The Obligatory End of Year Blog Post

Virtually all media elements engage in the age-old ritual of summarizing the year that was, and looking ahead to the year that will be. Though the number of blogs dedicated to open source, or even those that mention open source on a frequent basis, is extremely small in the blogging universe, my open source compatriots are doing the same ... look at Matt Asay's The Open Road, Zack Urlocker's Open Sources, and Dana Blankenhorn's Linux and Open Source, to name a few. Each of these writers have provided valuable insight into the important open source events of 2008 and areas of focus for 2009 and I encourage you to read their posts.

I do not presume to add much to what these writers have already provided, but I would like to make a few observations. First, I see 2008 as a great success for the open source movement both on an industry-wide basis, and from my personal perspective. The industry as a whole has gained acceptance to the point that it is viewed as an important consideration in the business strategy of all software companies. On a personal level, not only was I privileged to be part of MySQL at the time of Sun's acquisition, but I also started this blog and made more than twenty postings.

Second, I believe 2009 has a strong chance of being the year that open source achieves critical mass not only of mind share, but of economic sustainability. While it's true that several open source companies are making in the tens of millions of dollars in revenues, the economic pressures that hit hardest at the end of 2008 could result in significant gains in revenue opportunities for these companies in the coming year. The economic pressures might be so severe that all IT spending is burdened throughout 2009, but the important point is that in the near future, the cost-conscious thinking arising in these times will likely lead to a radical change in the view of what constitutes value. No doubt, the open source industry will benefit.

The only prediction that can be made with any certainty is that few predictions become reality. In any case, I wish everyone all the best in 2009!

Making Money with Open Source

The question of whether a business can make money with open source software has most often been answered with an uninformed "no," at least until recently. As open source becomes mainstream and an integral part of the software industry, the common answer to this question is becoming, "yes, but I'm not exactly sure how." This was the topic that Joyce Chow (Apple Inc.) and I addressed in our presentation on Open Source Business Models at the Practicing Law Institutes seminar on Open Source Software in San Francisco earlier this month. Here is a brief summary of the highlights of our presentation.

To start, calling open source a "business model" is not accepted by everyone. Open source is clearly a development and license model, but it does not directly derive revenue. It is best viewed as a tool or strategy that can be used to generate revenue, much like any other business strategy. For the sake of simplicity, this post will treat use of open source in any meaningful way as a strategy that is an open source business model.

Open source business models are best considered as a spectrum of strategies using open source, from a 100% open source software model, to a pure proprietary model (though some might argue that "proprietary" is not the opposite of "open source" ... we will treat it here as the other end of the spectrum because it indicates that revenue is generated with no reliance on open source software). Along the spectrum are various combinations of development, licensing, services and other strategies with different triggers for generating revenue. Some of the most well know, starting from pure open source and moving to pure proprietary, are:

• 100% Pure Open Source - This is not a business model in the sense that entities in this category are typically non-profit entities that collect donations for the purpose of furthering the goals of their chosen open source project rather than profit-seeking. Entities like the Apache Foundation and Free Software Foundation fall into this category.
  

• Open Source as a Lure - Companies like Google and Sun Microsystems (my employer) employ this strategy. Google hosts its own open source code repository and open source applications (such as Android) optimized to its search results framework to generate higher web traffic and resulting ad revenue from developers and application users. Sun optimizes its hardware-dependent open source applications (such as Open Storage, xVM Ops Center, and MySQL database software) so they work extremely well on Sun's high-performance servers. In both cases, revenue is not derived from the open source software directly, but rather from the increased sales of related activities and materials.

• Aggregation and Services - These are really two separate models, but aggregation is not a viable business opportunity on its own and the two models are well matched. In consideration of seemingly infinite amount the open source code available on sites like Sourceforge or Launchpad, pulling related code together into a fully functioning application is a real value. Red Hat's ability to compose Linux from multiple sources with many copyright holders into an enterprise-friendly, reliable operating system is a perfect example. Providing services (including training, support, maintenance and professional consulting) is a very compelling revenue opportunity. Services are a natural addition to aggregation because of the expertise and knowledge gained in the process of aggregating code and ensuring it works properly. Red Hat also enhances its offering by providing a full spectrum of services to customers.

• Embedded Use - Open source software licensed as embedded components is another viable business model, but the revenue generating potential lies in the use of a dual-license model rather than the value of the open source software itself. An embedded component licensed under a permissive open source license (e.g., BSD, MIT, Apache, etc.) will not generate revenue because users have no incentive to pay for the freely available software with broad license rights. By contrast, an embedded component licensed under a restrictive or viral license (e.g., GPL) forces a potential OEM or system integrator to purchase a commercial license to the same software. Of course, this requires full ownership (or at least broad license rights) of all rights in the software. The MySQL database is an example of this model.

• Tiered Product - Tiered open source software offerings include two basic types of models. First, an open source offering could be an entry level version of a product, much like the evaluation or "light" version of a proprietary product, with a more fully-featured version available for a fee. However, the open source vendor has an advantage over the typical proprietary evaluation product because the source code is freely available for modification and customization. Funambol's open source and carrier grade editions illustrate this type of tiered product well. Second, an open source offering could be fully featured with no separate enterprise version of the product, and the open source vendor can compel purchase of a commercial license by offering additional tools or add-ons that make the open source software more valuable either by making it easier to use or enhancing its efficiency. In both cases, we come closer to a pure proprietary model in that revenue is generated by the value of the software itself either alone or in conjunction with other software or services.

