Sometimes we think that the reasons for Software as a Service and open-source success are mutually exclusive. According to David Heinemeier, founder and developer of the various 37Signals' projects and products, however, open source is integral to 37Signals' success.
In fact, it's fair to say by David's reasoning there's very little to recommend a proprietary software strategy anymore:
Open source provides an incredible amount of technical leverage for small companies. No matter how productive your rock-star programmers are and no matter how much judo you apply to your problems, solid infrastructure takes a long time and benefits immensely from broad involvement. It really does take a village to raise great infrastructure.
The Ruby on Rails framework of today is a lot more productive than the one I was using before it was open-sourced. I use features every day created by others, enjoy polish done by others, evade bugs caught by others. All work I would otherwise have to do myself. So I simply get more done for less effort than it would otherwise have taken. The same holds true for the other open-source projects that have been cultivated in 37signals, like Prototype and Capistrano.
Open source is all about leverage, in other words. But it's also about the ethos of giving back, attracting great employees, and other benefits stemming from the open-source process.
Indeed, as David notes, unless your code is the direct, saleable reason for your being, the reasons compelling an open-source strategy far outweigh those suggesting you lock up the code. And if your strategy is to peddle bits, do you belong in business anyway?
Not in the 21st century.