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Sustainable Open Source
   Business Models

          Prof. Dr. Dirk Riehle, M.B.A.
Friedrich Alexander-University Erlangen-Nürnberg


            OGD 2012 – 2012-06-26
Open Source Definition
Legal                                        Process
 ●   Open source license [1]                 “Open source is a development
     ●   Free use allowed                    method for software that har-
                                             nesses the power of distributed
     ●   Source code available
                                             peer review and transparency of
     ●   Modification of code allowed        process. The promise of open
     ●   Distribution of modifications OK    source is better quality, higher
                                             reliability, more flexibility, lower
 ●   Open source initiative                  cost, and an end to predatory
                                             vendor lock-in.” [2]
     ●   Approves open source licenses
     ●   Permissive vs reciprocal licenses

 ●   Permissive code growing [3]

[1] See http://www.opensource.org/osd.html
[2] See http://www.opensource.org/
[3] See http://bit.ly/xbYEYP
                                                                        ETAS GmbH - 2012-05-31
                                                           © 2012 Dirk Riehle - All Rights Reserved   2
Economic Significance and Growth
 ●   Open source is in wide use in
     enterprises
     ●   In a large 2009 survey, Forrester
         Research found that 46% of all
         responding enterprises were
         using or implementing open
         source software [4]

 ●   Most software firms use open
     source in products
     ●   In 2009 Gartner Group estimated
         that by 2012, at least 80% of all
         software product firms will use
         open source software in their
         products [5]

[4] Jeffrey S. Hammond. “Open Source Software
    Goes Mainstream.” Forrester Research: 2009.
[5] Mark Driver. “Key Issues for Open Source
    Software, 2010.” Gartner Research: 2010.
                                                               ETAS GmbH - 2012-05-31
                                                  © 2012 Dirk Riehle - All Rights Reserved   3
Who Wrote Linux 2.6.20?



       “At least 65% of the code
       which went into 2.6.20 was
       created by people working
       for companies.”         [6]



[6] See http://lwn.net/Articles/222773/
                                                       ETAS GmbH - 2012-05-31
                                          © 2012 Dirk Riehle - All Rights Reserved   4
Sustainable Open Source Business Models

    For Profit (“Commercial”)
     1. Single-Vendor Open Source Firms
     2. Open Source Distributors

    Not-for-Profit (Subsidized)
     3. Developer Foundations
     4. User Foundations


                                             ETAS GmbH - 2012-05-31
                                © 2012 Dirk Riehle - All Rights Reserved   5
1. Single-Vendor Open Source Firms

       “Single-vendor commercial open source
       software projects are open source software
       projects that are owned by a single firm
       that derives a direct and significant revenue
       stream from the software.”                 [8]

       “By 2012, at least 50% of direct commercial
       revenue attributed to open-source products or
       services will come from projects under a
       single vendor's patronage.”               [5]

[8] Dirk Riehle. “The Single-Vendor Commercial Open Source Business Model.” - 2012-05-31
                                                                          ETAS GmbH
    Information Systems and e-Business Management. Springer Verlag, Dirk Riehle - All Rights Reserved
                                                                © 2012 2010.                            6
Why Pay for Open Source Products?




        “Some people spend time to
        save money, some spend
        money to save time.”   [9]



[9] Marten Mickos. “Open for Business.” Talk at PARC Forum, 2010.
    Abstracted: http://bit.ly/bmSUga
                                                                             ETAS GmbH - 2012-05-31
                                                                © 2012 Dirk Riehle - All Rights Reserved   7
Commercial Open Source Products [10]

                                                                                   DOC     documentation
                     Web Store                     Direct Sales
                                                                                           incident-based
     Open Source




                                                                                    INC
     Community




                                                                                           support

                   DOC    INC       UTIL
                                                                                   UTIL    utilities


                                                                                           commercial
                                                                                    LIC
     Customers
     Enterprise




                                                                                           license
                                                   LIC    UPD UTIL
                                                                                           update
                                                  DOC     TRN      24x7            UPD     service



                                                                                   TRN     training
       ISV/OEM




                                                       LIC        UTIL
                                                                                    ...
                                                  DOC     TRN      24x7
                                                                                   24x7    24x7 hotline




[10] Florian Weikert. Product Features in Commercial Open Source Software. Bachelor
                                                                             ETAS GmbH - 2012-05-31
    Thesis, Friedrich Alexander-University of Erlangen-Nürnberg: 2012. Dirk Riehle - All Rights Reserved
                                                                   © 2012                                   8
Community vs. Commercial Edition
Community Edition                           Commercial Edition
●   Core product                            ●   Core product
    ●   Open source license                     ●   Commercial license
    ●   No warranties, no indemnification       ●   “Dual-license” strategy
●   Whole product                           ●   Whole product
    ●   Enterprise features missing             ●   Enterprise features
                                                ●   “Open core” model
●   Operational comfort                     ●   Operational comfort
    ●   None or limited                         ●   Subscription, updates
                                                ●   Various support contracts
●   Consulting services                     ●   Consulting services
    ●   None or limited                         ●   Various consulting services
                                                ●   Second-level support
                                                                         ETAS GmbH - 2012-05-31
                                                            © 2012 Dirk Riehle - All Rights Reserved   9
Sales Best Practice: Create Champions

     Market           Engage in
     Product         Comp. Sales               Win Sale!



