business models of opensource and free software

faberNovel Consulting 2007Public document

Research paper – September 2007

Business models of open source software and free software: a few landmarks

This work is licensed under the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported license. To view a copy of thislicense, visit http://creativecommons.org/licenses/by-nc-sa/3.0/ or send aletter to Creative Commons, 171 2nd Street, Suite 300, San Francisco,California, 94105, USA.

2

Executive summary

The open source software industry is experiencing a strong growth that shouldcontinue in the years to come

Open source companies have structured themselves around four businessmodels:

The service modelThe distribution with value added modelThe double license modelThe mutualization model

These business models are profitable and sustainable over time

Beyond the diversity of business models, some key success factors arecommon to all open source companies

Several factors, such as the intensified competition and the lingering distrusttowards open source solutions, could lead to strategy changes fromcompanies in the future

3

4

Context and objectives of the paper

Typology of different business models

Key success factors shared by all models

What are the strategies to come for open source software?

Summary

5

Summary





Before open source: the free software movement

Free software appeared in 1985, when Richard Stallmand founded the FreeSoftware Foundation (FSF)

According to the FSF, free software must respect four freedoms:The freedom to launch software for any useThe freedom to study the way software works and thus to freely access itssource codeThe freedom to redistribute and sell copiesThe freedom to enhance software and publish the results

The FSF grants several licenses, the most widespread being the GeneralPublic License (GPL). In 2004, it accounted for 68,5% of the projects listed bySourceForge

To avoid confusion between what is free of use/free of charge, the OpenSource Initiative, created in 1998, wrote up the Open Source Definition

6

1) Sur un panel de 52.183 projets2) Sourceforge est la plus grande plateforme internet de développement et de téléchargement des codes et applications open source

Open sources licenses fulfill ten criteria

Free redistribution

Access to the source code

Right to change the source code and develop derived works

Respect of the integrity of the author’s source code: the license can require derived worksto be made available under a different name, or that the original version is distributedalong with the patches

Forbidding discrimination against persons and groups

Forbidding discrimination against fields of endeavor

Universality of the rights attached to the program. They must apply to anyone to whom itis redistributed, without making it mandatory to obtain an additional license (that way,programs which initially had the Open Source Definition license would not be closed upusing indirect means such as requiring a non-disclosure agreement)

Protection of the program, and not of the product

Lack of contamination of other products containing a protected source code

Technological neutrality. The license cannot discriminate against any technology or styleof interface.

7Source: Open Source Initiative

Three kinds of licenses can be identifiedaccording to their permissiveness

8

Free proliferatecopyleftedlicenses

Free copylefted persistent licenses

Free non-copylefted licenses

Anyone can transform a source code underthis license without acknowledging its originaldeveloper

Examples:Xfree86X ConsortiumLicense Apache

They contain a clause allowing users to mixthe software with proprietary software andplace it under a proprietary license, on thecondition that the free module remains undera free license

Examples:Lesser General Public License (LGPL)Berkeley Software Distribution (BSD)License MIT

They require that any modified softwareand any program including this softwarein a derived product must be placedunder the same license

Examples:General Public License (GPL)Mozilla Public License (MPL) Extentto w

hichlicenses

canbe

claimed

- permissive

+ permissive

Open source software’s growth should keepup in the years to come

Open source solutions maintain a significant margin of progress

9Sources: Forrester, 2005, faberNovel analyses

$59.9 million:Red Hat’s net income in 2006

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2004 2005

Open source solutions’ adoption in Europe* (2005)

Don't know

Plan to use

Already in use

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Open source solutions’ adoption in Europe* (2005)

Not interested in using

Potentially interested in using

Very interested in using

Will use in the 12 coming months

Already use

* : Sample group of 305 European companies and 104 US companies

Open source solutions’ attributes are widely acknowledged today

A surer and more flexible use:Possibility to adapt the product to one’s exact needs with the source codeSoftware’s transferability is lessbinding (no lock-in phenomenon)Frequent updatesPatches’ emission is easy

A quality product, cheaper thanproprietary software

Particularly likeable and adherence tothe open source movement’s values

10

Nevertheless, many executives remain wary because they lack knowledge of the open source companies’ economic models

0

500

1000

1500

2000

2500

3000

3500

Middle income organizations

(<$50 M)

High income organizations

(between $50 Mand $1 Md)

Very high income organizations

( > $1 Md)

Money saved since open source solutions are in use* [$ ‘000] (2005)

*: Sample group of 502 American entities (companies, governmental agencies and other organizations) between August and September 2005Sources: Optaros 2005, fabernovel analyses

The objective of this paper is to analyse the differentopen source business models

Broadly, a business model is made up of two elements:

