the adopter    training (from source code, publicly available
                      documentation)
 Potential disadv. of May be perceived as in partial competition with existing
      the model       specialists, human intensive, most of it cannot be
                      replicated at low cost
   Sale condition     Lack of internal experts (or too high cost for creation of
                      internal skills), complex configuration and setup of OSS
                      product
Freeriding protection Training material are usually non-public, trainers are
                      inherently non-replicable
 External ecosystem No
OSS Vendor         Indirect Revenues
  Business model
  Vendor example       Mozilla, most hardware suppliers
Number of cov. prod.   Single or few
Economic advantage     Source availability reduces engineering costs and increase
   for the vendor      visibility on multiple platforms
Economic advantage Adopters obtains a quality product at no cost; potential
  for the adopter  large ecosystem for extensions
Potential disadv. of  Requires a large external market for incentives, may be
    the model         dependent on a single (or small number) of actors
                      increasing risk
   Sale condition     There should be an external source of revenue linked to
                      adoption (eg. Ecommerce sales of related products,
                      search engine back-payments, etc.) Usually linked to high
                      adoption numbers
Freeriding protection license choice, copyrighted and trademarked elements
                      included in the product
 External ecosystem Yes
OSS Vendor        R&D cost sharing, Open Inside
  Business model
  Vendor example      Eclipse
 Number of covered    single or few
      products
Economic advantage    Reduction of R&D, reduced maintenance costs
   for the vendor

Economic advantage (same as vendor- in this case, vendor and adopter
  for the adopter  coincide)

      Potential       Establishing the management and contribution structures
disadvantages of the may be complex and costly, requires constant effort
       model
   Sale condition     Significant R&D costs, higher than the cost of
                      management of the shared community
Freeriding protection license choice

External ecosystem    yes
●
  There is no “good” or “bad” model - there are
  models that work and those that do not
● Models change with time, and market conditions

● To survive, you must understand what you are doing,


  and what can be improved; a good way to do it is
  using a business model schema
● In the Osterwalder model:
● Customer Segments (For whom are we creating
  value?)
● Value Propositions (What value do we deliver to the


  customer? Which one of our customer’s problems
  are we helping to solve?)
● Key Resources (What is essential for our work to be


  possible?)
● Key Activities & Key Partners

● Cost Structure

● Revenue Streams (No, giving things for free does


  not count)
●
  Channels (How we reach our customers – or
  potential ones)
●
  Customer Relationships
● The basic idea behind business models: I have
  something or can do something, and it is more
  economical to pay me to do or get this “something”
  instead of doing it yourself. The most important
  elements: customer segments and value
  proposition
● With    Open Source, usually “property” is non-
  exclusive (with the exception of Open Core, where
  part of the code is not open at all)
● The remaining element is efficiency, that is the


  ability to perform an action with a lower cost (both
  tangible and intangible)
●
  Efficiency and property are the underlying
  justification behind OSS business models
Property                          Efficiency
     (Trademarks, source                (Development
     copyrights, patents,           efficiency, marketing
         contracts..)                    efficiency...)



     Dual licensing, Aggregate support   Product specialists,
      Open Core.. providers, platform     training, software
                        providers...          selection..
●   Exclusive properties are barriers that can be
    enforced weakly or strongly (eg. Trademarks in
    RHEL). Other barriers are convenience, control
●   Efficiency increases monotonically except when a
    new technology is introduced, when effort stops
    efficiency decreases (also monotonically)


                                                  If company stops
                                                  investing/researching
        Efficiency




                                Introduction of
                                new technology


                       effort/research
●   Work necessary for a task is the inverse of
    efficiency, and this provides an higher bound for
    revenues:
                   “I'll do it myself”   “We have done it
                                         a few times”




                                                       “We do it for a
                                                       living”
          Effort




                                     effort/research
● If no one pays me, my only possibility is to invest my
  time to create something. In any case, I have
  increased my efficiency in that activity
● I can trade this efficiency and convert it into money


  if the work that I am doing is repeatable to a large
  extent..
●
  .. and thus you turn into a product specialist
●
  You will be in business as long as the efficiency
  differential is sufficient to provide a margin for your
  activity (including overheads) and your research
  costs (since you need to continue to maintain the
  efficiency differential in time)
● Anyone else can become a competitor, but he will
  have to invest to reach your efficiency level (or he
  will not be able to maintain competition for long)
● If  you focus on a single step of the software
  adoption cycle:




●   ...you obtain as a result most of the possible business
    models: training, legal support, aggregate support..
● Difference between an open source company and a
  proprietary one: the R&D sharing
● The main efforts that can be done to improve this


  sharing advantage: increasing and facilitating
  contributions, or the “platforming” (the use of your
  product as a basis for something else)
● If you use property as a basis, to increase revenues


  the best approach is not forcing monetization (as the
  available budget remains zero) but customer
  segmentation (who can be targeted for the
  enterprise product? who can use the product as basis
  for another service?)
● Segmentation can be done across axes related to
  relevant variables; for example, size (small,
  medium, large), private company or public
  administration...
● For each cell, list your offering and that of the


  competitors; separately list the possible value
  proposition for each cell obtained by customizing
  your basic product
● Some market are more interesting than others; for


  example if the market is too small or dominated by
  an incumbent that has an inherent advantage, it may
  be simply anti-economical to try to enter that
  market without a compelling value proposition
● In fact, the approach used to “force” people to pay
  (for example by removing features from the
  community edition) will not increase monetization in
  a significant way, because those that are most
  affected are those that have no budget available;
  those people will turn to forks
● The company should target those non-users that


  could become adopters, and at the same time
  increase dissemination, as a fixed percentage of all
  users will become paying in one form or the other
● “Viral”    dissemination does not work across
  different groups, so marketing is still essential, even
  with an open source approach
Thanks!
       Carlo Daffara