     Provide
   Open Source



                    Generate Leads
   Track Users
                    From Behavior



  Connect Users        Identify                Make Sales
  of Organization     Champion                 Call / Visit


                                                  ETAS GmbH - 2012-05-31
                                     © 2012 Dirk Riehle - All Rights Reserved   10
2. Open Source Distributors [12]

                                                                                                   g
                                                                                                bu
                                                                                      w           fix
                                                                                    ne t.




                                                                                                              backport
                                                                               g     fea
                                                                            bu
                                                                      w       fix
                                                                    ne t.
                                                                     fea
                                                  g    10.10                                                                   10.10
                                               bu                                                                              EOL




                                                                                     backport
                                     w           fix                 commercial
                                   ne t.




                                                         backport
                              g     fea                               features
                           bu
                             fix
                      es
                   tur
                                    backport




            w   fea
          ne
10.04                                                                                              10.04
                                                                                                   EOL
                     commercial
                        features



[12] Dirk Riehle. “The Economic Motivation of Open Source.”
    IEEE Computer vol. 40, no 4 (April 2007). Page 25-32.
                                                                                                 ETAS GmbH - 2012-05-31
                                                                                    © 2012 Dirk Riehle - All Rights Reserved    11
3. Open Source Developer Foundations
Definition                     Purpose
1. A developer foundation is   ●   Lower development costs
  a non-profit organization    ●   Increase share of wallet
  (foundation, consortium)     ●   Reach more customers
2. with the purpose of         ●   Grow addressable market
  managing and performing      ●   Reduce strategic lock-in
3. the development of
  (non-differentiating)        Downsides
  open source software         ●   Higher engagement
  made available to
  foundation members
  (and the general public).


                                                          ETAS GmbH - 2012-05-31
                                             © 2012 Dirk Riehle - All Rights Reserved   12
Examples of Developer Foundations




                                         ETAS GmbH - 2012-05-31
                            © 2012 Dirk Riehle - All Rights Reserved   13
Increase Share of Wallet [15]
    money spent on bundled solution




                                      $$$$
                                                                  customer cost savings
                                              business            $$$$$

                                             application
                                                                           business
                                      $$$$
                                                                          application

                                        closed-source
                                       operating system           $$
                                                                         open-source
                                                                       operating system
                                        without open source               with open source



[15] Dirk Riehle. “The Economic Case for Open Source Foundations.”
    IEEE Computer vol. 43, no. 1 (January 2010). Page 86-90.
                                                                             ETAS GmbH - 2012-05-31
                                                                © 2012 Dirk Riehle - All Rights Reserved   14
Reach More Price-Sensitive Customers
 money spent on bundled solution




                                                     cus
                                   $$$$$                tom
                                                              er
                                                               emd
                                   potential profits for         an
                                   business application vendor     dc
                                                                     urv
                                                                        e
                                   $$
                                      cost of providing
                                   business application
                                   $$
                                     cost of providing
                                   open source operating system
                                                                            number of customers sold to



                                                                                              ETAS GmbH - 2012-05-31
                                                                                 © 2012 Dirk Riehle - All Rights Reserved   15
Grow Addressable Market

                                                                                    market 2
 total market size




                                                                                     customer
                                                                                    cost savings
                        market 1          market 2                             $$$$$$$

                     $$$$              $$$$$$

                                                             market 1
                      applications
                                                        $$                        applications
                                         applications    applications

                     $$$$                               $$$$


                     closed-source                      closed-source
                        platform         open-source
                                                           platform              open-source
                                       $$ platform                             $$ platform

                         two competing platforms        dominant open source platform
                        with equal total market size     with larger total market size


                                                                                     ETAS GmbH - 2012-05-31
                                                                        © 2012 Dirk Riehle - All Rights Reserved   16
4. User Foundations
Definition                    Purpose
1. A user foundation is       ●   Lower TCO
  a non-profit organization   ●   More flexibility
  (foundation, consortium)    ●   More predictability
2. with the purpose of        ●   Reduced vendor lock-in
  sponsoring
  (financing and managing)    Downsides
3. the development of         ●   Higher engagement
  (non-differentiating)
  open source software
  made available to
  foundation members
  (and the general public).