• Incidental Open Source - Many of the most useful and reliable software tools, components and subroutines are available under open source licenses. As a result, virtually all software developed and distributed today contains open source software to save time and resources. However, the mere inclusion of open source components in a software product does not mean that a software vendor is engaged in the open source business. As a result, the incidental use of open source should not be seen as a means of generating revenue through the use of open source.

• Pure Proprietary - The name says it all. Distribution of software containing no open source components, and with no connection to other open source software is in no way an open source business model. This model was common 10 - 15 years ago with most software vendors such as Microsoft, Oracle and others, though all of these vendors not use open source materials at least on an incidental basis and are actively participating in other open source business models.

This is not an exhaustive list by any means. Each business entity must consider its goals, strengths, and the multitude of variables of each development, license, go-to-market element and revenue trigger for each open source strategy to ensure it finds the best point along the spectrum for it's unique needs. Moreover, these business models should be combined to achieve maximum effectiveness.

Open Source Legislation and Budgeting

California's fiscal health is in a downward spiral with no end apparently in sight. But when that end comes, the crash will be a doozy. After enduring California's longest budget stalemate in history, a time period spanning July to September 2008, the legislature and governor agreed upon a budget that was almost immediately torpedoed by the nation's economic crisis.

Now California legislators are arguing virtually around the clock from their entrenched positions (Democrats primarily advocating tax increases, with Republicans primarily advocating spending cuts) to find a way to plug a budget gap likely exceeding $40 billion by next year. The current proposal would impact Californians with massive additions to and increases in taxes, surcharges and fees including a 2.5% income tax surcharge, an additional $0.10 (possibly more) per gallon fee on gas purchases, and numerous other increases. It would also include dramatic cuts and work stoppages in infrastructure projects.

The budget stalemate not only illustrates the disconnected between political parties, but the disconnect between the politicians and their constituents. The citizens of California deserve to have a stronger voice over their politicians and the policies that impact them directly. You are surely asking, "what does this have to do with open source?" Well, nothing directly, but the ideals of open source (as identified by the Open Source Initiative and the classic text "The Cathedral and the Bazaar", as well as concepts drawn from the book "Wikinomics") provide an excellent starting point for changing the budget and legislative processes to better serve the state. Consider these advantages found in the open source model:

• More brain power means more diversity of views and better ability to solve problems
  

• Speedy fixes to problems and resolution of issues
  

• Lower overhead by outsourcing difficult issues to those with expertise and interest
  

• Creating a closer tie between companies (politicians/government) and customers (constituents)
  

• Better responsiveness to customer feedback and needs
  

• Facilitating a sense of inclusion and legitimacy of decisions and actions

The idea that government activities would benefit from more transparency to and direct involvement from involvement of constituents is not new. An organization known as MorePerfect.org has had its website running since 2006 offering a platform for anyone to voice there opinion, and draft and modify legislation on any issue (including revising the US Constitution). This is but one example, but imagine how effective such an idea could be if both the legislature and constituents committed to it.

Maybe the politicians could set aside their entrenched positions by listening to the priorities and needs of citizens, which would not only lead to a budget aligned with the state's needs but would also help win the trust of citizens.

Jump On the Bandwagon

Last week I attended a very informative CLE on Open Source Software 2008: Benefits, Risks and Challenges for Software Users, Developers and Investors, and was lucky enough to join Joyce Chow from Apple in presenting a session on Open Source Business Models. What made the seminar so useful was the breadth of topics it covered … everything from the nuts and bolts of open source licenses, to the technical details of linking and derivative works, and even ethics in open source (presented in part in a very entertaining fashion by Dave Marr, one of my colleagues at Sun). Bob Pierce, a former colleague of mine at Adobe, provides an informative review of the presentations on his blog.

In talking with other presenters and attendees, it became clear that the law surrounding open source software has reached a milestone. The skills needed to support an open source software business are no longer practiced by a handful of attorneys, and instead are skills that every attorney should have. Examples of the importance of understanding open source appear almost daily:

• Current economic troubles make the low cost and convenience of open source software particularly attractive to IT departments and businesses of all sizes.
  

• Cisco has been sued by the FSF and SFLC for failure to comply with the GPL - having a effective open source management process, knowing how to comply with open source licenses and ensuring such compliance occurs is critical to virtually all software businesses.

• The Open Inventions Network is pooling patents and prior art to protect Linux and the open source community from patent lawsuits - the open source community controls intellectual property rights for the benefit of the community.

• Gartner research shows that 85% of enterprises currently use open source software and the other 15% will within the next 12 months - even if you think your client doesn't use open source, it almost certainly does.

These are but a handful of examples, but searching everything from broadly circulated business periodicals to the most narrowly pointed open source geek blog will yield a virtually limitless supply of information on the growing importance of the open source model.

In short, this is the time to jump on the band wagon or be prepared to be left behind.