(The debates on the European Software Strategy came across several issues that are of general interest, but the debates themselves cannot be disclosed for reasons of procedural confidentiality. Instead, this article takes one issue and discusses it from a personal perspective.)
Although it seems somewhat antiquated today, “How do you make money with Free Software?” was a very common question just a few years ago. Today, that question has evolved into “What are successful business strategies that can be implemented on top of Free Software?”
This question is a lot more focussed already, and came up several times during the discussions around the European Software Strategy, with pointers to noteworthy contributions from various people, such as Matthew Aslett, Carlo Daffara or Matt Asay. Another person who recently took a shot at answering this question is Anoop John, who I met in Kerala two years ago.
After several years in the field, helping entrepreneurs find business models that work for them, discussing the question of Free Software companies, and the diversity of a community that is both commercial and non-commercial at the same time, a few things occurred to me that I wanted to share.
Point 1: Think clearly
In order to develop business strategies, it is first necessary to have a clear understanding of the different aspects that you seek to address. Unfortunately this is not made easier by popular ambiguous use of some terms for fundamentally different concepts and issues, e.g. “Open Source” being used for a software model, development model, or business model.
These models are orthogonal, like the three axes of the three-dimensional coordinate system, their respective differentiators are control (software model), collaboration (development model), revenue (business model).
The software model axis is the one that is discussed most often. On the one hand there is proprietary software, for which the vendor retains full control over the software and the user receives limited usage permission through a license, which is granted according to certain conditions. On the other hand there is Free Software, which provides the user with unprecedented control over their software through an ex-ante grant of irrevocable and universal rights to use, study, modify and distribute the software.
The development model axis describes the barrier to collaboration, ranging from projects that are developed by a single person or vendor to projects that allow extensive global collaboration. This is independent from the software model. There is proprietary software that allows for far-reaching collaboration, e.g. SAP with it’s partnership program, and Free Software projects that are developed by a single person or company with little or no outside input.
The business model axis describes what kind of revenue model was chosen for the software. Options on this axis include training, services, integration, custom development, subscription models, “Commercial Off The Shelve” (COTS), “Software as a Service” (SaaS) and more.
These three axes open the space in which any software project and any product of any company can freely position itself. That is not to say all these combinations will be successful. A revenue model based on lock-in strategies with rapid paid upgrade cycles is unlikely to work with Free Software as the underlying software model. This approach typically occurs on top of a proprietary software model for which the business model mandates a completed financial transaction as one of the conditions to grant a license.
It should be noted that the overlap of possible business models on top of the different software models is much larger than usually understood. The ex-ante grant of the Free Software model makes it generally impossible to attach conditions to the granting of a license, including the condition of financial transaction. But it is possible to implement very similar revenue streams in the business model through contractual constructions, trademarks and/or certification.
Each of these axes warrants individual consideration and careful planning for the goals of the project.
If, for instance the goal is to work with competitors on a non-differentiating component in order to achieve independence from a potential monopolistic supplier, it would seem appropriate to focus on collaboration and choose a software model that includes a strong Copyleft licence. The business model could potentially be neglected in this case, as the expected return on investment comes in the form of strategic independence benefits, and lower licence costs.
In another case, a company might choose a very collaborative community development model on top of a strong Copyleft licence, with a revenue model based on enterprise-ready releases that are audited for maturity, stability and security by the company for its customers.
The number of possible combinations is almost endless, and the choices made will determine the individual character and competitive strengths and weaknesses of each company. Thinking clearly about these parameters is key to a successful business strategy.
Point 2: Freedom moving up the stack
According to Gartner, usage of Free Software will reach 100 percent by November 2009. That makes usage of Free Software a poor criterion for what makes a Free Software company. Contribution to Free Software projects seems a slightly better choice, but as many Free Software projects have adopted a collaborative development model in which the users themselves drive development, that label would then also apply to companies that aren’t Information Technology (IT) companies.
IT companies are among the most intensive users of software, and will often find themselves as part of a larger stack or environment of applications. Being part of that stack, their use of software not only refers to desktops and servers used by the company’s employees, but also to the platform on top of which the company’s software or solution is provided.
Maintaining proprietary custom platforms for a solution is inefficient and expensive, and depending upon other proprietary companies for the platform is dangerous. In response, large proprietary enterprises have begun to phase out their proprietary platforms and are moving towards Free Software in order to leverage the strategic advantages provided by this software model for their own use of software on the platform level. These companies will often interact well with the projects they depend upon, contribute to them, and foster their growth as a way to develop strategic independence as a user of software.
What makes these enterprises proprietary is that for the parts where they are not primarily users of software, but suppliers to their downstream customers, the software model is proprietary, withholding from its customers the same strategic benefits of Free Software that the company is using to improve its own competitiveness.
From a customer perspective, that solution itself becomes part of the platform on which the company’s differentiating activities are based. This, as stated before, is inefficient, expensive and a dangerous strategy.
Assuming a market perspective, it represents an inefficiency that provides business opportunity for other companies to provide customers with a stack that is Free Software entirely, and it is strategically and economically sane for customers to prefer those providers over proprietary ones for the very same reasons that their proprietary suppliers have chosen Free Software platforms themselves.
Strategically speaking, any company that includes proprietary software model components in its revenue model should be aware that its revenue flow largely depends upon lack of Free Software alternatives, and that growth of the market, as well as supernatural profits generated through the proprietary model both serve to attract other companies that will make proprietary models unsustainable. When that moment comes, the company can either move its revenue model to a different market, or it has to transform its revenue source to work on top of a software model that is entirely Free Software.
So usage of and contribution to Free Software are not differentiators for what makes a Free Software company. The critical differentiator is provision of Free Software downstream to customers. In other words: Free Software companies are companies that have adopted business models in which the revenue streams are not tied to proprietary software model licensing conditions.
But every company naturally needs a differentiator that provides its unique sales proposition, the one thing that it can do better, cheaper, faster than anyone else and that provides the reason for customers to choose that particular company over another.
Traditionally, many IT companies have relied upon proprietary software models and patents for uniqueness and differentiation. This is particularly apparent in the venture capital environment, and lack of these sources of uniqueness is often perceived as a strategic weakness.
So in one of my next articles I am planning to show how differentiators used by Free Software companies can be as strong as those of proprietary companies, and that the differentiators of proprietary companies are often much less unique than it appears.