11

A feature of the open source business models is that their main difference liesin their revenue models. For the sake of clarity, we will present a typologycentred around these models

The revenue model The cost structure

Value creation: definition of the offergenerating the highest willingness topay

Capture of the value created through:The sale of rights (sale ofpatents, licenses or even client files)The sale of productsThe sale of services

Definition according to the costcategories (raw materials, marketing,R&D, administrative) and their types(fixed or variable)

Identification of the company’sspecific skills which give acompetitive advantage

Determination of the capital sources

12





Summary

Four business models can be identified

13

Whichever model is chosen, all the companies offer complementaryservices for their products that can represent a quarter or half of their

sales figure

The services or indirect valorisation model

The value addeddistribution model

The double license or commercial open source

license model

The mutualization model

Business Model

The service model takes two forms

Simple service model:commercialization of services that haveno link to a specific product

A variant of this model involvesproviding an application service withoutany direct link to the open sourcesoftware used via an Internet networkusing a standard protocol (ASP model)

Indirect monetization model:commercialization of servicesassociated to software developed orpackaged internally

14

« Our job is to be the Switzerland ofopen source software components »(M. Halsey, Alliances and international sales vice-president forSpikesource)

The service model

The services offered are of different types

15

•Help with the integration of tested software•Guaranteedinteroperability

Formation

Tests and guarantee

•Algorithms control•Bug detection•Surveillance of securityproblems coming fromother open source software

Surveillance

•Help•Publication of support documents•Creation of patches shoulda problem occur

Technical assistance

The service model

The simple service model relies on twoopposite levers

16

Growth levers

Extending the numberof services offered

Specializing the services offeredto develop a competitive

advantage

Segments of the market available:depending on the number of companiescommercializing open source solutionswithout offering complementaryservices of satisfying quality

The company’s faculty to offer serviceson a great number of software that it didnot develop itself

The competition’s level of intensity onthe services offered: the stronger thecompetition is, the more it is in the opensource company’s interest to developspecific skills around a few products

The consumer’s need and theirwillingness to pay: if potential clientshave specific needs and are not verysensitive to price, it would be better forthe open source company to specializearound a few profitable services forwhich the company can charge a lotEvolution

Factors

The service model

The success of the indirect monetization model relies on two levers

17

Levers of growth

Increasing the size of the marketby preferring a wide diffusion of

the solutions

Increasing the monetization rate by offering services to a maximum

number of users

The competition’s level of intensity onthe software offered, which dependson the forking1) risk

The license’s choice:If the products are made for a directuse, no other software will be developedwith the source code made by thecompany. As a consequence, a copylefttype license is adapted because there isno risk of contaminationIf the products are modulesinstead, meant to be inserted in otherprograms, it is imperative that thecompany uses a copylefted persistentlicense or a non-copylefted one

The competition’s level of intensity oncomplementary services offered

The choice of the product’s level ofrefinement:

A product that is too sophisticated onlyneeds a few complementary servicesA product that is not related enough to theoperational product will be rejected byusers and developers

1): Use of the software’s source code (completely allowed since the code is free) to create a challenging product

EvolutionFactors

The service model

An example of a company offering a service model: Spikesource

The Spikesource company is specialized in the testing, thecertification and the integration of LAMP open sourcesoftware and the different applications that may use it. In2005, its sales figure amounted to $76,000, and it hadraised $21 million to pursue its development

18Sources : Spikesource, faberNovel analyses

The company has two offers:

Spikelgnite Platform: A set of open source guaranteed and integrated software and middlewareUpdates developed using the platform, allowing the count of 25,000 patches and updates for the software supported by Spikesource every weekA starting offer at about $1,890 a year

Spikenet: a technical help and maintenance system, which starting price is$7,500 a year

The service model

The value added distribution model consists in sellinga standard version of an existing product

With this model, open sourcesoftware is not developed bythe firms that commercializetheir services: they alreadyexist and are packaged in astandard version that can bedownloaded, pre-installed oncomputers or sold onphysical bases

The « sale» is generallymade as a yearlysubscription to the productand a set of attachedservices*

19


Sources : Red Hat, faberNovel analyses

*: the subscription accounts for 85% of Red Hat revenues in 2006

This model offers a triple client value

20

Client Value

Saving time: the clientdirectly gets a packagedand tested version of thesoftware, which isimmediately compatiblewith his computer and hissoftware

Transfer of the risksrelated to the use of opensource solutions, from theclient to the firm:

• Tested, certified andguaranteed versions

• Indemnification incase of seriousproblems

• Technical assistanceservices integrated inthe packaging

Regular Obtention of newpatches and updates forthe length of thesubscription


An example of value added distribution: Red Hat

Red Hat specializes in the distribution of Linux. It reported for the 2006financial year a revenue of $401 million and a net income of $59,9 million.In April 2006, the company took over Jboss, an open source firmspecializing in middleware solutions, for a sum of $350 million. In July2007, its market capitalization on the NYSE was $4,1 billion and itemployed 1800 persons

21Sources : Red Hat, faberNovel analyses

Red Hat’s offer is made of two versions:The Enterprise version, which is tested and whose interoperability is warranted

Red Hat Enterprise Linux, or RHEL, which allows only two users to have RHEL simultaneouslyRHEL Advanced Platform, which allows an unlimited number of user to have it at the same time

The « community » version (Fedora)

The enterprise version offers 5 different modules:For the RHEL version

Basic offer, $349 per year, 2 business answer s per day via email, unlimited for technical incidentsStandard offer: $799 per year, 12x5 phone assistance, unlimited via InternetPremium offer: $1299 per year, 24x7 phone assistance

For the RHEL Advanced Platform versionStandard offer: $1499, 12x5 phone assistance, unlimited via InternetPremium premium: $2499, 24x7 phone assistance

Even though Fedora does not provide any revenue, Red Hat is careful not to neglect its communityversion and partipates actively in its animation


The double license model relies on a discrimination of the users

This model rests on a double license system:An open source license for the standard productA license that is more protected, which comes with a guarantee and is generally linked to a product thatoffers more functionalities

The open source license has to be proliferatecopylefted because every enterprise wishing tointegrate the source code to a larger set ofproducts and keep it under proprietary licensewill then have to buy the commercial version ofthe solution offered

Symetrically, the commercial version must beunder proprietary license to avoid forking risks,or free non-copylefted or persistent to avoidproliferation effects if the client company wishesto integrate the source code in a larger system

This solution allows the combination of the freelicenses’ advantages (creating a community ofprogrammers, fast diffusion to benefit fromnetwork effects) and those of the proprietarylicense (stable and known revenue flow, nocontamination risk from open source licenses)

22

*

The double license model

Open source companies using this double licensemodel have to arbitrate twice

23


Arbitration type

Percentage of the commercial version’s code included in the

community version

Level of finishing of the commercialized products

Factorsof choice

Role played by the community: the moreimportant its role is, the higher the commercialversion’s code should be included in thecommunity version

Product renown: the better-known the productand the need it answers are, the easier users willsee its usefulness. The company will not have todivulge much in the community version then.

Company renown:The better-known the company is, the lower theforking risk. The community open source versioncan thus contain a very important part of thecommercial version’s code, without taking the riskof seeing fierce competitors emergeThe better-known the comapny is, the lessdependent on the community version’s trial thepurchase of the commercial version is. For thisreason, the community version does not need tobe close to the commercial version

The company’s internal resources and skills:the double license model is perfectly suited forcompanies which develop their components.Companies which make the choice to developfinished products must have the internal resourcesnecessary to lead a community of developers,convince corporate customers to buy thecommercial version, offer technical support for anextended customer base, etc.

The example of a company using the double license model: SugarCRM

SugarCRM is one of the leading companies in the opensource CRM tools sector. In 2006, it reported a salesfigure of $6.6 million and employed over 100 persons

SugarCRM’s offer is divided into two versions:The community version, which contains 85% of the commercialversionThe commercial version

Sugar Professional: $275 per year and per userSugar Enterprise: $449 per year and per user, which offersmore advanced functionalities (Oracle databasesupport, offline client synchronization, etc.)

SugarCRM also offers:A set of services (technical assistance, online training, patchessending, etc.) available on its platform Sugar Network ($119per year and per user)TheSugar Sales Professional Service, which allows thedefinition of a personalized offer. It may contain an installationassistance, a more advanced technical assistance and aconsulting offer to optimize SugarCRM sofware and adapt it tothe specific needs of the client. The cost of these services canvary greatly (between $239 and $4,995)

24Sources: SugarCRM, faberNovel analyses


A variant of this model: the commercialization of an associated product

This variant consists incommercializing associatesoftware, instead of selling almostidentical products under twodifferent licenses

The complementary monetizationrests on the conversion of usersinto clients:

The user base cannot be seen as arevenue sourceThis base must be monetized withthe adoption of a complementarymodel

25Sources: L. Dahlander [2005], faberNovel analyses

Until 1999, the company Roxen was an excellent example of this principleFocused on the development and the improvement of its web server, the only way to measureits success then was the number of daily downloads and the total number of usersThings have changed with the renewal of the management team and today, to quote one of themanagers: “We have constantly moved away from the OSS concept towards a more traditionalapproach of selling proprietary software. We felt that something had to be done in order tosurvive. The original approach which was strongly influenced by ideas within the free and opensource software movement was impossible to combine with profits in our case.”