     cdaffara@conecta.it
http://carlodaffara.conecta.it

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Linuxtag daffara

  • 1. Open source business models: myths, realities, practical examples Carlo Daffara European Working Group on Libre Software Conecta Research
  • 2. “Open-source software is deliberately developed outside of market mechanisms... fails to contribute to the creation of value in development, as opposed to the commercial software market ... does not generate profit, income, jobs or taxes … The open- source licenses on the software aim to suppress any ownership claims to the software and prevent prices from being established for it. In the end, the developed software cannot be used to generate profit.” University of Muenster, Muenster Institute for Computational Economics “Open Source- Software: An Economic Assessment”
  • 3. … yet OSS represents 25% of the total sw+services market
  • 4. Where does this overall value comes from? ● firms contributing code to FLOSS projects have in total at least 570 thousand employees and annual revenue of 263 billion € (FLOSSPOLS study, 2005) ● Adapted to 2008: 890 thousands employees, 315 B€ total annual revenue
  • 5. OSS Vendor Dual Licensing Business model Vendor example MySQL Number of covered single or few products Economic advantage Dissemination for the product with reduced costs, for the vendor creation of external ecosystem of add-ons (outside the source), visibility, self-segmentation of the market Economic advantage The adopter may opt for the open source edition if it is for the adopter deemed sufficient; for the proprietary part, reduction in cost may give better price/quality ratio Potential Low external participation (limited code contributions) disadvantages of the model Sale condition Integration of the product with non-OSS components in externally distributed products Freeriding protection license choice External ecosystem Limited (very little external contributions, mainly debug activity and external products)
  • 6. OSS Vendor Open Core Business model Vendor example Zimbra Number of covered single or few products Economic advantage Reduction of R&D, reduced maintenance costs, visibility, for the vendor increased dissemination, external ecosystem of add-ons, self-segmentation of the market for the proprietary add- ons Economic advantage The adopter may opt for the open source edition if it is for the adopter deemed sufficient; for the proprietary part, reduction in cost may give better price/quality ratio Potential Difficult to estimate the right balance between open and disadvantages of the closed parts, external groups may create substitutes for model the proprietary parts Sale condition Need for the proprietary additions or need of support Freeriding protection license choice, segmentation on features External ecosystem Potentially large, depending on the balance open/proprietary
  • 7. Open Core is actually a combination of different models: Open source modules Proprietary modules Open source components Dually-licensed wrapper ● So, we can infer from our research that the wrapper will receive little or no contributions from the outside (no moral judgment – a practical one..)
  • 8. OSS Vendor Product Specialist Business model Vendor example Acquia, OpenCascade Number of covered single or few products Economic advantage Reduction of R&D, reduced maintenance costs, visibility, for the vendor increased dissemination, external ecosystem of add-ons Economic advantage Reduction in cost may give better price/quality ratio for for the adopter the adopted software, stability, integrated support reduces external costs Potential Low barrier of entry for third-parties disadvantages of the model Sale condition Need of support or specialized modifications, lack of internal expertise Freeriding protection License choice, segmentation on features External ecosystem Yes
  • 9. OSS Vendor Platform Providers Business model Vendor example RedHat, Novell (partially) Number of cov. prod. many Economic advantage Reduction of R&D, reduced maintenance costs, visibility, for the vendor increased dissemination, external ecosystem of software and additions Economic advantage Reduction in cost may give better price/quality ratio for for the adopter the adopted software, stability, integrated support reduces external costs, legal protection is included, easy to find trained personnel, availability of long-term options Potential disadv. of Platform engineering requires large R&D efforts even the model with shared resources Sale condition Value perceived by user must be higher than the cost of going to an unsupported recompilation (eg. CentOS); usually mission-critical environments, need of support or lack of internal expertise Freeriding protection License choice, copyrighted and trademarked elements included in the product External ecosystem Yes
  • 10. OSS Vendor Software Selection Business model Vendor example Navica Number of cov. prod. many Economic advantage Cost of software certification and selection can be for the vendor partially shared across customers, as most adopters have a large share of common needs Economic advantage Reduced selection costs; reduced risk of wrong choice for the adopter Potential disadv. of Limited market, difficulty in following rapid evolution of the model the products covered (evaluation costs) Sale condition Complex requirements, many areas or strict vertical requirements to match, possibly large company size Freeriding protection Selection documents are usually proprietary; selection requires human intervention (non-replicable) External ecosystem No
  • 11. OSS Vendor Aggregate support providers Business model Vendor example OpenLogic Number of cov. prod. many Economic advantage Cost of support can be partially shared across customers, for the vendor economies of scale Economic advantage A single point of control and cost for a large number of for the adopter project, reduced negotiation efforts for large number of individual vendors, simplified management and governance Potential disadv. of Limited market, may be perceived as in partial the model competition with existing specialists Sale condition Large number of managed projects, use in mission-critical infrastructure Freeriding protection Inherent in the non-transferability of support contracts External ecosystem No
  • 12. OSS Vendor Legal certification and insurance Business model Vendor example Palamida, Black Duck Number of cov. prod. many Economic advantage Cost of legal certification and secondary-level insurance for the vendor can be shared across the most used OSS projects Economic advantage Equivalent to insurance; provides a materialized and for the adopter stable costs against uncertain, difficult to quantify negative events Potential disadv. of Limited market, difficult to estimate risk probabilities, the model need to cover separate legal frameworks across the world with different rules Sale condition Potential legal risk Freeriding protection Inherent in the non-transferability of certification and insurance contracts External ecosystem No
