Making Money With Open Source, Part 1: Turning Users Into Buyers

Introduction by Dominic Sartorio, president of the Open Solutions Alliance

2007 was an eventful year for the commercial open source industry. We have seen many new entrants, and now there are hundreds of viable companies that are based on open source, filling nearly every segment of the software market. We have seen significant exit events from companies such as XenSource and Zimbra that further validate the viability of open source-based businesses. Additionally, we have seen the growth of new consortia such as the OSA and the Linux Foundation that exist to help address common problems facing these businesses.

Meanwhile, there continues to be extensive business model experimentation, as different companies try different ways of monetizing open source. All hinge on a key challenge: how to encourage wide distribution of freely available source, and then encourage a significant subset of those consumers to purchase value added offerings? Those offerings may take many forms, including support, updates, professional services, or a commercial version of a product including features that are available only for purchase.

For each, there have been examples of very successful and less successful companies. For entrepreneurs looking to enter this market, this may seem like a confusing state of affairs. Fortunately, with time, the truly viable and repeatable business models will stand out, but until then, this has been the topic of much discussion amongst industry experts. Indeed, what it means to be a commercial open source business has been the topic of debate.

Two Sides

In this series of articles, we highlight two industry experts who have differing views of what it means to be a commercial open source business and how to be successful. Bernard Golden, CEO of Navica, an open source consultancy, and Michael Grove, CEO of OpenITWorks, which focuses on helping IT organizations collaborate, are both recognized as industry experts and thought leaders.

In point-counterpoint style, Bernard first discusses how commercial open source is its own business model and is unique in that it faces two “chasms” (from Geoffrey Moore’s Crossing the Chasm), one involving broad adoption of the free versions of product, and the other involving converting a significant subset of adopters to paying customers. Businesses should focus their strategic planning on how to cross both chasms, and failure to do this will result in not achieving their full potential, either by not converting enough adopters into paying customers, or not finding enough adopters in the first place.

In Part 2, Michael follows by discussing that it is a mistake to think of commercial open source as its own business model. Instead, open source is one of many possible means to an end of making a single software business model successful — that of selling value to customers through software. Businesses should focus their strategic planning on how to best monetize their value propositions, whether it is through open source or something else.

Bernard Golden: Crossing the Chasm

Perhaps the most accepted catchphrase — or clich — in high-tech market analysis is Geoffrey Moore’s “Crossing the Chasm.” His theory holds that in order to reach the promised land of mainstream customer acceptance, early stage companies must transform themselves by extending their innovative products with additional elements like training, professional services, and so on. This transformation requires such a change that it is, in Moore’s analysis, like “crossing a chasm.”

Countless sessions at open source conferences the past few years have posed this question: has open source crossed the chasm? The invariable answer, as you might guess, is “yes.”

That brings up an interesting corollary question: “what does crossing the chasm mean to open source companies?” According to Moore’s theory, it should mean that money starts showering onto early stage companies as mainstream customers become comfortable with their products and begin to purchase in volume.

What’s interesting about open source and mainstream customers is that the evidence suggests that they are adopting open source in droves — but that their purchasing habits aren’t following Moore’s model. While they gladly install open source products, they appear to be much more reluctant to purchase support and services associated with those products. Estimates vary, but most informed observers place the percentage of users who purchase support/services at 2 percent or less.

Since most commercial open source companies have been set up explicitly to provide the additional elements that mainstream customers demand, this adoption without purchase is puzzling. Why aren’t customers behaving rationally and financially embracing open source companies?

The Service Question

Don’t get me wrong. Successful open source companies are doing well financially. Their customer base and revenues are growing — just nowhere near as fast as the adoption of their products. Why aren’t more of those pesky customers conforming to their assigned role?

Clearly, Moore’s theory needs to be updated to reflect the new reality of open source. I believe there is a second chasm in the open source market that lies far to the right of the original one. This second chasm reflects the gap between adopters of an open source product and purchasers of support and services associated with that product; moreover, the characteristics of the customer lying on the far side of the second chasm are markedly different than those on the near side, which accounts for why only 2 percent of a total user base ponies up for commercial open source.

The key to understanding the difference between users and buyers is to understand the differences between proprietary and open source software. Proprietary software imposes bit coercion; that is, to gain access to the bits, you have to buy a license, which bundles support, updates, and IP indemnity as well — it’s a package deal. Whether you need or want those other aspects of the product doesn’t matter: you need to buy them as part of the package. Open source software, by contrast, does not impose bit coercion — you are free to use the product without any licensing fee. Of course, you also forgo support and IP indemnity as well (updates are available at no cost due to the absence of bit coercion).

Herein lies the difference between open source users and open source buyers. If you are a user, but feel no need for attentive support and IP protection, you can choose not to buy. On the other hand, if you are a user that wants to be sure that help is only a phone call away, you’ll become a buyer. Or, perhaps you are a user with strong aversion to the possibility, however remote, of IP issues in your software stack — you guessed it, you’ll become a buyer.

It’s About Risk

Therefore, risk tolerance forms the basis of the second chasm. Users with higher risk tolerance are delighted to use open source software, but are willing to live without entering into a financial transaction with a commercial provider. They live on the left of the second chasm. Users with lower risk tolerance are delighted to use open source software, but are unwilling to use it sans commercial offerings that reduce the risk associated with open source. They live on the right hand side of the second chasm.

As you might guess, the right hand side of the chasm is where commercial open source revenue is located. Since open source companies are always seeking ways to increase revenues, let me offer a couple of thoughts about how more revenue might be found:

First, don’t think of the user base as an undistinguished mass. It’s made up of segments, some of which are risk tolerant, some of which are risk averse. Focus marketing on the latter (but don’t neglect the former; one of the factors risk averse users use to assess whether to commit to an open source package is the total user base. Consequently, non-revenue users aren’t freeloaders, they are a community that signals lower risk to potential purchasers. For an interesting perspective on this, see James Dixon’s essay on open source beekeeping that addresses this topic).

Second, look at risk from the perspective of the user. Most open source companies talk about how they lower the risk of the software, but users are really concerned about their own situation — they have something at risk. Find our more about that something and you can better present how you reduce their risk, and thereby raise their likelihood of purchase.

Overall, open source is revolutionizing the software world. Dropping bit coercion as a condition of software access is a huge benefit to both users and vendors. However, absent bit coercion, other factors come into play, which affect a user’s propensity to buy. To identify open source buyers, look to their risk profile and think about how to lower that; and there you will find the location of the revenue stream.

Dominic Sartorio, who wrote the introduction, is president of the Open Solutions Alliance, an organization dedicated to making enterprise-class open software solutions work together.

Bernard Golden is CEO of Navica, an open source consultancy.

Making Money With Open Source, Part 2: Only One Chasm

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