Archive for category OSS business models

The economic value of Open Source software

(this is a repost of the original article with some corrections. Includes the Oxford TransferSummit 2011 presentation based on this data)

What is the real value that Open Source has brought to the economy? This is not a peregrine question. Since most of the current evaluation methods are based on assessing “sales”, that is direct monetization of OSS, we are currently missing from this view the large, mostly under-reported and underestimated aspect of open source use that is not “sold”, but for example is directly introduced through an internal work force, or in services, or embedded inside an infrastructure. Summary: OSS provide cost reduction and increases in efficiency of at least 116B€, 31% of the software and services market.
World business. 3D image. The isolated illustration

Getting this data is, however, not easy. There is an easy approach, called “substitution principle”, that basically tries to measure how much a collection of hard-to-measure assets is valued by counting the sum of the money necessary to substitute them; for example, counting the value of all the Apache web servers by adding the cost of changing them all with an average, marketed substitute. This approach does not work, for two reasons: first of all it introduces a whole world of uncertainty, given the fact that software is never perfectly exchangeable with an alternative. The second is related to the fact that users may be unwilling to pay for an alternative, so from that point of view the real value is much lower. This is, by the way, the (erroneous) way that RIAA and other rights organizations measure piracy losses: by counting how many times the copy of a film is downloaded, and assuming that all the people that downloaded it would have paid for a full cinema ticket if piracy did not exist. It is obviously wrong – and would be equally wrong if we applied the same principle.

Another approach is to measure the revenues of companies that are adopting an OSS-based business model, something that we have extensively studied in the context of the FLOSSMETRICS project. The problem with this approach is that it totally ignores the work that is performed without a monetary compensation, and it under-reports the software that is distributed widely from a single source (for example, the open source code that is embedded in phones or routers). A purely monetary measurement also ignores inherent improvements in value that can derive from an improved technology. Let’s make an example: let’s imagine that in the world, all television sets are black and white only, and only recently a new and improved television set can provide color. The new TV sets costs quite a lot more than the old B&W ones, so if we imagine that all the current TV viewers want to move to color the TV set provider can obtain a total amount of money that is the product of the cost of the new TV set multiplied by the number of viewers. The company is happy :-)

Now, let’s imagine that a magic signal allows the old TV sets to show color images. The company that produces the color TV sets is clearly unhappy, since its value dropped instantly to zero, but on the other hand all the people with B&W TV sets is happy, even if there is no monetary transaction; the user value increased substantially. We need to capture this value as well, since a substantial amount of this economic value is hidden in the user balance sheets. This means that we need to find a different, alternative way to measure OSS value: enter macroeconomics!

We can start from the overall economic value of IT in general. There is one thing that we know for sure: the total economic value of a country or a region like Europe – 12.3T€ (trillion of Euro). We also know the average IT expenditure of companies and Public Administrations, that is 4% (source: Gartner IT key metrics data, EU eBusiness-Watch) with wide variations (small companies: around 7%, going up with size up to the average for Fortune 500: 3%). This means that the average IT spending, including services, employees, hardware, software, whatever. This means that the overall IT spending in Europe is approximately 492B€, of which 24% is hardware (source: Assinform, Gartner, IDC) – which means that software and services market is valued at 374B€. (Estimates from Forrester are in the same range, so we are at least consistent with the big analyst firms)

Still with me? Good! Now, the next step is estimating the savings that are directly imputable to open source. We have two sources: an internal source (code replaced by OSS) and external (savings reported by IT personnel through use of OSS). Let’s start with savings from OSS adoption, that can be estimated (using data from Infoworld and our data from COSPA) at 15% for “light” adopters (less than 25 OSS products used) to 29% for “heavy” adopters (more than 25 OSS products), up to the 75% of specific cases (reported by Gartner for maintenance and licensing). Taking into account the share of use of OSS in general and the variation in use of OSS among different sizes, we can estimate that the savings directly introduced by OSS amount to 41B€ – those do not appear anywhere but in the adopters balance sheets, that is in a reduction of IT expenses, or a better result for the same IT expenditure (think about the TV set example outlined before).

And now, software development. It may sound strange, but only a small part of software is ever developed for the market – what is called “shrinkwrapped”. The majority of software is developed (internally or through external companies) for a specific internal need, and is never turned into an external product. In fact, when we consider the “service” part of the non-hardware IT market, we discover that nearly half of that value is actually sponsored software development, and the remaining 35% is non-software services (support, training, ancillary activities). This means that in Europe, 244B€ are software spending in a form or the other (for example, employee wages).

