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Channel sales and the shifting value of free stuff over time

Red Hat is looking to its channel to grow the business. Giving stuff away for free has its limits.

Todd Barr (Director of Marketing at Red Hat) has a great post about open-source revenue mechanics and how they shift as an open-source company becomes an established player. Net net: giving away free software is great for driving adoption, but an open-source vendor needs to figure out more than how to give things away to build a great business.

Sound simplistic? Just try it. Sexy as open source is, you spend far longer ramping revenue (revenue, mind you, not bookings/sales) to cover expenses than you would in a typical proprietary license-based software model, as Todd points out. I've argued that open-source startups have benefits that proprietary vendors can't match (a focus on ubiquity, for one thing, and the attendant benefits that derive from "abundance"), but it's not easy sailing.

Todd writes:

So, start-up open source companies necessarily need low-cost, high-impact marketing tactics. And, by golly, providing awesome software to download for free is a great tactic - it drives a lot of web traffic, builds your brand, helps you get your early adopters, and quickly builds a community of advocates that might buy your value-added services in the future. But the free download tactic is less relevant to the challenges of a mid-sized company:

...converting the early majority (especially big companies), upselling existing customers, expanding your product portfolio, and doing it all profitably (and without early adopter discounts). That's when you begin to think seriously about your channel strategy and business plan, and start to figure out that you aren't all that much different than other software companies - except for the crucial fact that customers inherently want the value you're selling, which is a great place to be.

Small wonder, then, that Red Hat has been working hard to ratchet JBoss up a notch with a strong channel play.

In fact, the channel has become a major emphasis for Red Hat. It has traditionally done well with vanilla resellers but has lately stepped up its efforts with systems integrators and other value-adding resellers. It's no longer good enough for Red Hat to slap Linux on some hardware and watch it go. At a recent meeting of Red Hat's preferred SIs, Red Hat told the group that it intends to grow through its channel, and not by continuing to scale out its sales force.

Open source is all about leverage. Leveraging a community to assist in development. Leveraging a free download to achieve ubiquity. Leveraging a channel to make ubiquity pay....