How Do You Make a Profit While Using Open Source?

rjst01 asks: "I work for a small company that sells an advanced engineering product targeted at a small niche. We have about 600 customers worldwide and our software is available in 3 languages, soon to be 4. My boss loves the idea of Open Source, and would very much like to release our software under an open source license. But, we're unable to find a working business model appropriate to such a small customer base, that won't result in us achieving anything other than destroying our revenue stream. The fact that our software is in an obscure language (think embedded programming) doesn't help. Can anyone suggest a business model that allows us to open source our software while continuing to make a profit?"

Comments

This simple plan:

[tverbeek]

1. Don't spend money on software.

2. Collect revenue for your services.

3. ????

4. Profit!

Open Source is not a panacea

[jfclavette]

Sell support. If you want to sell your product per see, then you can't go Open Source. Why all the ideological bullshit about Open Source ? What kind of idea behind Open Source does your boss like ? The fact that he can get free programmers ? I doesn't work that way. Maybe you want a shared source license with your customers.

Support it!

[kcbanner]

1. Here take this software, its free!

2. Sell support contract for the price you were charging for the software, plus some.

3. Profit?

I'm serious, support is something you definetely can sell. Its a renewable resource!

-kcbanner

What are the benefits?

[Sierran]

If your product is presently proprietary, what would the benefits be of opensourcing it? Seriously, Open Source != panacea. If you have a market which supports you, especially a small one, it's because nobody else as of yet has found it worth their time to come up with a solution and provide a common good. You say your boss 'likes open source' - but why? Philosophically? that's nice. Philosophy doesn't pay bills. Business models do. If it is becoming prohibitively expensive to find and attract coders who can maintain and develop for your application in this obscure language/environment, and you're attempting to leverage community talent, then perhaps you would benefit from simply porting the application to a less-obscure platform, if possible, so as to broaden your talent pool.

The problem of finding a business model which utilizes open source is presently confounding many companies, many of them very large ones. Open source is very, very useful at reducing the costs of doing business - it's not so clear-cut as to how it makes one money directly.

This question is somewhat incomplete. Why do you 'like' Open Source, and what motivates you to release your software? Unless we know that, there's no way to determine what sort of business model might be appropriate. What are you trying to get out of releasing it? Warm fuzzies? If so, then sorry, you're just going to be committing business suicide. If there are specific gains you're looking to make, then perhaps.

Re:What are the benefits?

[dch24]

This seems to be the real clincher. I would agree with you:

The problem of finding a business model which utilizes open source is presently confounding many companies, many of them very large ones.

Why do you 'like' Open Source, and what motivates you to release your software?

It's like the huge problem the RIAA and MPAA are having with filesharing, torrents, and DRM. The market (for better or for worse) is made up of humans. They behave rationally most of the time. They count the costs and make decisions based on perceived profit, etc. Economics.

But humans also behave irrationally. Sometimes closed source is a good idea, because humans are irrational. I think that's where I agree with you. For instance, if you own a business doing embedded programming for some boring widget, it would be difficult to gain a financial advantage by open sourcing your code and hoping the community would contribute.

However, humans also behave irrationally the other way. Take patent-holding companies like NTP, for example, whose sole existence is to file suits based on their patent portfolio. The cost to our whole society of a patent reform is enormous, and possibly the only way we can move past such things as submarine patents and the fear, uncertainty, and doubt surrounding the Microsoft/Novell partnership.

Leaving the economics alone, there's an enormous sea-change happening here. Evidence includes the Microsoft/Novell partnership. If even the largest, most profitable company to ever exist is threatened by the Free Software Foundation (okay, I know that some would debate this, but for the sake of argument, think about this) -- then this could be very significant. I've heard it said by other /.ers that it has to do with the ease of copying bits. This is not the same as a brick-and-mortar store, and the RIAA's complaints of "stealing" become shades of gray.

But the change is more than just "a chicken in every pot / a source tarball for every binary."