What can we say about this software? We know that a part of it is Open Source, because the majority of developers (69%, according to Evans Data) is using open source components within their code. We also know, thanks to Veracode, that “sampling … find that between 30 and 70% of code submitted as Internally Developed is identifiably from third-parties, most often in the form of Open Source components and Commercial shared libraries and components”. In our own database, we found out that the role of commercial shared libraries is hugely dependent on application type and vertical sector, and it falls consistently between 15% and 30% of the code not developed from scratch. Using a very conservative model, we can thus estimate that 35% of the code that is developed overall is based on Open Source, and this means that there is both a saving (software that is reused without having to redevelop it) and a cost, introduced by the need for adaptation and the “volatility cost”- that is, the risk introduced by using something developed outside. Thankfully, we already have quite a lot of information about these costs, thanks to the effort of the software engineering community; some details can be found here for those that really, really want to be put to sleep.

Applying the software engineering costs detailed in my previous article (volatility, increased cost for code re-factoring, glue code development) we can estimate that the savings introduced by OSS are, in a very conservative way, 31% of the software-related part of the IT ecosystem, that is 75B€. The real value is higher, mainly because reused OSS code tends to be of higher quality when compared with equivalent proprietary code (data and academic references available here) but I will leave this kind of evaluation for a future article. We can however say, with quite a good level of certainty, that the lower bound of savings that OSS does bring to the European economy is at least 116B€ - the majority of which does not appear in the “market” and only in a minimal part in the balance sheets of OSS companies (consider that only Red Hat is now approaching 1B$ in revenues). It is savings and increased efficiency of companies and Administrations that use OSS, something that was already discovered: “Finally, comparing the individual data on firms with turnover of less than 500,000 euros with the variable on size classes of customers (by number of employees), one can hipotesize a correlation between the use of software Open Source and the ability to attract customers of relatively larger scale. At the same turnover, in other words, companies “Open Source only” seem to have more chances to obtain work orders from companies with more than 50 employees (ie medium – large compared to our universe of reference).” (source: Venice study on Open Source) or the fact that revenue-per-employee ratio is higher in companies that adopt open source software (on average by industry, OSS-using companies have a revenue-per-employee that is 221% of the non-OSS controls). It is also important to recognize that this is only a measure of the direct impact of OSS. The reality is that software has a substantial impact on revenues; an example I found out is Siemens, that with 70B€ in revenues spends 5% in software drives 50% of its revenues. A similar impact can be expected of the savings introduced by OSS – something that we will talk about in a future post.

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Open Source as a differentiator?

What is an “open source company”? What is the real differentiation element introduced by Open Source? These and more questions were introduced by a great post by Matthew Aslett (if you don’t follow him, go and follow now. I’ll wait. Yes, do it. You will thank me later.), called “The decline of open source as an identifying differentiator“. It is an excellent analysis of how companies mostly stopped using the term “open source” in their marketing materials, and has a follow up (here) that provides a summary of the main responses by other analysts and observers.

The post raises several interesting points, and in my opinion provides a great basis for a more general discussion: what is the difference introduced by open source? Is there a difference at all?

Let’s start with an observation of the obvious: the use of open source to build software is now so widespread that it is not a differentiating element anymore. There goes the various “built on open source components” of some companies – practically all companies are using open source inside. It’s simply not a difference. So, let’s start with what is the real differential between OSS and proprietary:

The licensing. An open license may introduce a difference for the adopter. This means that if such a differential is used by the company, it must provide a value that derives from the intrinsic property of open source as a legal framework. For example, independence from supplier (at least, theoretically…) both in case of provider change, and independence in terms of adding or integrating additional components, even if the company is in disagreement.

The development model. The collaborative development model is not a certainty – it arises only when there is a clear infrastructure for participation. When it does happen, it is comparatively much faster and more efficient than the proprietary and closed model. For this to be a real differentiator, the company must engage in an open development model, and this is actually happening only in a very small number of cases.

