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Open source enables value-based business models

Open source has never been a business model, but it does provide ways for companies to make money from the software they develop.

After more than five years participating in the open-source realm, I always find it interesting that we continue to ask the same questions about open-source companies versus projects, and consistently mix them up. Admittedly, we haven't always made it easy on ourselves with confusing licenses, varied revenue models, and reliance on a free product to manifest itself as a revenue stream.

Open source is a development and distribution strategy that software developers use to get their products into the hands of users. It's not a business model.

The business model is found in the additional value that developers (which are often vendors) put on top of the software in the form of support, additional features, etc. These provide revenue opportunities, which in turn creates a business.

An open-source "company" is the the strategic implementation of monetization efforts around an open-source software product.

I've read several recent articles that suggest open source will be subsumed into the fabric of all software, but that it won't offer large enough revenue opportunities for standalone companies. One of the key arguments is that software revenues get cut down to 10 percent 20 percent of what they would be from a proprietary vendor. That's likely true, but the argument against this notion is that software has been way too expensive for way too long.

Standalone open-source companies will/do have the same challenges that any software company has. Open source's lower revenue target is balanced by lower marketing and sales costs such that you can run at a very high margin once you reach critical mass in adoption. We've seen that clearly with Red Hat, JBoss, and MySQL.

The more products you have to sell at a good margin, the higher the profits. That's simple economics. Open source doesn't change that, it just tips the scale in different directions. Open-source products (not projects) probably need to be consolidated into a few larger vendors. With the economic downturn in full swing, I suspect we'll see a number of open-source vendors merge to take advantage of scale.

And, I suspect we'll see a new breed of open-source companies start to pop up over the next few months. We've certainly seen enough different models at this point for entrepreneurs to learn from.