  • 13. OSS Vendor Training and documentation Business model Vendor example GbDirect Number of cov. prod. many Economic advantage A significant portion of training development costs can be for the vendor shared across customers, economies of scale, reuse of community-developed material Economic advantage Lower cost for training compared to self-managed for the adopter training (from source code, publicly available documentation) Potential disadv. of May be perceived as in partial competition with existing the model specialists, human intensive, most of it cannot be replicated at low cost Sale condition Lack of internal experts (or too high cost for creation of internal skills), complex configuration and setup of OSS product Freeriding protection Training material are usually non-public, trainers are inherently non-replicable External ecosystem No
  • 14. OSS Vendor Indirect Revenues Business model Vendor example Mozilla, most hardware suppliers Number of cov. prod. Single or few Economic advantage Source availability reduces engineering costs and increase for the vendor visibility on multiple platforms Economic advantage Adopters obtains a quality product at no cost; potential for the adopter large ecosystem for extensions Potential disadv. of Requires a large external market for incentives, may be the model dependent on a single (or small number) of actors increasing risk Sale condition There should be an external source of revenue linked to adoption (eg. Ecommerce sales of related products, search engine back-payments, etc.) Usually linked to high adoption numbers Freeriding protection license choice, copyrighted and trademarked elements included in the product External ecosystem Yes
  • 15. OSS Vendor R&D cost sharing, Open Inside Business model Vendor example Eclipse Number of covered single or few products Economic advantage Reduction of R&D, reduced maintenance costs for the vendor Economic advantage (same as vendor- in this case, vendor and adopter for the adopter coincide) Potential Establishing the management and contribution structures disadvantages of the may be complex and costly, requires constant effort model Sale condition Significant R&D costs, higher than the cost of management of the shared community Freeriding protection license choice External ecosystem yes
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  • 20. ● There is no “good” or “bad” model - there are models that work and those that do not ● Models change with time, and market conditions ● To survive, you must understand what you are doing, and what can be improved; a good way to do it is using a business model schema ● In the Osterwalder model:
  • 21. ● Customer Segments (For whom are we creating value?) ● Value Propositions (What value do we deliver to the customer? Which one of our customer’s problems are we helping to solve?) ● Key Resources (What is essential for our work to be possible?) ● Key Activities & Key Partners ● Cost Structure ● Revenue Streams (No, giving things for free does not count) ● Channels (How we reach our customers – or potential ones) ● Customer Relationships
  • 22. ● The basic idea behind business models: I have something or can do something, and it is more economical to pay me to do or get this “something” instead of doing it yourself. The most important elements: customer segments and value proposition ● With Open Source, usually “property” is non- exclusive (with the exception of Open Core, where part of the code is not open at all) ● The remaining element is efficiency, that is the ability to perform an action with a lower cost (both tangible and intangible) ● Efficiency and property are the underlying justification behind OSS business models
  • 23. Property Efficiency (Trademarks, source (Development copyrights, patents, efficiency, marketing contracts..) efficiency...) Dual licensing, Aggregate support Product specialists, Open Core.. providers, platform training, software providers... selection.. ● Exclusive properties are barriers that can be enforced weakly or strongly (eg. Trademarks in RHEL). Other barriers are convenience, control
  • 24. Efficiency increases monotonically except when a new technology is introduced, when effort stops efficiency decreases (also monotonically) If company stops investing/researching Efficiency Introduction of new technology effort/research
  • 25. Work necessary for a task is the inverse of efficiency, and this provides an higher bound for revenues: “I'll do it myself” “We have done it a few times” “We do it for a living” Effort effort/research
  • 26. ● If no one pays me, my only possibility is to invest my time to create something. In any case, I have increased my efficiency in that activity ● I can trade this efficiency and convert it into money if the work that I am doing is repeatable to a large extent.. ● .. and thus you turn into a product specialist ● You will be in business as long as the efficiency differential is sufficient to provide a margin for your activity (including overheads) and your research costs (since you need to continue to maintain the efficiency differential in time)
  • 27. ● Anyone else can become a competitor, but he will have to invest to reach your efficiency level (or he will not be able to maintain competition for long) ● If you focus on a single step of the software adoption cycle: ● ...you obtain as a result most of the possible business models: training, legal support, aggregate support..
  • 28. ● Difference between an open source company and a proprietary one: the R&D sharing ● The main efforts that can be done to improve this sharing advantage: increasing and facilitating contributions, or the “platforming” (the use of your product as a basis for something else) ● If you use property as a basis, to increase revenues the best approach is not forcing monetization (as the available budget remains zero) but customer segmentation (who can be targeted for the enterprise product? who can use the product as basis for another service?)
  • 29. ● Segmentation can be done across axes related to relevant variables; for example, size (small, medium, large), private company or public administration... ● For each cell, list your offering and that of the competitors; separately list the possible value proposition for each cell obtained by customizing your basic product ● Some market are more interesting than others; for example if the market is too small or dominated by an incumbent that has an inherent advantage, it may be simply anti-economical to try to enter that market without a compelling value proposition
  • 30. ● In fact, the approach used to “force” people to pay (for example by removing features from the community edition) will not increase monetization in a significant way, because those that are most affected are those that have no budget available; those people will turn to forks ● The company should target those non-users that could become adopters, and at the same time increase dissemination, as a fixed percentage of all users will become paying in one form or the other ● “Viral” dissemination does not work across different groups, so marketing is still essential, even with an open source approach
  • 31. Thanks! Carlo Daffara cdaffara@conecta.it http://carlodaffara.conecta.it