In general, the majority of companies that we surveyed in FLOSSMETRICS have now a limited degree of differentiation when compared to their peers, and even as a “signaling” open source is now no more interesting than other IT terms that entered the mainstream (we can discuss further whether “cloud” will disappear in the background as well..) Of the companies we surveyed, I would say that those that we marked originally as “specialists” are the ones more apt to still use “open source” as a differentiating term, with “open core” ones the least (since they don’t reap the advantages of a distributed development model, neither the adopter reaps the advantages of the open source licensing). A potential difference may arise for development tools or infrastructures, where open source is a near necessity; in this case, the natural expectation will be for the platform to be open – thus not a differentiating element any more.

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Strategy, Tactics, and why companies are free to not contribute.

Yesterday Julie Bort wrote in the NetworkWorld site an interesting post called “Cisco doesn’t contribute nearly enough to open source”, where she contends that “”[despite its] .. proclaims it responsible for a half percent of the contributions to the Linux kernel (0.5%). In reality, Cisco has been a near non-entity as an open source contributor”. Of course the author is right in its claims – the amount of contributed code to the Linux kernel is substantial but very “vertical”, and specific to the needs of Cisco as a Linux adopter.

Which is a perfectly sensible thing to do.

The problem of “contribution” comes up and again in many discussions on open source and business adoption of OSS; it is, in fact, a source of major debate why participation is low, and what can be done to improve it. It is my opinion that there are some barriers to OSS contribution – namely, internal IPR policies, lack of understanding of how participation can be helpful and not just a gift to competitors, and more. On the other hand, two points should be made to complement this view: the first is that some companies contribute in ways that are difficult to measure, and the second is that sometimes companies have no economic reasons to do so.

Let’s start with the first point, that is a little peeve of me. Companies can provide source code; some do, and that’s a beautiful thing. However, there are many, many alternative ways of collaborating. Aaron Seigo, of KDE fame, in one presentation outlined the many activities that are part of the possible KDE contributions:

  • Artwork
  • Documentation
  • Human-computer interaction
  • Marketing
  • Quality Assurance
  • Software Development
  • Translation

In fact, I would say that some aspects like Artwork, Marketing and Quality Assurance may even be more important than pure coding – the problem is measuring such contributions. While the technical work underpinning source code analysis is quite well researched (among others, in our FLOSSMETRICS project) there is NO research on how to measure non-code contributions. And such contributions may be hugely important; one of my favorite example is the release, from Red Hat, of the Liberation fonts – a set of fonts with metrics compatible with the most widely used Microsoft fonts, like Arial. That alone helped substantially in improving the quality and correctness of document editing and visualization on Linux. How to measure that? Ubuntu has substantially contributed in terms of dissemination, in creating a base for many other distributions (including our own Everydesk). How to assess the value of that?

The second aspect is more complex, and is related to the strategy and tactics that a company uses to fulfill its own goals. Let’s take into account what a normal company do: first of all, survive (that is, revenues+reserves>expenses). Not all companies do have such a goal (a company designed to fulfill a task and then end its activities does have the survival goal with a deadline) but most do. This means that a company performs an internal or external activity if it does provide, now or in the future, a probable increase in revenues or reserves, or decreases expenses. Moral or ethical goals can be easily modeled in this schema using a “ethical asset”, that is a measure of how good we are in a specific target environment; for example, ecological contributions and so on.

So, let’s think about our typical company using OSS for a product. Let’s imagine that the company is doing a tactical adoption, that is it does not have a long term strategy that is based on Open Source. If the cost of contributing something is lower than the cost of doing everything from scratch, then the  company will contribute back (or at least, the probability of that action is higher). In absence of a strategy based on open source, there is no need to go further.

For example, in the blog post the open sourcing of IOS is mentioned; the question is: why? What economic goal this open sourcing brings? If the company decides to adopt a long term strategy based on resource sharing (with the idea of receiving substantial contributions from external entities – like Linux, WebKit, Apache, and so on) then this may make sense; but it implies a substantial change in company strategy. Such large changes are not easy to do and perform well; Sun tried (and partly failed), and most of the “famous” examples are only partially adopting an open-based strategy (IBM, Oracle, Google).

To recap: 1) we must evaluate and appreciate all kind of contributions – not only code. 2) We can expect large scale contributions only from companies that bet their strategy on OSS – Red Hat is among my favorite examples of that. We cannot expect, realistically, for companies that are using Open Source in a tactical way to contribute back in the same way.