                                                          ETAS GmbH - 2012-05-31
                                             © 2012 Dirk Riehle - All Rights Reserved   17
Ecosystem of User Foundations 1/2


                                   UF




                                         UF
                           M

                                  owns



                                            s
                                           ele
                         sA




                                              c
                           y




                                                ts
                       plo




                                                +p
                    em

                                  OSS



                                                  ay
                 UF



                                           de




                                                     s
                             ls              ve
                          tro                   lop




                                                       SD
                         n
                       co                          s

                           AM manages SV
              AM                                       SD

UF: User Foundation
AM: Alliance Management
SD: Software Developer
                                                                      ETAS GmbH - 2012-05-31
                                                         © 2012 Dirk Riehle - All Rights Reserved   18
Ecosystem of User Foundations 2/2


                                      SU




                                            SU
                                 e
                              ns



                                             pa
                           ice

                                     uses



                                               ys
                            l
                         CP




                                                 for
                                    (OSS)
                      or




                                                      CP
                       f

                                    CP
                    ys




                                                         c
                                              cu




                                                           us
                 pa



                              s                 sto
                           lop                        mi




                                                              tom
                        ve                               ze
                SU




                      de                                   s




                                                                  .
                                  collaborate
               SV                                              CF

SU: Software User
SV: Software Vendor
CF: Consulting Firm                                                         ETAS GmbH - 2012-05-31
                                                               © 2012 Dirk Riehle - All Rights Reserved   19
Conclusions



 1. Open source is here to stay

 2. Four sustainable business models
 3. Open source simplifies consortia



                                        ETAS GmbH - 2012-05-31
                           © 2012 Dirk Riehle - All Rights Reserved   20
Thank you! Questions?

         dirk.riehle@cs.fau.de – http://osr.cs.fau.de
 dirk@riehle.org – http://dirkriehle.com – @dirkriehle




 ETAS GmbH - 2012-05-31   © 2012 Dirk Riehle - All Rights Reserved   21
DR

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Sustainable Open Source Business Models

