The Open-Source Business Model

By now, I'm sure that you've heard someone in the IT industry ask, "How do you make money on open-source software?" The answer is quite simple: support. Everyone should be familiar with the software giant Red Hat. Red Hat has built its business solely around selling services, support, and subscriptions for Red Hat Enterprise Linux products.

This business model is very easy to apply to software or consulting services. If you take software that is free and open source, which allows customers to be flexible in how they apply it within their business, and couple that with a support contract to provide updates and fixes, then you have a basic combination that can create revenue streams. The customer wins with the ability to change the code, and the vendor offering services wins by collecting payment for support.

The next question might be, "What advantage does this give a company?" The first answer is cost. Generally, the code is free (but you pay for support and services). The second answer is exactly why open source is starting to heavily affect the way proprietary vendors are approaching their customers: lack of vendor lock-in.

The "Evil" Vendors

While costs of licenses and software play a role in business decisions about choosing open source or proprietary, vendor lock-in is the huge monkey on the backs of proprietary vendors today and is one of the key reasons companies choose open source over proprietary. Much of the growing success of open-source solutions can be attributed to the lack of vendor lock-in. Some argue that the proprietary Microsofts and Oracles of the software industry are evil and out to do you harm, and they must be put out of business. Then again, some don't exactly call the "giants" evil but don't like to entertain thoughts of being trapped into hardware and applications with data they own.

Red Hat's Vice President of Corporate Development, Mike Evans, shares the latter opinion about proprietary software models, although he does recognize that some of his customers view proprietary software as evil. With the popularity of open source rising, some hope that it will completely stop proprietary companies and closed source software altogether, but according to a recent interview, Evans doesn't necessarily concur.

Instead, he feels that Red Hat customers don't harbor malicious thoughts toward proprietary software; rather, "they look at how they can make a better piece of technology for the market and for their customers." Evans goes on to explain that he feels proprietary software will never really disappear but agrees that it will continue to change.

Proprietary Businesses Are Changing

Perhaps you've already noticed the drastic changes in the way proprietary companies are offering software and services to customers. One of the leaders in virtualization technology, VMware, is a prime example of this. The vendor has both a server and a desktop virtualization line of products. Within each line, it has released fewer featured versions of its products for free. In the server line, VMware Server and Converter are free for use on Windows and Linux. At the desktop level, VMware Player is free.

If you'd like full-featured and better-performing versions of the software, you can buy those products and support. You might ask how a company expects to make money with this approach, but it makes perfect sense when you think about it. Basically, give a little taste of your software, keeping it fully functional and usable, but then keep the full-featured software for purchase. In VMware's example, use VMware Server on Linux for any applications you might have; then, if you need enterprise-class performance and support for business-critical applications, VMware ESX is available. Given this model, chances are that if users find the free versions useful, they will purchase the enterprise-class software for their business. It's a great business strategy that allows VMware to compete effectively in the market.

You can find many other vendors following suit. Oracle is releasing Oracle Database 10g Express as an entry-level starter database free for download, allowing you to develop, deploy, and distribute the software. Microsoft is now releasing SQL Server 2005 Express with a description that's almost identical of Oracle's release notes. Lastly, you can grab a free version of IBM DB2 Express-C.

One last major player in the IT business that's changing its strategies is Sun Microsystems. It's certain by now that the news of Sun open-sourcing Java and Solaris has reached your desk. Sun's decision to open source everything prompted Sun Vice President Larry Singer to leave the company last March. Singer's reason for stepping down apparently was specific to his reservations about Sun's lack of concentration on revenue; instead, Sun was concentrating on migrating software to open-source standards. Sun, which reported earnings of $3.219 billion in the most recent Investor Relations press release, feels the market is shifting more toward open source.

The Bottom Line

Ultimately, what does the evolution path of the software industry look like? As always is the case with technology, it's extremely hard to predict. What is definite, though, is the fact that the software business is experiencing a huge transition. As for proprietary software being exterminated and never seen again, I highly doubt that about-face will be occurring anytime in the near future. There will almost always be someone who creates software that, in return, someone else will purchase. Unless vendor lock-in suddenly becomes illegal, I don't believe it will ever truly go by the wayside.

As the VMwares, IBMs, Oracles, and Suns of the world adapt, I believe you'll find several things happening in the future. First, if proprietary vendors want to keep up with the competition, they will have to start following these examples and offering the customer freedom of choice. Open source is growing immensely as a viable solution for businesses and is clearly in the public eye now.

Furthermore, an already-common situation in IT shops is the complementary, co-existing mesh of open-source solutions with proprietary solutions. Windows XP or Vista desktop PCs and laptops with open-source server back-ends running the show behind the scenes will become more common in IT. Also, open-source software running on proprietary OSes will become more prevalent. The OpenOffice choice over Microsoft Office is a great example of open source and proprietary sharing a common roof.

At the same time, proprietary software vendors will have to pay strict attention. The availability of so many open-source applications will be a critical factor in determining how they adapt to the market. Open source is already here, and proprietary vendors will have to adapt if they want to survive in the future. For once, the customer should benefit from such changes because proprietary can no longer ignore their needs. It'll be very interesting to watch the changes occurring in the software industry over the next few years.