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OSS 4.0 and licenses: not a clear-cut choice

The (always great) Matthew Aslett posted today on some of his most recent results on the future of OSS licensing, in what he calls “Open Source 4.0″, characterized by corporate-dominated development communities. This form of evolution was one of the prediction in my previous posts – not for ethical,or community reasons, but for entirely practical and economic reasons: collaborative development is one of the strongest model in all the 11 basic components that we have identified in the FLOSSMETRICS group. In fact, I wrote in the past something like

Many researchers are trying to identify whether there is a more “efficient” model among all those surveyed; what we found is that the most probable future outcome will be a continuous shift across model, with a long-term consolidation of development consortia (like Symbian and Eclipse) that provide strong legal infrastructure and development advantages, and product specialists that provide vertical offerings for specific markets

which, I believe, matches quite well Matthew’s idea about OSS4.0. One area where I am (slightly) in disagreement with Matthew is related to licensing; I am not totally sure about the increased success of non-copyleft licenses in this next evolution of the open source market. Not because I believe that he is wrong (I would never do that – he is too nice :-) ) but because I believe that there are additional aspects that may introduce some differences.

The choice of an open source license for a project code release is not clear-cut, and depends on several factors; in general, when reusing code that comes from external projects, license compatibility is the first, major driver in license selection. Licenses do have an impact on development activity, depending on the kind of project and who controls the project evolution. Previous studies that shown that restrictive, copyleft licenses do have a negative impact on contribution (for example in Fershman and Gandal, “Open source software: motivation and restrictive licensing”) has been refuted by other researchers (Stewart, Ammeter, Maruping, “Impacts of License Choice and Organizational Sponsorship on User Interest and Development Activity in Open Source Software Projects”). An interesting result of that research is the following graph:

devel

What we found is that for non-market sponsors and new code, there is an higher development activity from outside partners for code that is released under a non-copyleft license. But this implies that the code is new and not encumbered with previous license obligations, like for example the reuse of an existing, copyleft-licensed project. The graph shows the impact on development activity in open source projects, depending on license restrictiveness and the kind of “sponsor”, that is the entity that manages a project. “No sponsor” is the kind of project managed by a non-coordinated community, for example by volunteers; “market sponsor” are projects coordinated by a company, while “nonmarket sponsor” are project managed by a structured organization that is not inherently for-profit, like a development consortia (an example is the Eclipse Foundation). The research data identified a clear effect of how the project is coordinated and the kind of license; the license restrictiveness has been found to be correlated with decreased contributions for nonmarket sponsors, like OSS foundations, and is in general related to the higher percentage of “infrastructural” projects (like libraries, development tools, enabling technologies) of such foundations.

In general,the license selection follows from the main licensing and business model constraints:

  • When the project is derived from an external FLOSS project, then the main constraint is the original license. In this case, the basic approach is to find a suitable license from those compatible with the original license, and select among the possible business models the one that is consistent with the selected exploitation strategy.
  • When one of the partners has an Intellectual Property Rights licensing policy that is in conflict with a FLOSS license, the project can select a MIT or BSD license (if compatible with an eventual upstream release) or use an intermediate releaser; in the latter case there are no constraints on license selection. If a MIT or BSD license is selected, some models are of difficult application: for example, Open Core and Dual Licensing are difficult to implement because the license lack the reciprocity of copyleft.
  • When there are no external licensing constraints, and external contributions are important, license can be more or less freely selected; for nonmarket entities, a non-copylefted license gives a greater probability of contribution.

So, if you are creating a nonmarket entity, and you are free to choose: choose non-copyleft licenses. In the other situations, it is not so simple, and it may even be difficult to avoid previous licensing requirements.

The point on intermediate releasers require some additional consideration. An especially important point of OSS licenses is related to “embedded IPR”, that is the relationship of the code released with software patents that may be held by the releasing authority. While the debate on software patents is still not entirely settled, with most OSS companies vigorously fighting the process of patenting software-based innovations, while on the other hand large software companies defending the practice (for example SAP) most open source licenses explicitly mention the fact that software patents held by the releasing authority are implicitly licensed for use with the code. This means that business practices that rely on separate patent licensing may be incompatible with some specific OSS licenses, in particular the Apache License and the GPL family of licenses. The Eclipse Public License gives patent grants to the original work and to enhanced versions based on the original work but not to code not directly derived from the release, while permissive licenses like BSD and MIT give no patent rights at all.