  • 1. Sustainable Open Source Business Models Prof. Dr. Dirk Riehle, M.B.A. Friedrich Alexander-University Erlangen-Nürnberg OGD 2012 – 2012-06-26
  • 2. Open Source Definition Legal Process ● Open source license [1] “Open source is a development ● Free use allowed method for software that har- nesses the power of distributed ● Source code available peer review and transparency of ● Modification of code allowed process. The promise of open ● Distribution of modifications OK source is better quality, higher reliability, more flexibility, lower ● Open source initiative cost, and an end to predatory vendor lock-in.” [2] ● Approves open source licenses ● Permissive vs reciprocal licenses ● Permissive code growing [3] [1] See http://www.opensource.org/osd.html [2] See http://www.opensource.org/ [3] See http://bit.ly/xbYEYP ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 2
  • 3. Economic Significance and Growth ● Open source is in wide use in enterprises ● In a large 2009 survey, Forrester Research found that 46% of all responding enterprises were using or implementing open source software [4] ● Most software firms use open source in products ● In 2009 Gartner Group estimated that by 2012, at least 80% of all software product firms will use open source software in their products [5] [4] Jeffrey S. Hammond. “Open Source Software Goes Mainstream.” Forrester Research: 2009. [5] Mark Driver. “Key Issues for Open Source Software, 2010.” Gartner Research: 2010. ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 3
  • 4. Who Wrote Linux 2.6.20? “At least 65% of the code which went into 2.6.20 was created by people working for companies.” [6] [6] See http://lwn.net/Articles/222773/ ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 4
  • 5. Sustainable Open Source Business Models For Profit (“Commercial”) 1. Single-Vendor Open Source Firms 2. Open Source Distributors Not-for-Profit (Subsidized) 3. Developer Foundations 4. User Foundations ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 5
  • 6. 1. Single-Vendor Open Source Firms “Single-vendor commercial open source software projects are open source software projects that are owned by a single firm that derives a direct and significant revenue stream from the software.” [8] “By 2012, at least 50% of direct commercial revenue attributed to open-source products or services will come from projects under a single vendor's patronage.” [5] [8] Dirk Riehle. “The Single-Vendor Commercial Open Source Business Model.” - 2012-05-31 ETAS GmbH Information Systems and e-Business Management. Springer Verlag, Dirk Riehle - All Rights Reserved © 2012 2010. 6
  • 7. Why Pay for Open Source Products? “Some people spend time to save money, some spend money to save time.” [9] [9] Marten Mickos. “Open for Business.” Talk at PARC Forum, 2010. Abstracted: http://bit.ly/bmSUga ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 7
  • 8. Commercial Open Source Products [10] DOC documentation Web Store Direct Sales incident-based Open Source INC Community support DOC INC UTIL UTIL utilities commercial LIC Customers Enterprise license LIC UPD UTIL update DOC TRN 24x7 UPD service TRN training ISV/OEM LIC UTIL ... DOC TRN 24x7 24x7 24x7 hotline [10] Florian Weikert. Product Features in Commercial Open Source Software. Bachelor ETAS GmbH - 2012-05-31 Thesis, Friedrich Alexander-University of Erlangen-Nürnberg: 2012. Dirk Riehle - All Rights Reserved © 2012 8
  • 9. Community vs. Commercial Edition Community Edition Commercial Edition ● Core product ● Core product ● Open source license ● Commercial license ● No warranties, no indemnification ● “Dual-license” strategy ● Whole product ● Whole product ● Enterprise features missing ● Enterprise features ● “Open core” model ● Operational comfort ● Operational comfort ● None or limited ● Subscription, updates ● Various support contracts ● Consulting services ● Consulting services ● None or limited ● Various consulting services ● Second-level support ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 9
  • 10. Sales Best Practice: Create Champions Market Engage in Product Comp. Sales Win Sale! Provide Open Source Generate Leads Track Users From Behavior Connect Users Identify Make Sales of Organization Champion Call / Visit ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 10
  • 11. 2. Open Source Distributors [12] g bu w fix ne t. backport g fea bu w fix ne t. fea g 10.10 10.10 bu EOL backport w fix commercial ne t. backport g fea features bu fix es tur backport w fea ne 10.04 10.04 EOL commercial features [12] Dirk Riehle. “The Economic Motivation of Open Source.” IEEE Computer vol. 40, no 4 (April 2007). Page 25-32. ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 11
  • 12. 3. Open Source Developer Foundations Definition Purpose 1. A developer foundation is ● Lower development costs a non-profit organization ● Increase share of wallet (foundation, consortium) ● Reach more customers 2. with the purpose of ● Grow addressable market managing and performing ● Reduce strategic lock-in 3. the development of (non-differentiating) Downsides open source software ● Higher engagement made available to foundation members (and the general public). ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 12
  • 13. Examples of Developer Foundations ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 13
  • 14. Increase Share of Wallet [15] money spent on bundled solution $$$$ customer cost savings business $$$$$ application business $$$$ application closed-source operating system $$ open-source operating system without open source with open source [15] Dirk Riehle. “The Economic Case for Open Source Foundations.” IEEE Computer vol. 43, no. 1 (January 2010). Page 86-90. ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 14
  • 15. Reach More Price-Sensitive Customers money spent on bundled solution cus $$$$$ tom er emd potential profits for an business application vendor dc urv e $$ cost of providing business application $$ cost of providing open source operating system number of customers sold to ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 15
  • 16. Grow Addressable Market market 2 total market size customer cost savings market 1 market 2 $$$$$$$ $$$$ $$$$$$ market 1 applications $$ applications applications applications $$$$ $$$$ closed-source closed-source platform open-source platform open-source $$ platform $$ platform two competing platforms dominant open source platform with equal total market size with larger total market size ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 16
  • 17. 4. User Foundations Definition Purpose 1. A user foundation is ● Lower TCO a non-profit organization ● More flexibility (foundation, consortium) ● More predictability 2. with the purpose of ● Reduced vendor lock-in sponsoring (financing and managing) Downsides 3. the development of ● Higher engagement (non-differentiating) open source software made available to foundation members (and the general public). ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 17
  • 18. Ecosystem of User Foundations 1/2 UF UF M owns s ele sA c y ts plo +p em OSS ay UF de s ls ve tro lop SD n co s AM manages SV AM SD UF: User Foundation AM: Alliance Management SD: Software Developer ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 18
  • 19. Ecosystem of User Foundations 2/2 SU SU e ns pa ice uses ys l CP for (OSS) or CP f CP ys c cu us pa s sto lop mi tom ve ze SU de s . collaborate SV CF SU: Software User SV: Software Vendor CF: Consulting Firm ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 19
  • 20. Conclusions 1. Open source is here to stay 2. Four sustainable business models 3. Open source simplifies consortia ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 20
  • 21. Thank you! Questions? dirk.riehle@cs.fau.de – http://osr.cs.fau.de dirk@riehle.org – http://dirkriehle.com – @dirkriehle ETAS GmbH - 2012-05-31 © 2012 Dirk Riehle - All Rights Reserved 21 DR