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Open Source Business Models Alan Kelon Oliveira de Moraes <[email protected]> IN953 – Software Engineering 2006.1 May 8, 2006 :: Recife – PE

Open Source Business Models

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Open Source Business Models. Alan Kelon Oliveira de Moraes IN953 – Software Engineering 2006.1 May 8, 2006 :: Recife – PE. The community. 6. Treating your users as co-developers is your least-hassle route to rapid code improvement and effective debugging. - PowerPoint PPT Presentation

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Page 1: Open Source Business Models

Open Source Business Models

Alan Kelon Oliveira de Moraes <[email protected]>IN953 – Software Engineering 2006.1May 8, 2006 :: Recife – PE

Page 2: Open Source Business Models

The community

6. Treating your users as co-developers is your least-hassle route to rapid code improvement and effective debugging.

7. Release early. Release often. And listen to your customers.8. Given a large enough beta-tester and co-developer base, almost

every problem will be characterized quickly and the fix obvious to someone.

10. If you treat your beta-testers as if they're your most valuable resource, they will respond by becoming your most valuable resource.

11. The next best thing to having good ideas is recognizing good ideas from your users. Sometimes the latter is better.

Raymond, E. S. 1999 The Cathedral and the Bazaar. 1st. O'Reilly & Associates, Inc.

Page 3: Open Source Business Models

Innovation Happens Elsewhere

• High productivity requires doing less to produce as much or more [...] in general, than one that can take advantage of the efforts of others. In most cases, this means that a company wishing to innovate productively must recognize that valuable work and talent exist outside the confines of the company and that it must find ways of using that outside material and expertise while still maintaining a competitive edge

Page 4: Open Source Business Models

Some reasons to engage with open source

• Getting high-quality, free software and software design and development help

• Making your software ubiquitous through participation and low cost

• Engaging end-users in design and testing• Reducing time to market• Working with partners who prefer a loose relationship• Positioning a company• Harvesting innovation• Making standards

Page 5: Open Source Business Models

Some reasons to engage with open source

• Changing the rules• Changing pricing practices• Adopting transparent development processes• Injecting discipline into the development process• Satisfying more customers• Avoiding lock-in• Creating markets [and doing m.a.r.k.e.t.i.n.g]

Page 6: Open Source Business Models

“Boss, let‘s start an Open Source group”

“OK”

Him: - But it must make economic sense

Me: - Sure – no problem

*gulp*

Langham (2005) Surviving the five year itch: A tale from the trenches of European Open Source business models

Page 7: Open Source Business Models

What is a business model?

• The way a company makes money– The financial and operational essence of a

company

Page 8: Open Source Business Models

Business models for technology & non-tech companies

• Conventional– Selling a product through a distribution channel

• “Loss leader”– Offer low price or free product to sell product(s) or

service(s)• Give away razors to sell razor blades

• “Web Model”– Aggregate eyeballs and sell advertising

• Value Apportion– Provide valuable data or service over time via

subscription

Page 9: Open Source Business Models

Setting Up Shop: The Business of Open-Source Software

• Few companies have enough people, money, or time to do everything that needs doing, especially when competing against larger companies with greater resources.

• A strategy exists to address all these challenges at once: turning some (or in exceptional cases all) of a company’s software products into open-source ones.

• Much of the value provided to customers will not be provided solely by you, but rather by other developers who are attracted to working on your open-source products

Hecker, F. 1999. Setting Up Shop: The Business of Open-Source Software. IEEE Softw. 16, 1 (Jan. 1999), 45-51.

Page 10: Open Source Business Models

Setting Up Shop: The Business of Open-Source Software

• Support Sellers: Revenue comes from media distribution, branding, training, consulting, custom development, and post-sales support.

• Loss Leader: A no-charge open-source product is used as a loss leader for traditional commercial software.

• Widget Frosting: Companies in business primarily to sell hardware use the open-source model for enabling software such as driver and interface code.

• Accessorizing: A company distributes books, computer hardware, and other physical items associated with and supportive of open-source software.

Hecker, F. 1999. Setting Up Shop: The Business of Open-Source Software. IEEE Softw. 16, 1 (Jan. 1999), 45-51.

Page 11: Open Source Business Models

Setting Up Shop: The Business of Open-Source Software

• Brand Licensing: One company charges other companies for the right to use its brand names and trademarks in creating derivative products.

• Sell It, Free It: A company’s software products start out their product life cycle as traditional commercial products and then are continually converted to open-source products when appropriate.

Hecker, F. 1999. Setting Up Shop: The Business of Open-Source Software. IEEE Softw. 16, 1 (Jan. 1999), 45-51.