If, for compatibility or derivation, a license that gives explicitly IPR rights must be selected, and the company or research organization wants to maintain the rights to use IPR in a license-incompatible way a possible solution may be the use of an intermediate releaser; that is, an entity that has no IPR on its own, to which the releasing organization gives a copy of the source code for further publication. Since the intermediate release has no IPR, the license clauses that require patent grants are not activated, while the code is published with the required license; this approach has been used for example by Microsoft for some of its contributions to the Apache POI project.

This may become an important point of attention for companies that are interested in releasing source code under an OSS license; most software houses are still interested in maintaining their portfolio of patents, and are not willing to risk invalidation through “accidental licensing” of IPR embedded in source code (one of the reasons why Microsoft will never sell a Linux based system).

As I wrote in the beginning, there is for a large number of consortia a clear preference for non-copyleft licenses; but it is not possible to generalize: the panorama of OSS is so complex, right now, that even doing predictions is difficult.

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Estimating source-to-product costs for OSS: an experiment

One of my recurring themes in this blog is related to the advantages that OSS brings to the creation of new products; that is, the reduction in R&D costs through code reuse (some of my older posts: on reasons for company contribution, Why use OSS in product development, Estimating savings from OSS code reuse, or: where does the money comes from?, Another data point on OSS efficiency). I already mentioned the study by Erkko Anttila, “Open Source Software and Impact on Competitiveness: Case Study” from Helsinki University of Technology, where the author analysed the degree of reuse done by Nokia in the Maemo platform and by Apple in OSX. I have done a little experiment on my own, by asking IGEL (to which I would like to express my thanks for the courtesy and help) for the source code of their thin client line, and through inspecting the source code of the published Palm source code (available here). Of course it is not possible to inspect the code for the proprietary parts of both platforms; but through some unscientific drill-down in the binaries for IGEL, and some back of the envelope calculation for Palm I believe that the proprietary parts are less than 10% in both cases (for IGEL, less than 5% – there is a higher uncertainty for Palm).

The actual results are:

  • Total published source code (without modifications) for IGEL: 1.9GB in 181 packages; total amount of patch code: 51MB in 167 files (the remaining files are not modified). Average patch size: 305KB, Patch percentage on total publisheed code:  2.68%
  • Total published source code (without modifications) for Palm: 1.2GB in 106 packages; total amount of patch code: 55MB in 83 files (the remaining files are not modified). Average patch size: 664KB, Patch percentage on total published code: 4.58%

If we add the proprietary parts and the code modified we end up in the same approximate range found in the Maemo study, that is around 10% to 15% of code that is either proprietary or modified OSS directly developed by the company. IGEL reused more than 50 million lines of code, modified or developed around 1.3 million lines of code. Without OSS, that would have costed more than 2B$, required a full staffing of more than 700 people for an effort duration of more than 20 years. Through OSS, the estimated cost (using the more appropriate semidetached model) is around 90M$, with an average staffing of 150 people and an estimated project duration of 5 years. Palm has a similar cost (the amount of modified code is quite similar), but starting from a smaller amount of reused code (to recode everything would still require 12B$, 570 people and 18 years of work). We have to add some additional costs (for an explanation you can check my previous post on the proper use of COCOMO II and OSS, using the model by Abts, Boehm and Bailey) that would bring the total cost to a little less than 100M$ (still substantially less than the full cost of development from scratch).

Open Source allows to create a derived product (in both case of substantial complexity) reducing the cost of development to 1/20, the time to market to 1/4, the total staff necessary to more than 1/4, and in general reduce the cost of maintaining the product after delivery. I believe that it would be difficult, for anyone producing software today, to ignore this kind of results.

Addendum: I received some requests for specific parts of source code from people willing to check the kind of modifications performed. For Palm, the website provides both original source code and patches. For IGEL, I requested the access to the source code, and was kindly provided with a username and password to download it. Since the single most requested file seems to be the modified rdesktop, I have linked the GPL sources here.

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The basis of OSS business models: property and efficiency

It is now time to write the closing part of our long multi-part look at open source business models. After all the discussion on how to look at the various parts of a model and how to improve it, I will try to summarize a bit on how to look at an OSS business model, and what implications can be made from a specific choice (for once, without mentioning open core).

The basic idea behind business models is quite simple: I have something or can do something – the “value proposition” – and it is more economical to pay me to do or get this “something” instead of doing it yourself (sometimes it may even be impossible to find alternatives, as in natural or man-made monopolies, so the idea of doing it myself may not be applicable)

There are two possible sources for the value: a property (something that can be transferred) and efficiency (something that is inherent in what the company do, and how they do it). With Open Source, usually “property” is non-exclusive (with the exception of Open Core, where part of the code is not open at all). Other examples of property are trademarks, patents, licenses… anything that may be transferred to another entity through a contract or legal transaction.