Think about the implication of the internet, its ability to spread the information which is publicly available. More than that, the internet, and even slashdot, are places where useful information seems to rise to the top. Because most people are rational most of the time, the trolls and flamebait sink and information is distilled. Open source software existed before the internet, but without the community effect, its pace was measured in decades instead of weekends.

Open source, file sharing, slashdot and the other blogs, VOIP, IPTV, piracy, viruses, and so many other things are examples of this community. I'm really trying to avoid the buzzwords of the .com boom v1.0, but the effect is real and the benefits are worth pursuing.

I think the real question facing individuals, business, and governments is simply this: If we all actually sat down and traded what we have for no cost, so that we all had access to the same resources, what could we accomplish? Would we benefit? Or would the Kim Jong Ils of the world build a nuke and turn us all into flamebait?

Two ideas

[AuMatar]

1)You say embedded programming. Are you selling the hardware as well? If so, the software is a vehicle to sell your hardware. You can easily make it open source and make money via hardware improvements. You may even make more this way, as you'll need less software development time (if people contribute back)

2)Sell feature prioritization. If you're really a small niche selling engineering equipment, chances are your users have very advanced needs. Offer to add features for a price. These features could either be exclusive (the user pays for you to develop it only for them) or inclusive (the user pays for it to be released globally) with sliding scales for each. This is on top of support and the usual open source models.

Easy

[not already in use]

Get bought out by google

Support and Maintenance Model

[kha0z]

Most open source business models that I have seen to date focus on support contracts and maintenance contracts for profit. That is if a user of you open source product needs support or wants a specific enhancement that is not part of the current project then a support and maintenance contract is negotiated in order to place effort on those enhancement requests. There are benefits to going open source such as lowering the cost of development since an open community of developers can place effort into the project. However, there are side effects that you need to look out for. Such as there is no guarantee that the open community of developers will work on enhancements requested by paying customers. These enhancements require that a paid development staff focus on those profit based enhancements to ensure delivery. In addition, project management of an open source project can be difficult since most poject managers are not typically trained to handle the management of open source projects. I suppose the point I am trying to make is that like any business model, your revenue streams needs to be identified and allocated appropriately to ensure the success of your business. Open source is always an option but the ramifications of making your source code public should be considered carefully to ensure that it supports your current business model and/or can help refine or mature your business model into a more profitable one.

Suitability?

[orkysoft]

I'm not sure it's such a good idea to endanger your business's only revenue stream. How about you keep the source closed, but make sure the support you offer is excellent (i.e. implementation of new features on request, being responsive to bug reports and actually fix bugs for customers who have already paid, porting to new architectures when there's demand)? Also, have your customers actually asked for the source code?

You have to consider whether switching to a free-code/pay-for-support business model would actually be a good idea. Is the business as it is now growing or declining? Is your product a cash cow or is it becoming obsolete, unable to bring in the big bucks in the near future?

If you catch and sell fish, it's good for business to give away some fish now and then, but a bad idea to give away your fishery (except in 2048, when it'll just be a liability).

(Boy, I wonder how this will get modded. Disclaimer: I am actually pro-open source, and use Linux almost exclusively, and I've hardly ever touched atrocities like MSIE and XP.)

Sometimes there's not a business case

[miyako]

The open source model was developed primarily as a way to write good software. I think in most cases it does that well, but you have to remember that there isn't always a business case for it.
I am not a CEO/MBA/any other business-oriented TLA, but I see three areas where the Open Source model can be a viable business case:
You have a lot of customers who pay for support - this seems to be the most touted business model. Give the software away for free, then sell support for it. This generally requires a pretty large user base to profit from though, because you have to make enough from support to cover the cost of developing the software.
You have customers with very specialized needs - this is basically the consulting model. You can use an open platform as a springboard for building custom solutions for your clients. This generally works well when you have large clients who can afford consulting fees, and it works best for things with a very large scope.
You Open Source the Product to buy Goodwill - basically if you have some software that isn't a huge source of income, you can make a business case for open sourcing it as a way to get good will from the community. Good will counts for a lot, but it can't replace your primary revenue stream.
From what you describe, your product doesn't really fit into any of these main categories. This doesn't mean that you can't make money by open sourcing your project, but the odds are probably stacked against you. If your company is interested in open source, you may consider looking at building porting your application to sit on top of a completely open stack of software.
I know a lot of people on slashdot tout open source as a magic bullet to solve business problems, but in the long run it's only going to give open source a bad name if people aren't honest about when it is a good solution, and when it isn't.