The « mutualization » model rests on the successive development of several modules…

The mutualization model consists in the development of a relatively simpleversion of the product and the subsequent development of modules ondemand

26Sources: Muselli [2007], faberNovel analyses


… and generally results in the creation of a community of clients

27

To make the development ofexpensive modules easier, theopen source company can createa community of clients, poolingtheir resources to fund themodule’s development

This community can becomedurable and turn into an investors’club, which regularly orders newmodules


A variant of this model consists in the mutualization of modules by developers

28

A model frequently used byopen source companies is todevelop the modules adistributor-integrater has askedfor

Several developers willparticipate in the developmentof the finished product which,once packaged, will bedistributed to the integrator’sclients


The mutualization model only applies to very specific conditions

29

Mutualizationmodel

Solutions for verytargeted needs

allowing the fast pre-emption of the marketand the curbing of the

competition

High rhythms of obsolescence of the solutions developed

Complex productthat can occasion the

development of numerous additional

modules


The revenue configuration of companiesthat follow this model varies

30Sources: Muselli [2007], faberNovel analyses

Costs for client1

(1)

Costs for client 2

(2)

Costs for client 3

(3)

Open source company’s

revenue(1)+(2)+(3)

Basic module(free) 0 0 0 0

Module 1 Development+ integration Integration Integration 1 development+ 3

integrations

Module 2 1/3 of the development+ integration

1/3 of the development+ integration

1/3 of the development+ integration

1 development + 3 intégrations

Module 3

Club entry fee+ yearlycontribution+ integration of module 3



Club entry fees+ yearlycontribution of clients 1, 2 and 3+ 3 integrations

Client 1 pays forthe development ofmodule 1, theothers only pay forits integration

The three clientspool theirresources to payfor thedevelopment ofmodule 2, they allpay for a third ofthe developmentand theintegration

Clients gatherin an investors’club

The basic moduleis internallydeveloped and isnot charged


The example of a company using the mutualization model: Open Trust

Open Trust is an open source companyspecialized in information security software,which employed 60 persons and had a $6.7million sales figure in 2004

31Sources: Open Trust, faberNovel analyses


It internally develops a basic Public Key Infrastructure module:The module is presented to potential clientsThe client community takes form

Each client will pay for the development of a new module which answers his specificneedsThe modules funded this way will be packaged into unique productsThese products are distributed to all members of the client community, without otherclients having to pay for modules they have not funded

This upgraded version is later made publicly available through freedownloads, after a duration of 6 to 18 months

Open Trust also created a « contributors’ club » with an entry fee varying from€50,000 to €100,000 and a yearly contribution varying from €15,000 to€25,000

Synthesis of the different business models

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Model Products offered

Service offeredSupport for all types of open source software or internallydeveloped software

Value addeddistribution

Integration of different source codes, patches offer and updates only for the distributed software

Double licenseDevelopment of enterprisesoftware (CRM, ERP, CMS, …), patches and updates

MutualizationDevelopment of enterprisesoftware and its complementsfor a pool of clients

Value proposition

Tests, certifications, software integration (LAMP), patches offer, updates and adaptable technical support

Tests and guarantee, patchesoffer and adaptable technicalsupport

Commercial version of the software containing part or the totality of the communityversion’s code, adaptable technical support, patches sending and updates and/or personalization of the software to fit the client company’sneeds

Specific services, totally suitedfor the company’s needs, adaptable and at a far cheapercost than the market’s prices

Main companies

Spikesource, SourceLabs, Optaros, Bearstech, Openlogic, Open Cascade, Altic, Nuxeo, Core-Techs, Pilot Systems

Red Hat, Novell’s SUSE, Mandriva, Mostick

MySQL,, JBoss, SugarCRM, Optaros, Alfresco, Sun, Wengo, ExoPlateform

OpenTrust, AF83, Emencia,

The business models distinguish themselves by the extent to whichtheir licenses can be claimed and their monetization model

33

Proliferating product(GPL license)

Product that can beclaimed (BDS license)

Indirect monetization(revenues stemmingfrom the sale of services)

Direct monetization(revenues stemmingfrom the sale of products)

34





Summary

35

Four key factors must be taken into account in the success of an open source company

Key successfactors

Establishedmarket

Alleviation of the managers’

fears

Stable commercial

infrastructure

Community of developers

36

The community of developers of an open source company represents an essential resource


Price competitivenessDevelopment and improvement of software for a small cost or none atall

Non-pricecompetitiveness

Rapid identification ofbugsand production of patches and updates

Prescription to otherusers

The community of developers fulfills

two roles

Lead users*

Early adopters

* Lead users distinguish themselves from other users by being one step ahead and having other needs on some market trends. The answers to these precocious needs have a strong value for these specific consumers. It gives them the incentive to develop solutions themselves.