Efficiency is the ability to perform an action with a lower cost (both tangible and intangible), and is something that follows the specialization in a work area or appears thanks to a new technology. Examples of the first are simply the decrease in time necessary to perform an action when you increase your expertise in it; the first time you install a complex system may require lots of effort, and this effort is reduced the more you experience the tasks necessary to perform the installation itself.

Examples of the second may be the introduction of a tool that simplifies the process (for example, through image cloning) and it introduces a huge discontinuity, a “jump” in the graph of efficiency versus time.

These two aspects are the basis of all the business models that we have analysed in the past; it is possible to show that all of them fall in a continuum between properties and efficiency:

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Among the results of our past research project, one thing that we found is that property-based projects tend to have lower contributions from the outside, because it requires a legal transaction to become part of the company’s properties; think for example at dual licensing: to become part of the product source code, an external contributor needs to sign off his rights to the code, to allow the company to sell the enterprise version alongside the open one.

On the other hand, right-handed models based purely on efficiency tends to have higher contributions and visibility, but lower monetization rates. As I wrote many times, there is no ideal business model, but a spectrum of possible models, and companies should adapt themselves to changing market conditions and adapt their model as well. Some companies start as pure efficiency based, and build an internal property with time; some others may start as property based, and move to the other side to increase contributions and reducing the engineering effort (or enlarging the user base, to create alternative ways of monetizing users).

This is the last post in our little mini-serie on OSS business models; I hope that my archetypal three readers will have enjoyed it as much as I enjoyed writing them. Of course, I will be happy to read and respond to any comment – even negative ones.

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The relationship between Open Core, dual licensing and contributions

Open Core continues to receive substantial bashing, both after the announcement of the new SugarCRM 6 and after the recent OpenStack intitiative. Sugar introduces a new interface that is not available in the open source edition (they are not the first in this: actually, Open-Xchange did it before them, making the javascript code for the new AJAX interface not usable for commercial activities), but despite this they claim “We are an open source company” In the OpenStack announcement, The Register reports that it was not possible for NASA to introduce the changes to Eucalyptus because that would have undermined the capability of the company to make users pay for the enterprise edition. I already wrote in the past that Open Core is not evil per se, but that it does introduce difficulties in encouraging external participation; both because there is a very thin line in feature selection between the community and enterprise edition, and because open core naturally hampers participation. I had some readers asking me why, and I will respond with a subset of my LinuxTag slides:

Screenshot-linuxtag-daffara.odp - OpenOffice.org Impress

Open core is usually built by a set of internal open source components held together by a dual-licensed wrapper, plus proprietary modules on the outside. One of the best examples of this is Zimbra (an excellent product on its own) but MySQL in recent editions can be included in the same group. As discussed in previous posts, dual licensing hampers contributions because it requires an explicit agreement on ceding rights to the company that employs it, in order to be able to relicense it for the proprietary edition. This means that Open Core companies, in itself, will have an easier time in monetizing their software, but will receive much less contributions in exchange. As I wrote before, it is simply not possible to get something like Linux or Apache with Open Core.

Again: open core is not bad per se (but I would have been more cautious in calling Sugar “an open source company”, for whatever definition you have of that). But it is a tradeoff: monetization versus contributions. And, my bets are on contributions, as OpenStack demonstrates – you need leverage and external resources to go beyond what a single company can do.

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An on-vacation post on Open core

[Note: since I am writing this from a sunny beach, with a cell phone, I will not be able to add more than a few links to external pages. Will add the rest of them at my return, after the 12th of July]

It seems that Open Core continues to be the source of significant debate; I wrote quite a few posts in the past, and Open Core was one of our researched business models (for more details, see my LinuxTag presentation on business models). I would like to enter again the debate with a few short comments on my own:

  • Companies using OC are not the devil, and should not be called names because of their choice of business model. Actually, there are no good and bad business models - only models that work, and those that do not. So, if open core works for a company, that’s a good thing.
  • Open core models are somehow confusing for adopters. As a consultant for more than 100 companies and public administrations, actually explaining open core is one of my most common tasks. And the marketing message of companies is confusing: if you go to the Zimbra webpage (no offence against Zimbra, which is a company/product I love and use as example of good practice) you see the phrase “Zimbra – the leader in open source email and collaboration”, not “Zimbra – the leader in open source and proprietary email” (not that the phrase would win any context :-) ) and the same for all the other open core companies. This is not, in my opinion, such a negative point if the website explains the difference between versions in a simple way, as for example both Zimbra and Alfresco do.
  • It is true that open core models tend to have a higher revenue than non-OC models. It is also true that OC does have an intrinsic limited number of contributions from outside (as we found in FLOSSMETRICS analysing a few hundreds packages), and as can be found in the mentioned LinuxTag presentation. So, you may have higher monetization ratio, but you basically forfeit external contributions. The CEO should decide what is more important – so the decision is not “ethical”, but practical and based on economics. You will never get the kind of participation that Linux, Apache and Eclipse do have in an Open Core model. If that is ok for you – that’s great.
  • The fact that most VC are funding open core companies is just a data point. Lots of open source companies do well without VC funding.
  • It is true that lots of people claims that “pure” open source models are not sustainable. Even my friend Erwin Tenhumberg (that is quite knowledgeable, expert and incredibly nice on its own) had a slide in this sense in his LinuxTag presentation; and you can find lots of comments like that in many publication (something like “the majority of OSS companies adopt the so called mixed model”, despite this being actually false, as we found in our survey of OSS companies). The point, like said before, is that the important thing is not that there is a superior model, but that for every company, every market there is an optimal model – it may be OC, it may be pure services, or lots of combinations of our 11 building blocks. The optimal model changes with time and market condition, and what is appropriate now may be wrong tomorrow.
  • No open source model can achieve the kind of profit margins of proprietary companies. So, if you want to make your OSS company, remember this basic fact. If you want the kind of profit margins of Microsoft or Oracle, forget it.

So, to end this post, there are three critical points: whether the model is clear for the adopter (and this should be a given, and actually nowadays I would say that most companies are absolutely honest and clear on this), whether the software in its open source edition provides sufficient functionality to be useful to a wide range of adopters (and this is a fine line to walk, and requires constant adaptation) and whether the increased monetization compensates for the lack of external contributions, that can substantially increase the value of the code base (you are trading cash for code and engineering, in a sense).

Can we put this to rest? End the name calling, be friends, and call all of us family? Especially since right now, under the sun of Fuerteventura where I am writing this, it seems difficult to fight :-)

[by the way: sorry for any misspelling. There is no spell checker here on this small screen...]

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How to analyse an OSS business model – part five

(part five of an ongoing series. Previous parts: part one, two, three, four).

Marten Mickos (of MySQL fame) once said that “people spend time to save money, some spend money to save time“. This consideration is at the basis of one of the most important parameter for most OSS companies that use the open core or freemium model, that is the conversion rate (the percentage of people that pays for enterprise or additional functionalities, versus the total amount of users). With most OSS companies reaching less than 0.1%, and only very few capable of reaching 1%, one of the obvious goals of CEOs of said open source companies is to find a way to “convert” more users to paying for services, or to increase the monetization rate.

My goal today is to show that such effort can have only a very limited success, and may be even dangerous for the overall acceptance of the software project itself.

Let’s start with an obvious concept: everyone has a resource at his/her disposal, namely time. This resource does have some interesting properties:

  • it is universal (everyone has time)
  • it is inflexible (there are 24 hours in a day, and anything you can do will not change it)
  • efficiency (work done in the unit of time) does have a lower bound of zero, and an higher bound that depends on many factors; efficiency can vary by one order of magnitude or more.

Another important parameter is the price per hour for having something done. At this point, there is a common mistake, that is assuming that there is a fixed hourly rate, or at least a lower bound on hourly rate. This is clearly wrong, because the price per hour is the simple ratio between what someone is paying you to do the work and the amount of time required for that action; so if no-one pays you, that ratio is zero. So, let’s imagine someone working for a web company, and one of the activities requires a database. Our intrepid administrator will start learning something about MySQL, will work diligently and install it (ok, nowadays it’s nearly point-and-click. Imagine it done a few years ago, with compiles and all that stuff).

This system administrator will never pay for MySQL enterprise, or whatever, because its pay is fixed, and there is no allocated budget for him to divert money to external entities. So, whatever is done by MySQL to monetize the enterprise version, there will be simply no way to obtain money from the people that is investing time, unless you sabotage the open source edition so that you are forced to pay for the enterprise one. But what will happen then? People will be forced to look at alternatives, because in any case time is the only resource available to them.