Treat it like it's not open source.

[chroot_james]

Pretend in every way that the software is not open source and people will start see no difference, except perhaps that the open source quality is higher... which is debatable...

Don't obfuscate the product with geeky crap like, "this program is a java program that is thread safe." No one cares unless they're a developer and even still you'd be lucky if they cared. Keep it simple. Say what the product does and why it's good at it (as in design, not ideology!) and let it speak for itself.

Just because it's open source doesn't mean you should be given a medal and a paycheck...

Don't open source your product

[Anonymous Coward]

The benefit of open source is having a community of developers who will improve on the product. If you have a small user base then you may not have that community of developers. The result is that you have given your product away for free, you can't afford to improve it and nobody else steps up to the plate. It's a lose-lose situation.

Even ESR admits that there are situations where open source makes no sense. Yours sounds like one of them.

Re:Sell Support

[QuantumG]

Well, I hold a similar opinion to the US Government, until there is more than one supplier for X, it's never going to be sensible to go with X over something else for which there is already multiple suppliers. I'm sure a lot of other people share this opinion, so opening your software so that more than just your company can provide support for that software is likely to result in a huge increase in your market.

Same as with proprietary software

[Billly Gates]

Focus on your bussiness and not the software you use to achieve your results. If your bussiness is developing software then focus on what your customers want and where the market is with demand.

Software should not be on your mind as much as other expenses and equipment needed to do your job. No magical software will create your bussiness model.

Just have a business that doesn't rely on binaries

[Shados]

Thats literally just it. How do you make money from a web site? I mean, the client has all the source, and can do whatever with them, no? (well, copyrights and all, but its still open source, and you sold it to them, so...). Its a bit like that.

Best case is probably an ERP system. Often with those, especialy for smaller companies, there isn't a very easy way to install them or configure them (which is where small ERP ISVs get their money). So even if its open source, who cares, they don't do anything with it. But the benifit is still there (if you go under, your customer isn't screwed).

Its pretty much the best of both worlds. Any business based mostly on services can do fine with open source. When the software -itself- is the product, you start having issues.

Simple...

[RAMMS EIN]

``How Do You Make a Profit While Using Open Source?''

Simple. I run my company on open source software. The software costs me no money. The services I sell bring in money. Profit!

As for making a profit from _writing_ open source software; that's a little harder. I could see the software being a loss leader for selling other things, like manuals or support contracts.

If you want to make a profit purely on writing the software itself, you will have to find one or more parties who are willing to pay for development and accept that the code they paid for may be used by others. Given that the others might contribute improvements, this may actually be an advantage, so you may be able to find such parties.

Re:Just have a business that doesn't rely on binar

[Bogtha]

How do you make money from a web site? I mean, the client has all the source, and can do whatever with them, no? (well, copyrights and all, but its still open source, and you sold it to them, so...).

No, it's not still open-source. Open source doesn't just mean access to the source code..

Take a look at how PyMOL is doing it...

[mkcmkc]

PyMOL has an Open Source tool, but the manual is not really free for use, although it's browseable online. Where I work, they wanted to use the software, and I realized that we really couldn't quite do it legally without buying a subscription, which I told the money people, and they ante'd up. This is a pretty good model--you want the stuff to be free for the people who can't pay, and there to be just enough legal nip to cause those who can pay to decide that it's more reasonable to do so. http://pymol.sourceforge.net/

Do you mean Open Source, or Free Software?