The realization of an open source project doesnot guarantee the creation of a community

Community of developes are “scale free networks”, which means they are organized around afew hubs and develop according to the “preferential attachment” principle stating that the moreconnections a hub has, the more likely he is to gain new ones

37

Example of a scale free networkExample of a random network

Given these conditions, though some communities will grow quickly, a majority of projects aredoomed to stagnation if they do not reach a critical size of approximately 100 people

Size of the community

Number of projects Administrators Regular

developersOccasionaldevelopers Active users*

≤ 8888< ≤ 279>279

6484719370

80329 (47.8%)590 (2.1%)798 (0.9%)

34659 (20.6%)1703 (5.7%)2576 (2.7%)

33275 (19.8%)17334 (60.3%)53030 (55.8%)

19941 (11.8%)9124 (31.7%)38593 (40.6%)

Composition of the projects developer community on Sourceforge in 2003

* : Active users report bugs, suggest improvements but do not change the source code

Sources: Jin Xu, Scott Christley et Gregory Madey [2005], faberNovel analyses


Three levers exist to unite a community of developers

38

Levers Actions

Adhesion

•Regularly publish helpful documents and be astransparent as possible (a key value for the opensource community)•Develop different tools to interact with thecommunity (mailing list, forum, meetings with thecommunity members)

Animation

•Send a newsletter on a regular basis to communitymembers (Pentaho sends a monthly newsletter withthe upcoming events and different technical tips)•Give community members an incentive to sharepatches they developed (e.g. Sourcefire)•Take part in projects coming from the community(developers working for Sun take part in numerousprojects and have an indirect influence on theirdevelopment)

Monetization

•Involve the community by having it take a part in the definition of the features that must be includedin future versions (Sun uses the community to conduct focus groups and marketing research)•Encourage the firm’s employees to do public interventions in conferences or events (e.g. MySQL or Alfresco)


Nevertheless, the community’s contribution to the development of the source code must not beoverestimated

The community of developers takes an active part in the improvement of aproduct but only rarely develops the core program

Among the 50 developers who contributed the most to the development ofSugarCRM, 95% were associates of the firm while the company only boasts5,000 members working on some 220 extensions. Broadly, less than 15developers create more than 85% of the basic program used in softwaredistributed by open source companies

The participation of users abides by the 1000/10/1 rule: 1000 use thesoftware, 10 report bugs and 1 develops patches

39Sources: Matt Asay, 2006, faberNovel analyses

Users’ activity

Simple use

Bugs reporting

Patches development


1000

10 1

It is best for open source companies rowork on an already established market

Working on an established market ensures:That consumers are educated. Potential customers have precisely identifiedtheir needs, which makes the monetization of the service sold by the open sourcecompany easierThat a benchmark exists. Open source companies are plagued by confidenceissues from users, which tend to decrease if one or more proprietary softwarehave already proven their efficiency. The existence of a benchmark alsohighlights the pros of an open source product (price, quality of service, etc.)

Open source’s main successes emerged on a market that was under thesway of a proprietary software seller:

Database: MySQL et PostgreSQL vs. Oracle, IBM and MicrosoftERP: Compiere vs. Oracle and SAPCRM: SugarCRM et Compiere, vs. Siebel o OracleOS: Red Hat vs. Microsoft

40

Established market

Managers distrust open source companies

41Sources: Optaros 2005, Forrester 2005, faberNovel analyses

* : Fearing a lack of applications or supports for the implementation of open source solutions can be equally attributed to thereality of some situations and to the prejudice and mistrust managers nurture towards open source solutions. These fearsshow what little knowledge managers have of open source solutions.

0%

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20%

30%

40%

50%

60%

70%

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90%

100%

Lack of skills or habit

Lack of applications*

Lack of supports*

Immature products

Main reasons for refusing to adopt open source solutions 1) (2005)

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30%

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60%

70%

80%

90%

100%

Lack of support from

the CEO or the head of the commercial

unit

Lack of support from executives

Lack of support from

the head of the IT department

Fear of issues related to

intellectual property

management

Main problems identified among companies which have adopted open source solutions and whose costs have not decreased significantly 2) (2005)

Alleviation of themanagers’ fears

1) On a sample of 140 companies, several answers possible2) On a sample of 350 companies, several answers possible

Open source companies must adopt a communication policy focused on addressingthe managers’ distrust

