Open Source Business Models

Oslo 17.04

Mikko Puhakka

Short Bio

-Management Consultant 1993-, currently via Cone Advisor

-Venture Capitalist (investment into MySQL in 2001) 1999-

-Researcher 2004-

-advisory Board member (xx companies such asTargetSource)

Agenda

-State of Open Source Business

-OS Business models

-Some ideas about the Future

4Source: Gartner ; Novell ; Press clippings ; SaS analysis

LINUX HYPE CYCLE HAS BEEN GUIDED,AMONG OTHERS, BY PERCEPTION OF PROs AND CONs

Visi

bilit

y

Time

Slope ofenlightenment

PROs CONs

Technologytrigger

?

Peak of inflatedexpectations

PROsCONs

Plateau ofproductivity

PROsCONs

Trough ofdisillusionment

CONsPROsPROs &

CONs inthe press

2001-2002 2003-now2000-20011997-20001991-1996

Governing ModelTechnology Adoption Life Cycle

by Geoffrey Moore

Pragmatists create the dynamics of high-tech market development

Innovators EarlyAdopters Early Majority Late Majority Laggards

Techies:Try it!

Pragmatists:Stick with the herd!

Conservatives:Hold on!

Skeptics:No way!

Visionaries:Get ahead of the herd!

OSS is Mainstream

Business Evolution (Puhakka)

1. Free Software 1985-2. Open Source 1998-3. Commercial (Professional) Open Source 2005-

Open Source evolution -from process innovation to value creation! (walli)

• In its early days open source was rather improving existing thaninnovating new

– Value creation and preservation are the key. The software value ispreserved by sharing it. The more people using it, the more value itcreates. People should not mix the value of "IP protection" (i.e. a legaltool to protect intellectual assets) to the business, with the value of theasset itself.

• Today there are clear evidences of business innovations– Proprietary software world talked about subscription models for years,

but it was companies with open source related products thatdeveloped real innovation here. Likewise,with SaaS vendors that areinvariably hosted on infrastructures of open source software and ableto be more inventive in their business models because their margincalculations scale differently.

Businessmodels 1/6

1) Open Source + ServiceWhat it means: Companies sell support and services around open-source software.

Who’s doing it: Compiere (ERP), JBoss (middleware), Red Hat (Linux)

Advantages for CIOs: You pay only for support, not software. The cost to switchproviders is relatively low because the source code is available to anyone.

Startup challenges: Difficult to build businesses because switching costs are low, asare barriers to entry. CIOs will always favor large, established vendors over startupsunless the startups also control code development. Hard to get venture fundingbecause venture capitalists are looking for sustainable competitive advantage intheir investments. Unless the software is complex or mission-critical, CIOs maychoose to support it themselves.

Businessmodels 2/6

2) MixedWhat it means: An open-source code base with proprietary add-ons.

Who’s doing it: Sourcefire (security), SugarCRM

Advantages for CIOs: CIOs may not need the proprietary stuff, but if they do they’llalready have acquired deep experience with the open-source product before buyingthe add-ons.

Startup challenges: There’s ample motivation to make the open-source productinferior to the proprietary package, transforming the open source into trial software. Ifthat happens, there may be a backlash among open-source developers and userswanting to see all the code.

Businessmodels 3/6

3) Open Source + Buy Off (Dual License)What it means: Companies offer a proprietary license for their open-source softwareso that users can modify the software and redistribute it without having to make thecode changes available to the public.

Who’s doing it: MySQL (database), Sleepycat (database)

Advantages for CIOs: The open-source software has all the features of theproprietary version.

Startup challenges: Sales of the proprietary version are limited mostly to thosecompanies that want to redistribute it as part of their own hardware or softwarepackages, companies also need to own all the rights to the product. Think MySQL vsPostgreSQL.

Businessmodels 4/6

4) Open Source + AggregationWhat it means: Companies assemble various open-source software packages intointegrated units that are easier for CIOs to consume.

Who’s doing it: Exadel, Navica, SourceLabs, SpikeSource

Advantages for CIOs: Simplifies open-source integration and support.

Startup challenges: Barriers to entry are low, brand differentiation is difficult, lack ofownership of open-source projects limits the influence of the company in thedevelopment of the code.

Businessmodels 5/6

5) Open Source + HardwareWhat it means: Hardware makers use open source as the foundation for the softwarethat runs their machines.

Who’s doing it: Cisco, Digium, Netezza, Nokia (Maemo with 900million Euro savings)

Advantages for CIOs: Lower prices on hardware.

Startup challenges: It’s difficult to differentiate on hardware alone, especially whenCIOs are looking to standardize their infrastructure

Businessmodels 6/6

These companies illustrate some of the OSS strategies beingused to create product value. (riseforth)

Value - Industry seems to know morethan Investors (Private or Public)

･Zimbra - $350 million (on ~$3 million of trailing revenues) -September 2007･XenSource - $500 million (on $1 million in trailing revenues)- August 2007･JBoss - $350 million (on $27 million in 2006 revenues) -June 2006･Sleepycat - $35-50 million (on ~$7 million in trailingrevenues, is my best guess) - February 2006･Gluecode - $10 million (on very little in trailing revenues,less than $1 million, I believe) - May 2005･SUSE - $210 million (can't remember revenues - I think$30-40 million) - November 2003･Ximian - ~$50 million (I can't remember - on $1 million orso in trailing revenues) - August 2003

Source: Matt Asay+ Trolltech & Sourcefire IPOs+ MySQL

Maybe we should change terminology?

Maybe we should start talking about software drivenbusinesses instead of Open Source businesses.

After all Open Source is way of producing and distributingsoftware, not a businessmodel.

...and the biggest successes in 2000’s have been software(OSS) driven businesses such as Google, Amazon,Ebay, Sulake Labs.

Conclusions and Implications• In building an OS software business you need the

same basic elements of business• OS to be part of company’s business model, it should

emphasis elements1. competitive position,2. source of competence and3. faster route to the international markets

• OS does provide a way to challenge incumbents, evengiant ones, but it has to be something more than justopening up the code, that does not provide enoughof disruption.

• Open Source is not evidently a business model