Page 12: Open Source Business Models

Seven open source business strategies for competitive advantage

• The Optimization Strategy• The Dual License Strategy• The Consulting Strategy• The Subscription Strategy• The Patronage Strategy• The Embedded Strategy• The Hosted Strategy

Koenig (2004) Seven open source business strategies for competitive advantage. IT Manager’s Journal

Page 13: Open Source Business Models

The Optimization Strategy

• Either the integrated system or the subsystems need to be modular (“suboptimal” and “inefficient”) and comfortable in order to optimize performance for the other.

• The modular and conformable layers are commodities

• Make money at the borders to the modular layers• E.g.: Linux & Oracle

Koenig (2004) Seven open source business strategies for competitive advantage. IT Manager’s Journal

Page 14: Open Source Business Models

The Dual License Strategy

• A software company offers free use of its software with some limitations, or alternatively offers for a fee commercial distribution rights and a larger set of features.

• Some restrictions– Any modifications that are distributed must also be made public

in source code form– Cannot use the free version as a component of any

commercialized product or solution• Advantages: Improved customer awareness and faster

adoption, stronger competitive positioning, and a large base of users to find bugs and recommend improvements to the software.

• E.g.: MySQL, Sleepycat (Oracle)

Koenig (2004) Seven open source business strategies for competitive advantage. IT Manager’s Journal

Page 15: Open Source Business Models

The Consulting Strategy

• Delivering a customer solution involves integration of hardware, software, and maintenance– middleware integration

• Custom application consulting

• E.g: spikesource.com

Koenig (2004) Seven open source business strategies for competitive advantage. IT Manager’s Journal

Page 16: Open Source Business Models

The Subscription Strategy

• Maintenance• Services• E.g.: Linux distros

(Red Hat, Novell)

Koenig (2004) Seven open source business strategies for competitive advantage. IT Manager’s Journal

Page 17: Open Source Business Models

The Patronage Strategy

• To drive standards adoption • To anticipate a de-facto standard and the

supporting community will converge around that contribution

• Advantages: – Commoditize a particular layer of the software stack– Eliminate competitors that are extracting revenue from

that layer

• E.g.: IBM & Eclipse

Koenig (2004) Seven open source business strategies for competitive advantage. IT Manager’s Journal

Page 18: Open Source Business Models

The Embedded Strategy

• Reuse and tailor existing platforms

• E.g.: Linux

Koenig (2004) Seven open source business strategies for competitive advantage. IT Manager’s Journal

Page 19: Open Source Business Models

The Hosted Strategy

• Don't sell your software, let users use it or rent it

• E.g.: SugarCRM

Koenig (2004) Seven open source business strategies for competitive advantage. IT Manager’s Journal

Page 20: Open Source Business Models

Open Source Paradigm Shift

• Commoditization of software

• Network-enabled collaboration

• Customizability and Software-as-Service

O’Reilly (2005) The Open Source Paradigm Shift. In Perspectives on Free and Open Source Software, eds. Feller et al., MIT Press

Page 21: Open Source Business Models

How open is open enough?

• Leveraging openness while keeping differentiation– Apple– IBM– Sun

J. West. How open is open enough? melding proprietary and open source platform strategies. Research Policy, 32, 7 (July 2003), 1259--1285.

Page 22: Open Source Business Models

Apple: reuse and leverage

J. West. How open is open enough? melding proprietary and open source platform strategies. Research Policy, 32, 7 (July 2003), 1259--1285.

Page 23: Open Source Business Models

IBM: from platforms to applications

• Phase I: application software

• Phase II: system software

J. West. How open is open enough? melding proprietary and open source platform strategies. Research Policy, 32, 7 (July 2003), 1259--1285.

Page 24: Open Source Business Models

Sun: opening new platforms

• Strategy 1: new platforms

• Strategy 2: partly-open source

• Strategy 3: if you can’t beat them, join them

J. West. How open is open enough? melding proprietary and open source platform strategies. Research Policy, 32, 7 (July 2003), 1259--1285.

Page 25: Open Source Business Models

Shifting from proprietary to open source strategies

• Proprietary platforms• Open standards• Open sources

J. West. How open is open enough? melding proprietary and open source platform strategies. Research Policy, 32, 7 (July 2003), 1259--1285.

Page 26: Open Source Business Models

Towards a Product Model of Open Source Software in a Commercial Environment

Deng et al. (2003). Towards a Product Model of Open Source Software in a Commercial Environment. In 3rd International Workshop on Open Source Software Engineering. ICSE 03.