Targeted actions towards managersand business units directors

Goal: to contradict existingprejudice on the quality of theproduct and show how serious thecompany is about its work

Put forward the security of thesolutions and the guarantees offeredby the open source companyProve that the provider is viable andwill last over time, present the businessmodel

42

Reassure about the provider Reassure about intellectualproperty

Targeted actions towards managersand business unit directors

Goal: to contradict commonprejudice on the risks linked to themanagement of intellectual property

Highlight the low legal risks thateffectively come with the use of opensource solutionsInsist on the fact that companies are infact more likely to be prosecuted byproprietary software companies forlicenses’ account managementproblems, than by open sourcecompanies for any problem that has tosee with intellectual property

Sources: Forrester 2005, faberNovel analyses

Alleviation of themanagers’ fears

Open source companies must provide their clients with a stable commercial infrastructure

Most non-specialist users and client companieshave yet to really comprehend how the opensource world functions and fear they will haveno one to talk to if problems arise

The only way to alleviate this fear is through theexistence of an apparent commercial entity,committed to the guarantee of commercializedproducts and able to provide an after salesservice

The necessary creation of an after sales servicerepresents an important cost center for opensource companies

43

47%Percentage of USorganizations that could notfind internal or externalresources to maintain andimprove their open sourcesystem

Sources: Optaros 2005, faberNovel analyses

Commercial infrastructure

Companies that already use open source solutions are plagued by a lack of follow-up and support

44

Open source companies must make their solutions less complex to use. This must beaccomplished through an improvement of the customer relationship management.

Sources: Forrester 2005, faberNovel analyses

0%

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Lack of follow-up Immature product Lack of skills

Main fears of IT managers using or planning to use open source solutions* (2005)

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40%

50%

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90%

100%

No disappointment

Operating is costlier and more complex

than planned

Quality (code, documentation, support)

does not meet expectations

Main disappointments after having adopted open source solutions* (2005)

* : On a sample of 95 IT managers, multiple answers possible

Commercial infrastructure

45



Key success factors shared by all business models


Summary

Open source companies’ strategies could go through major changes in the coming years

46

• What marketing model should be adopted?• What importance should be given to

marketing and distribution?Marketing strategies

• How can one deal with the competition of proprietary solutions giants setting a foot in the open source market?

• How can one avoid the intensification of the competition from other open source companies?

Fiercer competition on the open source solutions

market

Two marketing models go up againsteach other

47

Adoption through use Marketing

campaignsTrial versions relatively close to thecommercial one are available throughfree download

The community version of SugarCRMcontains 85% of Sugar Professional’scodeAlfresco’s trial version contains 100% ofthe commercial version’s code

After a trial period, the user needssupport and additional functionalities

Marketing expenditure is limited, thecompany’s resources being focusedon product development

Companies devote an important partof their resources to their marketingdepartment

MySQL and SugarCRM are strengtheningtheir marketing departmentSugarCRM and JBoss are studying thepossibility of using Google Adwords andlaunch advertising campaigns on webbannersIn 2005, Firefox asked its user communityto contribute to the elaboration of videoads, in prevision of future televised andweb campaigns

Companies do not rely solely on viraladoption and develop theircommunication capacity

This strategy allows companies tobetter target their clients and givesthem more control on their image

Marketing strategies

Most open source companies’ managers underline the low marketing and distribution costs

The marketing model of open source companies would be of pull type, withthe objective of getting the maximum number of downloads of the free versionand monetizing this base

Open source companies do not have to push for the adoption of their productswith massive marketing campaigns

48Sources: Goldman Sachs, SugarCRM, Jboss, faberNovel analyses

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

SugarCRM Proprietary software

Marketing and distribution expenditures[% of the sales figure] (2005)

0%

50%

100%

150%

200%

250%

Jboss Proprietary software

Acquisition cost of a client [% of the revenue coming from the maintenance

activity] (2005)


However, the marketing expenditure of open source companies increase with their development

Marketing and distribution spendings are cost items that are not important when the company is createdbut that are bound to grow with its development

The “adoption through use” process does not perform well for transactions dealing with high amounts ofmoney, but is nevertheless vindicated when it comes to the ones dealing with low amounts

Thus, the business model of an open source company can:Not integrate high marketing and distribution costs in the first place, freeing resources the company can use tofocus on the development of its product. The product by itself must bring in the first clients (constitution of acommunity of users)Plan at some point in the future high marketing expenditure to control its corporate imageAdd commercial action expenditure, focused on the corporate customers

An intensified communication policy is all the more important that the access to the source code is not areason to adopt open source solutions in its own right

