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9. Indirect Sale-Value Models

Nevertheless, there are ways to make markets in software-related services that capture something like indirect sale value. There are five known and two speculative models of this kind (more may be developed in the future).

9.1 Loss-Leader/Market Positioner

In this model, you use open-source software to create or maintain a market position for proprietary software that generates a direct revenue stream. In the most common variant, open-source client software enables sales of server software, or subscription/advertising revenue associated with a portal site.

Netscape Communications, Inc. was pursuing this strategy when it open-sourced the Mozilla browser in early 1998. The browser side of their business was at 13% of revenues and dropping when Microsoft first shipped Internet Explorer. Intensive marketing of IE (and shady bundling practices that would later become the central issue of an antitrust lawsuit) quickly ate into Netscape's browser market share, creating concern that Microsoft intended to monopolize the browser market and then use de-facto control of HTML to drive Netscape out of the server market.

By open-sourcing the still-widely-popular Netscape browser, Netscape effectively denied Microsoft the possibility of a browser monopoly. They expected that open-source collaboration would accelerate the development and debugging of the browser, and hoped that Microsoft's IE would be reduced to playing catch-up and prevented from exclusively defining HTML.

This strategy worked. In November 1998 Netscape actually began to regain business-market share from IE. By the time Netscape was acquired by AOL in early 1999, the competitive advantage of keeping Mozilla in play was sufficiently clear that one of AOL's first public commitments was to continue supporting the Mozilla project, even though it was still in alpha stage.

9.2 Widget Frosting

This model is for hardware manufacturers (hardware, in this context, includes anything from Ethernet or other peripheral boards all the way up to entire computer systems). Market pressures have forced hardware companies to write and maintain software (from device drivers through configuration tools all the way up to the level of entire operating systems), but the software itself is not a profit center. It's an overhead -- often a substantial one.

In this situation, opening source is a no-brainer. There's no revenue stream to lose, so there's no downside. What the vendor gains is a dramatically larger developer pool, more rapid and flexible response to customer needs, and better reliability through peer review. It gets ports to other environments for free. It probably also gains increased customer loyalty as its customers' technical staffs put increasing amounts of time into the code to do the customizations they require.

There are a couple of vendor objections commonly raised specifically to open-sourcing hardware drivers. Rather than mix them with discussion of more general issues here, I have written an appendix specifically on this topic.

The `future-proofing' effect of open source is particularly strong with respect to widget frosting. Hardware products have a finite production and support lifetime; after that, the customers are on their own. But if they have access to driver source and can patch them as needed, they're more likely to be happier repeat customers of the same company.

A very dramatic example of adopting the widget frosting model was Apple Computer's decision in mid-March 1999 to open-source "Darwin", the core of their MacOSX server operating system.

9.3 Give Away the Recipe, Open A Restaurant

In this model, one open-sources software to create a market position not for closed software (as in the Loss-Leader/Market-Positioner case) but for services.

(I used to call this `Give Away the Razor, Sell Razor Blades', The coupling is not really as tight as the razor/razor-blade analogy implies.)

This is what Red Hat and other Linux distributors do. What they are actually selling is not the software, the bits itself, but the value added by assembling and testing a running operating system that is warranted (if only implicitly) to be merchantable and to be plug-compatible with other operating systems carrying the same brand. Other elements of their value proposition include free installation support and the provision of options for continuing support contracts.

The market-building effect of open source can be extremely powerful, especially for companies which are inevitably in a service position to begin with. One very instructive recent case is Digital Creations, a website-design house started up in 1998 that specializes in complex database and transaction sites. Their major tool, the intellectual-property crown jewels of the company, is an object publisher that has been through several names and incarnations but is now called Zope.

When the Digital Creations people went looking for venture capital, the VC they brought in carefully evaluated their prospective market niche, their people, and their tools. He then recommended that Digital Creations take Zope to open source.

By traditional software-industry standards, this looks like an absolutely crazy move. Conventional business-school wisdom has it that core intellectual property like Zope is a company's crown jewels, never under any circumstances to be given away. But the VC had two related insights. One is that Zope's true core asset is actually the brains and skills of its people. The second is that Zope is likely to generate more value as a market-builder than as a secret tool.

To see this, compare two scenarios. In the conventional one, Zope remains Digital Creations's secret weapon. Let's stipulate that it's a very effective one. As a result, the firm will able to deliver superior quality on short schedules -- but nobody knows that. It will be easy to satisfy customers, but harder to build a customer base to begin with.

The VC, instead, saw that open-sourcing Zope could be critical advertising for Digital Creations's real asset -- its people. He expected that customers evaluating Zope would consider it more efficient to hire the experts than to develop in-house Zope expertise.

One of the Zope principals has since confirmed very publicly that their open-source strategy has "opened many doors we wouldn't have got in otherwise". Potential customers do indeed respond to the logic of the situation -- and Digital Creations, accordingly, is prospering.

Another up-to-the-minute example is e-smith, inc.. This company sells support contracts for turnkey Internet server software that is open-source, a customized Linux. One of the principals, describing the spread of free downloads of e-smith's software, says ``Most companies would consider that software piracy; we consider it free marketing''.

9.4 Accessorizing

In this model, you sell accessories for open-source software. At the low end, mugs and T-shirts; at the high end, professionally-edited and produced documentation.

O'Reilly Associates, publishers of many excellent references volumes on open-source software, is a good example of an accessorizing company. O'Reilly actually hires and supports well-known open-source hackers (such as Larry Wall and Brian Behlendorf) as a way of building its reputation in its chosen market.

9.5 Free the Future, Sell the Present

In this model, you release software in binaries and source with a closed license, but one that includes an expiration date on the closure provisions. For example, you might write a license that permits free redistribution, forbids commercial use without fee, and guarantees that the software come under GPL terms a year after release or if the vendor folds.

Under this model, customers can ensure that the product is customizable to their needs, because they have the source. The product is future-proofed -- the license guarantees that an open source community can take over the product if the original company dies.

Because the sale price and volume are based on these customer expectations, the original company should enjoy enhanced revenues from its product versus releasing it with an exclusively closed source license. Furthermore, as older code is GPLed, it will get serious peer review, bug fixes, and minor features, which removes some of the 75% maintainance burden on the originator.

This model has been successfully pursued by Aladdin Enterprises, makers of the popular Ghostscript program (a PostScript interpreter that can translate to the native languages of many printers).

The main drawback of this model is that the closure provisions tend to inhibit peer review and participation early in the product cycle, precisely when they are needed most.

9.6 Free the Software, Sell the Brand

This is a speculative business model. You open-source a software technology, retain a test suite or set of compatibility criteria, then sell users a brand certifying that their implementation of the technology is compatible with all others wearing the brand.

(This is how Sun Microsystems ought to be handling Java and Jini.)

9.7 Free the Software, Sell the Content

This is another speculative business model. Imagine something like a stock-ticker subscription service. The value is neither in the client software nor the server but in providing objectively reliable information. So you open-source all the software and sell subscriptions to the content. As hackers port the client to new platforms and enhance it in various ways, your market automatically expands.

(This is why AOL ought to open-source its client software.)

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