Page 27: Open Source Business Models

Apache chairman: Days numbered for commercial software

• As the open-source stack grows and grows and takes over more areas, there's less money available in packaged products

• All of your software will be free. It means that, over time, you aren't going to be paying for software anymore but will instead pay for assistance with it

• A license can ruin a perfectly good piece of software […] A bad license can make it so restrictive that nobody wants to use the software

Krill (2006) http://www.macworld.co.uk/news/index.cfm?RSS&NewsID=14172

Page 28: Open Source Business Models

Licensing and Sponsorship

• Several project characteristics may be important to OSS success including – project age– project development status– programming language– type of software developed – intended audience– reputation of participants– licensing issues– organizational involvement in the project

Stewart et al. (2005) A Preliminary Analysis of the Influences of Licensing and Organizational Sponsorship on Success in Open Source Projects. In Proceedings of the 38th Annual Hawaii International Conference on System Sciences (HICSS'05)

Page 29: Open Source Business Models

Licensing and Sponsorship

• 147 projects on Freshmeat.net• Dependent variables:

– Change in subscribers (popularity)– New releases (vitality)

• Independent variables– License restrictiveness– Is the project sponsored?– Initial popularity

• Control variables– Project category– Project age

Stewart et al. (2005) A Preliminary Analysis of the Influences of Licensing and Organizational Sponsorship on Success in Open Source Projects. In Proceedings of the 38th Annual Hawaii International Conference on System Sciences (HICSS'05)

Page 30: Open Source Business Models

Licensing and Sponsorship

• Hypothesis 1: OSS projects that use a nonrestrictive license will become more popular over time than those that use a restrictive license.

• Hypothesis 2: Sponsored OSS projects will become more popular over time than non-sponsored OSS projects.

• Hypothesis 3: OSS projects using a restrictive license will experience higher levels of vitality than those using a non-restrictive license.

• Hypothesis 4: OSS project popularity will have a positive effect on OSS project vitality.

Stewart et al. (2005) A Preliminary Analysis of the Influences of Licensing and Organizational Sponsorship on Success in Open Source Projects. In Proceedings of the 38th Annual Hawaii International Conference on System Sciences (HICSS'05)

Page 31: Open Source Business Models

Guide to Legal Issues in Using Open Source Software

• A guide to help New Zealand government departments assess and mitigate the legal risks of using open source software.

New Zealand’s State Services Commission (2006) [http://www.e.govt.nz/policy/open-source/open-source-legal/guide-to-legal-issues-in-using-open-source-software.pdf]

Page 32: Open Source Business Models

Guide to Legal Issues in Using Open Source Software

New Zealand’s State Services Commission (2006) [http://www.e.govt.nz/policy/open-source/open-source-legal/guide-to-legal-issues-in-using-open-source-software.pdf]

Page 33: Open Source Business Models

Guide to Legal Issues in Using Open Source Software

New Zealand’s State Services Commission (2006) [http://www.e.govt.nz/policy/open-source/open-source-legal/guide-to-legal-issues-in-using-open-source-software.pdf]

Page 34: Open Source Business Models

Guide to Legal Issues in Using Open Source Software

New Zealand’s State Services Commission (2006) [http://www.e.govt.nz/policy/open-source/open-source-legal/guide-to-legal-issues-in-using-open-source-software.pdf]

Page 35: Open Source Business Models

Proposal of licensing guide

Ribeiro (2006) Potencial e Modelos de Negócio para novos empreendimentos em Software Livre, TG, CIn-UFPE.

Page 36: Open Source Business Models

The real development community?

• The myth of a global, expansive open source development community is just that: a myth.

• The reality is more like severe clumping of development around Linux, Apache, and very few other projects.

• Even JBoss and MySQL are overwhelmingly developed by those respective companies, and not by a crowd of outside developers (95% and 85%, respectively, I believe) [Asay 2005]

Asay (2005) So you want to build an open source community... [http://asay.blogspot.com/2005_09_01_asay_archive.html]

Page 37: Open Source Business Models

• Between 80 percent and 85 percent of persons working on Eclipse projects are paid salaries by their employers who send them to work for Eclipse.

Krill (2006) Death of the software salesman? http://www.infoworld.com/article/06/02/16/75460_HNdeath_2.html

The real development community?

Page 38: Open Source Business Models

Community tensions

Sebastian Rahtz (2005) OSS Watch

Page 39: Open Source Business Models

In the end…

• There is no “right” business model for Open Source.

• Whatever works for you, your customers and the community you participate in, is right.

Langham (2005) Surviving the five year itch: A tale from the trenches of European Open Source business models

Page 40: Open Source Business Models

Open Source Business Models

Alan Kelon Oliveira de Moraes <[email protected]>IN953 – Software Engineering 2006.1May 8, 2006 :: Recife – PE