49Sources : Forrester 2005, faberNovel analyses

0%10%20%30%40%50%60%70%80%90%

100%

The source code is seen but not changed

The source code is changed

The source code is changedand the community ofdevelopers is informed

No one has seen the source code

Use of the source code by the companies* (2005)

* : On e sample of 95 IT managers


Communication strategies could becomemore targeted

The cost of IT tools is rarely supported by the departments who use them, butis allocated either *:

To the IT departmentTo the company as a whole

Members of a company’s different departments would rather order aproprietary software, because:

They find it more “secure” and are used to working with itThey do not have to bear the cost of using a proprietary software, as it isallocated to another department

Open source companies must consequently have an active communicationpolicy towards companies’ general management, insisting on the overallreduction of the costs should open source solutions be extended to the wholeof the companies’ departments

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* : The purchase of a CRM software license by the marketing department is not a cost that can be directly attributed to the department’soperations. As such, it is more likely to be attributed to the company as a whole or to the IT department’s budget.


Open source companies must deal with the competition that proprietary software firmsrepresent

Proprietary software companies have recently made massive investments in the open sourcesector:

IBM 2001 : announcement of a $1B investment program in Linux IBM 2005 : $4.5B estimated revenue coming from open source

This orientation corresponds to a change in strategies from proprietary software companies,more than to a simple effort to improve their image:

On a sample of 50 open source projects having a real activity in 20051), 18 received 99,99% of the investments made between 1995 and 2005This high concentration reveals an internal selection process of the investments and highlights the strategic nature of these activities for the proprietary software companies

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1) : i.e. projects where the contribution of the community represents 7 people working full-time in number of hours

Fiercer competition on the open source solution market

0%10%20%30%40%50%60%70%80%90%

100%

Red Hat IBM The Apach Software

Foundation

Sun Microsystems

Free Software Foundation

Oracle

Companies that contribute the most to the improvement of open source solutions according to IT managers* (2005)

* : on a sample of 95 IT managers

Sources: Marco Iansiti et Gregory L. Richards [2006], IBM, Forrester 2005, faberNovel analyses

Open source software companies remain the biggest contributors to open source codes yet

Open source firms keep investing extensively in source code develoment

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0

50

100

150

200

250

300

350

Sun IBM Red Hat Silicongraphics corp.

SAP ag MySQL ab

Top contributors to open source code development* [M€] (2006)

*: on a sample of 960 companies which represent a total of €1,2B cost development

Sources: UE 2006, faberNovel analyses

However proprietary software companies are integrating the development ofopen source codes into their strategies. The amount spent on open source bythese firms should increase in the near future


Proprietary software companies now use open source solution to monetize theirproprietary solutions

Proprietary software companies resort to the complementary monetizationmodel and to a users locking policy:

The free or at a very low cost distribution of open source solutions grantsinfluence in determining which standards will be used by the user community andleads them towards proprietary solutions on different segmentsOnce this influence has been exerted, users are more likely to pay a high pricefor the proprietary solutions offered

IBM and Oracle are a perfect example of this strategy:The two firms are in direct competition with open source solutions on their corebusiness, especially middleware solutions and company applicationsThey develop open source projects on market segments that do not correspondto their core business. Thus, Oracle contributes to the development ofApache, Eclipse or PHP on the middleware tools development segment

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Threshold effectCostly skills (marketing,

commercial, distribution, etc.) are required for the development

Intensification of the competition

Arrival of proprietary software companies

The open source world could be led to evolve along 3 axes

Sector integration

Niche seeking strategy Increased cooperation withproprietary software

companies


A trend towards the integration of open source companies is appearing

Sector integration is one of the standard outcomes of an increased competition

In the open source sector, there are two different forms:

Vertical integration: the companies of the same industry (application server, database management) integrate the elements of the value chain as a whole, from the production to the distribution, to the sale of complementaryservices, e.g. Novell Bull and Open Trust signing a partnership regarding technicalsupport for Novell solutions in September 2004

Horizontal integration: companies keep the specificity of their business model and try to reach a sufficient critical mass, e.g. Alliance Open Trust HP and Atos Origin collaborating to create a unique and centralized support platform

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Niche seeking or cooperating with proprietary software companies are riskier solutions at first glance

The relatively low development costsof open source products

Allow the adoption of a niche

strategy (amortization of the

investment on a scaled-down user

base)

Limit the sector’s barriers to entry

(constant threat posed by

newcomers)

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Niche strategy Cooperation

The cooperation with proprietarysoftware companies

Allows open source firms to

benefit from precious skills (e.g.

marketing and commercial)

Can result in a provider/client type

of relationship (a catalog of small-

size providers for a global client)


Allow us now to introduce ourselves…

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faberNovel’s activities are split into 3 units

