The Bloj

How can you make money if it’s free? (Profit models of Free Open Source)

Posted on March 23rd, 2006 by Chris.
Categories: Chris, General/Misc..

A while back Gas wrote an article that criticized open source software as not offering the necessary incentives to drive people to develop for deaf, blind, grandma, and other types of non-programmers who use computers. (In response to this article I wrote before that).

While some might criticize Tim’s post as MS fanboying, I think he made a very valid point that would apply to socialists and other anti-capitalists as well: You can’t just give it away. The point he made was simple: that you need a profit motive to develop good software.

The point I would like to make here is equally simple, in the hopes of explaining to the uninitiated how Red Hat and MySQL can make a profit off of a free product.

Companies that make money off of Open Source typically sell a service; they sell maintenance, not the car.

Introdution: Most people who think of the software business are familiar with the Microsoft Model of sales; Microsoft releases a product every couple of years that offers newer and greater features than the one before.

This model reminds me of a Calvin and Hobbes strip I saw a couple of years ago. Calvin asks his dad for the latest model of wagon, and his dad replies that wagons don’t come in model years. In the next panel, Calvin and Hobbes are rushing away, Calvin saying, “I tell you, Hobbes, there’s a fortune to be made!”

Simply put, we replace cars because they rust and fade and age. Code does none of those things; it’s technically infinitely reusable. So how does Microsoft make money? It does so by creating incentives to upgrade to the newest product, in terms of features, looks, and usability. [see this article, last paragraph]

Response: This is not the only way to do things though. Red Hat is an obvious example; it is not making its money off of licensing fees. Rather, Red Hat is in the other side businesses that come with software: helping companies to utilize it, supporting it, and training people in using it.
It might seem silly to think that selling services with the product could ever be more important than selling the product itself, but even in the case of cars, plenty of money is spent on maintenance and insurance and gas–sometimes even more than the cost of the car itself. The services that keep the car going may revolve around the car, but they are not secondary in importance to the car!

Question: Does this mean that Open Source will not be innovative?

Through this, we can understand why IBM or Red Hat might offer a product that was free and hope to make money off of it. We can even explain why they might want to make this product useful to those who aren’t programmers–everyone is a potential customer for their services.
However, this analysis begs the question: Would Red Hat not be as interested in innovation as Microsoft, a company that needs to make each product significantly more innovative than the past one in order to generate a profit?

One theory–and this is just a theory–is this:

Theory: Free standards force companies following the Microsoft Model to innovate; the Microsoft Model forces companies following the Free/Open Source model to keep up.

How this would work:

1. Microsoft develops a profitable product (Office 97) and builds a monopoly around it.
2. Because every company owns Office 97, MS can make money from support.*
3. In response to this, a FOSS company takes OpenOffice and makes it into a reliable competitor, charging for support, eroding MS’s market share.
4. To remain competitive, MS uses its strategic resources to build a product with significantly more features than Office 97 or OpenOffice, causing people to both buy the new product and pay MS for support.
5. To remain competitive, FOSS must play catch-up, making OpenOffice have the same features as the new Office.
6. Repeat ad infinitum.

This is just a theory. (*In fact, it’s not exactly true for Office 97, which was actually a competitor to MS’s own later products. One could say that FOSS didn’t have to exist to force MS to innovate–MS just had to have old products that didn’t die.)

*Consequences: Does this mean grandma gets her Linux?

The short answer is probably not. This has a lot to do with a completely different aspect of software development; that the majority of customers are businesses who need business features, not grandma features. Ditto with disabled users, except where law or self interest intervenes. However, unless software must change from year to year (think Madden NFL), there is no reason that a service-oriented business like Red Hat couldn’t produce an open source alternative to a commercial product.
-Chris

2 comments.