The document discusses open source business models and the evolution of open source software. It outlines 6 common open source business models: [1] open source + services, [2] mixed proprietary/open source, [3] open source + dual licensing, [4] open source aggregation, [5] open source + hardware, and [6] open source consulting. It also notes that open source software is now mainstream and that companies should think of themselves as software-driven businesses rather than open source businesses specifically. In conclusion, building a successful open source software business requires the same fundamentals as any business, and open source alone does not provide a sustainable competitive advantage.

1. Open Source Business Models
Oslo 17.04
Mikko Puhakka

2. Short Bio
-Management Consultant 1993-, currently via Cone Advisor
-Venture Capitalist (investment into MySQL in 2001) 1999-
-Researcher 2004-
-advisory Board member (xx companies such as
TargetSource)

3. Agenda
-State of Open Source Business
-OS Business models
-Some ideas about the Future

4. LINUX HYPE CYCLE HAS BEEN GUIDED,
AMONG OTHERS, BY PERCEPTION OF PROs AND CONs
Visibility
Peak of inflated
expectations Plateau of
productivity
Slope of
enlightenment
Trough of
disillusionment
Technology
trigger
1991-1996 1997-2000 2000-2001 2001-2002 2003-now Time
PROs &
CONs in
the press
? PROs
CONs PROs
CONs
PROs CONs
PROs
CONs
Source: Gartner ; Novell ; Press clippings ; SaS analysis 4

5. Governing Model
Technology Adoption Life Cycle
by Geoffrey Moore
Pragmatists: Conservatives:
Stick with the herd! Hold on!
Visionaries: Skeptics:
Get ahead of the herd! No way!
Techies:
Try it!
Innovators Early Early Majority Late Majority Laggards
Adopters
Pragmatists create the dynamics of high-tech market development

6. OSS is Mainstream

7. Business Evolution (Puhakka)
1. Free Software 1985-
2. Open Source 1998-
3. Commercial (Professional) Open Source 2005-

8. Open Source evolution -
from process innovation to value creation! (walli)
• In its early days open source was rather improving existing than
innovating new
– Value creation and preservation are the key. The software value is
preserved by sharing it. The more people using it, the more value it
creates. People should not mix the value of quot;IP protectionquot; (i.e. a legal
tool to protect intellectual assets) to the business, with the value of the
asset itself.
• Today there are clear evidences of business innovations
– Proprietary software world talked about subscription models for years,
but it was companies with open source related products that
developed real innovation here. Likewise,with SaaS vendors that are
invariably hosted on infrastructures of open source software and able
to be more inventive in their business models because their margin
calculations scale differently.

9. Businessmodels 1/6
1) Open Source + Service
What it means: Companies sell support and services around open-source software.
Who’s doing it: Compiere (ERP), JBoss (middleware), Red Hat (Linux)
Advantages for CIOs: You pay only for support, not software. The cost to switch
providers is relatively low because the source code is available to anyone.
Startup challenges: Difficult to build businesses because switching costs are low, as
are barriers to entry. CIOs will always favor large, established vendors over startups
unless the startups also control code development. Hard to get venture funding
because venture capitalists are looking for sustainable competitive advantage in
their investments. Unless the software is complex or mission-critical, CIOs may
choose to support it themselves.

10. Businessmodels 2/6
2) Mixed
What it means: An open-source code base with proprietary add-ons.
Who’s doing it: Sourcefire (security), SugarCRM
Advantages for CIOs: CIOs may not need the proprietary stuff, but if they do they’ll
already have acquired deep experience with the open-source product before buying
the add-ons.
Startup challenges: There’s ample motivation to make the open-source product
inferior to the proprietary package, transforming the open source into trial software. If
that happens, there may be a backlash among open-source developers and users
wanting to see all the code.

11. Businessmodels 3/6
3) Open Source + Buy Off (Dual License)
What it means: Companies offer a proprietary license for their open-source software
so that users can modify the software and redistribute it without having to make the
code changes available to the public.
Who’s doing it: MySQL (database), Sleepycat (database)
Advantages for CIOs: The open-source software has all the features of the
proprietary version.
Startup challenges: Sales of the proprietary version are limited mostly to those
companies that want to redistribute it as part of their own hardware or software
packages, companies also need to own all the rights to the product. Think MySQL vs
PostgreSQL.

12. Businessmodels 4/6
4) Open Source + Aggregation
What it means: Companies assemble various open-source software packages into
integrated units that are easier for CIOs to consume.
Who’s doing it: Exadel, Navica, SourceLabs, SpikeSource
Advantages for CIOs: Simplifies open-source integration and support.
Startup challenges: Barriers to entry are low, brand differentiation is difficult, lack of
ownership of open-source projects limits the influence of the company in the
development of the code.

13. Businessmodels 5/6
5) Open Source + Hardware
What it means: Hardware makers use open source as the foundation for the software
that runs their machines.
Who’s doing it: Cisco, Digium, Netezza, Nokia (Maemo with 900million Euro savings)
Advantages for CIOs: Lower prices on hardware.
Startup challenges: It’s difficult to differentiate on hardware alone, especially when
CIOs are looking to standardize their infrastructure

14. Businessmodels 6/6
These companies illustrate some of the OSS strategies being
used to create product value. (riseforth)

15. Value - Industry seems to know more
than Investors (Private or Public)
Zimbra - $350 million (on ~$3 million of trailing revenues) -
September 2007
XenSource - $500 million (on $1 million in trailing revenues)
- August 2007
JBoss - $350 million (on $27 million in 2006 revenues) -
June 2006
Sleepycat - $35-50 million (on ~$7 million in trailing
revenues, is my best guess) - February 2006
Gluecode - $10 million (on very little in trailing revenues,
less than $1 million, I believe) - May 2005
SUSE - $210 million (can't remember revenues - I think
$30-40 million) - November 2003
Ximian - ~$50 million (I can't remember - on $1 million or
so in trailing revenues) - August 2003
+ Trolltech & Sourcefire IPOs Source: Matt Asay
+ MySQL

16. Maybe we should change terminology?
Maybe we should start talking about software driven
businesses instead of Open Source businesses.
After all Open Source is way of producing and distributing
software, not a businessmodel.
...and the biggest successes in 2000’s have been software
(OSS) driven businesses such as Google, Amazon,
Ebay, Sulake Labs.

17. Conclusions and Implications
• In building an OS software business you need the
same basic elements of business
• OS to be part of company’s business model, it should
emphasis elements
1. competitive position,
2. source of competence and
3. faster route to the international markets
• OS does provide a way to challenge incumbents, even
giant ones, but it has to be something more than just
opening up the code, that does not provide enough
of disruption.
• Open Source is not evidently a business model