Wednesday, July 26, 2006

Open Source - What is the Model?

I flew to Portland really looking forward to learning more about open source business model and execution best practices. OSCON’s Executive Briefing included panelists from Red Hat, MySQL, Digium, and other leading open source companies. I looked forward to discussing optimal open source licenses, download to sale conversion ratios, best practices with respect to support, community development, and sales models… Unfortunately, the day largely centered on very high-level discussions about the relevance of Web 2.0 to open source and failed to satisfy the widespread interest in diving into meatier issues.

Like many conferences, the highlights were not panel-based conversations but rather the opportunity to meet and speak with the leaders in the field – CEOs and executives from a broad cross section of open source companies. At lunch, over coffee, and at dinner, we were able to get into the nuts and bolts of open source business models and compare notes with various teams with respect to license strategies, how to build support organizations, what download to sales conversion ratios one can expect, and how/if to bifurcate the product between free and commercial.

Despite conventional wisdom that open source models allow for pull-based selling, where telesales teams reach out to pre-qualified customers who have downloaded and tested the product and ping the company to inquire about orders, leveraged development, where community developers do the lions share of the work, support processes where developers should do both development and support etc, I left struck by the lack of consensus on the optimal operating model. Conversations with various teams certainly begged the question if download driven models are more fiction than fact.

It appeared that conversion ratios on downloads were very low (1 in 10,000), that many teams were discovering the need to hire direct sales forces that made outbound calls rather than simply taking ordersJ, and that providing scalable 24x7 support that met enterprise customer scrutiny would demand more than asking developers to code 50% of the time and then get on the phone to fix a customer bug or deployment issue.

Some executives observed that they expect that at scale open source companies may look not too different from traditional software companies with respect to sales and marketing and development expenses. The argument was made that rather than a permanent shift in models (with respect to expense ratios –marketing and sales/revenue), open source really served as an on-ramp strategy that greatly reduced the capital required to reach customers and material revenue rate rates. Capital efficiency is still a great benefit but I sensed a lack of confidence that a permanent shift in operating leverage would be possible.

Another common view was that dual-license models are the optimal approach. The dual-license model – like MySQL – is premised on a single product that is common independent of license (GPL or commercial). Other approaches involve offering two products – a stripped down open source version and a commercial version with full bells and whistles. Many executives I spoke with view the latter as inconsistent with the open source value proposition and prefer a reciprocal relationship whereby users either pay with contributions back into the project (GPL) or with money (enterprise).

While the conference in many ways failed to address core business model issues it did provide a common forum for start-ups to discuss the evolving state of the open source industry and operational best practices.

Finally, despite the evolving nature of open source models one thing is clear – incumbent vendors are failing their customers with extremely expensive, difficult to deploy, and often legacy technologies. The pricing umbrella available to companies in sector after sector – system management, integration, database, app server, business intelligence – remains truly amazing. Customers are seeing 80-90% cost savings, plus access to great technology. The benefits to the enterprise of moving to open source are legion and while on the margin some questions of strategy remain unanswered, one leaves OSCON more convinced than ever that the alignment of customer interest and value/cost ratio that open source allows will continue to roil the software markets for years to come.

1 comment:

  1. Seems to me that part of the lack of consensus around open source business models stems from the fact that open source isn't a business model. That is, open source is a method of production and can, at times, be a valuable piece of brand strategy/market positioning. But, the underlying revenue generation models and cost structures don't radically change just because people can see your code. The open source movement (or rather the products created as a result of that movement) have certainly opened up new opportunities by (in some cases radically) changing the cost structure of getting things off the ground (the LAMP stack being a perfect example). Perhaps it's just a matter of semantics to quibble over whether there even are "open source business models", but as our understanding of the business implications of open source evolves it is probably worthwhile to at least consider...