This basic concept is valid even when companies do have budget available. Consider the fact that the average percentage of revenues invested in ICT (information and communication technology) by companies is on average around 5%, with some sectors investing slightly less (4%) up to high-tech companies investing up to 7%. This percentage is nearly fixed, valid for small to large companies and across countries and sectors; this means that the commercial OSS company is competing for small slices of budget, and its capability to win is related mainly to the perceived advantages of going “enterprise” versus investing personnel time.

Does it means that trying to increase conversion rate is useless? Not exactly. The point is that you cannot address those users that have no budget available, as those will never be able to pay for your enhanced offering; you have two different possible channels: those that are using your product and may have the potential to pay, or address the group of non-users with the same demographics. So, the reality is that mining current users is potentially counterproductive, and it is more sensible to focus on two interlocking efforts:

  • increase the number of adopters, and
  • make sure that people knows about the commercial offering.

This can be performed “virally”, that is by creating an incentive for people to share the knowledge of your project with others, which is very fast, efficient and low-cost; however, this approach does have the disadvantage that sharing will happen within a single group of peers. In fact, viral sharing happens within only homologous group, and this means that it is less effective for reaching those users that are outside the same group – for example, the non-users that we are pointing at. This means that purely viral efforts are not capable of reaching your target – you need to complement it with more traditional marketing efforts.

Next: resource and development sharing, or how to choose your license depending on your expectations of external participation.

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How to analyse an OSS business model – part four

Welcome to the fourth part of  our little analysis of OSS business models (first part here, second part here, third part here). It is heavily based on the Osterwalder model, and follows through the examination of our hypothetical business model; after all the theoretical parts, we will try to add a simple set of hands-on exercises and tutorials based on a more or less real case. We will focus today on the remaining parts of our model canvas (with less detail, as those parts are more or less covered by every business management course…), and will start a little bit of “practical” exploration, to create the actors/actions model that was discussed in the previous instalments.

Cost structure: this is quite simple – the costs incurred during the operation of our business model. There are usually two kind of models, called “cost-driven” (where the approach is minimization of costs) or “value-driven” (where the approach is the maximization of value creation). Most models are a combination of the two; for example, many companies have a low-cost offering to increase market share, and a value offering with an higher cost and higher overall quality. In open source companies it is usually incorrect to classify the open source edition as “cost-driven”, unless a specific price and feature difference is applied between a low-level and high-level edition.

Key partners: do our company partners with external entities? Common examples are resellers, external support providers, and so on. Additional examples may be partnerships with other companies or external groups for co-development of the OSS components (even competitors may share work on improving a reciprocally useful OSS package); sometimes the partnership may be informal (for example, with an OSS community) but fundamental as well.

Key activities: what is the basis of our work in our hypothetical OSS company? Of course, software development may be a big part; other examples are marketing, support… every company do have a specific mix, that is easily recognized simply by looking at what each person inside the company is doing right now.

Channels: how do we contact our customers, or potential ones? Directly? Through an external channel? Each channel provide different properties; web marketing is different from web word-of-mouth, exactly like radio advertising is different from print advertising. Choosing an appropriate channel is adifficult art, and is something that changes with time.

Customer relationships: How does the customer (or potential customer) interact with our company? Only through the software? Through online or in-person channels, like workshops? Support is self-service (the customer does it by itself) or requires human interaction? Is this interaction monitored? By who? A special case is handling the relationship with contributors (that are offering something of value to the company, without an economic intermediation) and OSS communities, that should be handled as a distinct entity (and not simply a collection of individuals). In this area I depart a little bit from the original Osterwalder model, by including not only customers but any interacting actor that provides value to the company, in one form or the other; this allows us to model in a more accurate way all those interactions that are not strictly monetary,

Revenue streams: this is easy! How the money enters your company? Is it structured in one-time payments, multiple recurring payments? Are there alternative form of revenue?

Are you still with me? Now that you have collected all the data on your company, the fun begins. We need to draft the network of actors (like your key resources, customer segments, external contributors…) and link these actors together with their relationship and effect. Some relations may impact on specific variables while  changing others (lowering the attractiveness of the community edition may increase conversion rates, but lower overall adoption rates).

In the next instalment we will provide an initial draft, and will later show how to convert this graph into a small and simple simulation.

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