Stimulate innovative genes Carry out quickly Remain entrepreneur

Consulting XP VenturiStrategy and organization for growth and innovation

Experimentation and projectmanagement

Internal project developmentand investment

Assisting large groups onmethodology, analysis anddecision making

Innovation consultingInnovation strategy

Organization and innovation

Change management

Knowledge management

R&D portfolio management

Strategic experimentationReduction of innovation risks

Fast acquisition of key know-how and skills

Conception and developmentof innovative products andservices

Functional specification

Outsourced projectmanagement

Conception and business validation

Evaluation and identification of partners

Piloting and feedback

Venture capital, “excubation”Investment and development

of internal projects

Company creation assistance

Capital shares offeringadditional action leverage

TimuzoC4Mprod

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faberNovel oversees projects from their positioning to theirrealization

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faberNovel Consulting heads all of faberNovel’sconsulting activities

StrategyGrowth strategyInnovation platformProject portfolio managementInnovation management

faberNovel consulting’s mission: stimulate firms’ innovative genes

Prospective intelligenceTechnologiesMarketsUses

ImplementationCompetitive benchmarkFunctional specificationsPartnerships/Monetization

OrganizationParticipative innovation(IdeaManagement System)Collaborative innovation (Customer Relationship Innovation ®)Intrapreneurship development

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Bilbiography

Dahlander L., “Appropriation and approbility in Open Source Software”, International Journal of Innovation Management Vol. 9 No.3 pp.259-285, Sept. 2005

Gosh Rishab Ayier, MERIT (2006), “Economic Impact of FLOSS on innovation and competitiveness of the EU ICT, sector”,http://ec.europa.eu/enterprise/ict/policy/doc/2006-11-20-flossimpact.pdf

Goulde, M. et Mulligan, J. A. (2007), “How to Turn an Open Source Product into a Commercial Business”, Forrester Research, January23th 2007

Goulde, M. (2005), “Open Source Usage is up, but Concerns Linger”, Forrester Research Paper, June 23th 2005

Iansiti Marco and Richards Gregory L. (2006), “The Business of Free Software: Enterprise Incentives, Investment, and Motivation in theOpen Source Community”, Working paper, Harvard Business School, http://www.hbs.edu/research/pdf/07-028.pdf

Jullien, N. Clément-Fontaine, M. and Dalle J.M. (under the direction of), “Nouveaux Modèles économiques, nouvelle économie du logiciel”,RNTL report January 2000

Krishnamurhty Sandeep (2003), « An Analysis of Open Source Business Models », Working paper, University of Washington, Bothell

Lerner, J. and Tirole, J. (2000), “ The Simple Economics of Open Source”, NBER Working Paper, No. 7600

Lerner, J. and Tirole, J. (2001), “The Open Source Movement : Key Research Questions”, European Economic Review, 45:819-826

Muselli L. (2004), « Licences informatiques et modèles d’affaires open source », 13th AIMS conference, 2004

Muselli L. (2007), “Business models and the payment of open-source software publishers. Mutualisation : an original business model”Conférence “The diffusion of FLOSS and the Organisation of the Software Industry: From Social Networks to Economic and Legal Models”,Nice-Sophia Antipolis, May 31th and June 1st juin 2007

Pal, N. et Madanmohan, T. (2002), “Competing on Open Source : Strategies and Practise”, MIT Working Paper,

Rogers, Diffusion of Innovations, the Free Press, 1995

Raymond, E. (1999), « The Cathedral and the Bazaar », http://www.catb.org/~esr/writings/cathedral-bazaar/

Schiff Aaron (2002), « The Economics of Open Source Software : A Survey of the Early Literature », Review of Network Economics, Vol. 1,Isssue 1-March 2002

Stürmer, M. (2005), « Open Source Community Building », Working Paper, Open Source Community, MIT,http://opensource.mit.edu/papers/sturmer.pdf

Välimäki, M. (2003), « Dual Licensing in Open Source Software Industry », Systèmes d’Information et Management, 8(1), 63-75

Walli, S., Gynn D. et von Rotz B., (2005) :”The Growth of Open Source Software in Organizations”, Optaros White paper,http://www.optaros.com/en/publications/white_papers_reports

XU, J., Gao Y., Christley, S.et Madey G. (2005), “A Topological Analysis of the Open Source Software Development Community”,Proceedings of the 38th Hawaii International Conference on System Sciences, 2005

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http://ec.europa.eu/enterprise/ict/policy/doc/2006-11-20-flossimpact.pdf

http://www.hbs.edu/research/pdf/07-028.pdf

http://opensource.mit.edu/papers/sturmer.pdf

http://www.optaros.com/en/publications/white_papers_reports