[TheRaven64]

Open Source is a development model (which, incidentally, requires a set of freedoms to be passed on to the user). The idea is to have a large community of casual developers (and, ideally, a smaller community of active core developers) who all provide a small amount of code in exchange for the ability to use the entire final product.

Free Software is orthogonal. It is the idea that every customer should receive a set of basic freedoms (such as the ability to modify the code, and to distribute derived works). This is good for customers, since if you go bust, they can hire someone to keep developing your code.

The real difference between the two is that the source code and rights for an Open Source application are generally distributed (to encourage more people to contribute) while a Free Software application only has these rights distributed to your customers (who may then distribute them to the world at large, but then they do it, not you).

From your perspective, making your product Open Source has the benefit of (potentially) giving you a bigger development community. The cost is that it makes it easier for your competitors to fork your code and make a competing product. The way to avoid this is to ensure that your developers know the code inside out and so your product will be better than a fork (and, thus, your support contracts will be more valuable). It would probably be a good idea to make your developers sign a non-compete clause so they can't go and keep developing the software for someone else.

Free Software is different. You give your customers more freedoms, but don't (as) actively encourage them to contribute changes back. This is almost certainly good for customers of an embedded software supplier, since it makes it easier for your customers to customise your software. The benefits would be that you could advertise easier-to-comply-with software licensing and ease of customisation. You would make money as you always did, as well as by selling your services for customisation ('support'). Customers would continue to use your services for customisation since you could have more experience with the code-base than anyone else, but you could sell a freedom from vendor lock-in as an advantage.

Open Source, but don't GPL

[sommere]

Open Source does not mean Free or free. You can release the source to your customers without giving your customers the right to redistribute it or their changes.

Your customers could benefit from this because they could make any customizations they want to the program -- which may not be possible with your competitor's product -- and because if there is a bug in your program which they must have fixed right away and they have the ability they might be able to fix it themselves faster than you would fix it.

You benefit because your customers might give you that bug fix so you'll incorporate it in new releases, and you'll have a competitive advantage over other vendors who don't release the source code.

If your customers redistribute the code, it is piracy, just like if they redistributed the compiled program.

The Boss Answer

[carpeweb]

The previous answers did better than I could at explaining the *real* issues related to moving your business model to open source.

I wish to address some implicit issues based on my inference that your boss went to school for his MBMA (management by magazine article).

1. Business Model
   The recognized expert for businesses run with philosophies similar to your boss's is a brilliant business writer named Scott Adams. He has compiled thousands of case studies from the highly successful engagements of Dogbert Consulting. I think that these case studies would be highly instructive for your boss. If you're worried that perhaps your boss would be uncomfortable using case studies from a book of cartoons, you could simply cut and paste the cartoons from one of Mr. Adams's books and place a cover from Harvard Business Review on them. Trust me; it will sell.
2. Marketing
   Although some conservative businesses would actually prefer the painstaking approach of building true relationships with their customers (as well as prospects) and ... oh, I don't know ... maybe talking to them about issues in order to form a marketing plan; I suspect your boss would be more comfortable with the Clippings model. The Clippings model is very similar to the approach I suggest for your business model, but a bit broader. Rather than limiting yourself to the writings of Mr. Adams, simply Google terms such as "customer focus", "digital marketing", and the like; then paste as many paragraphs (random order should be fine) into whatever strategy document you need to support your boss. If you really want to tighten it up, do a boolean search and make sure "open source" is included with every search term. The key to the successful Clippings approach, as every experienced corporate staff member knows, is not completeness or even accuracy of the search. Heck, it's not even all that important to spell check it. No, the real secret of a successful Clippings project is formatting. Choose the right fonts. Add some color graphics. Pay attention to these important details, and your boss will find you indispensible.
3. Cut and Run
   No, no; nothing to do with politics or current events. No; this important third issue is for you personally. You should have ample time to see the train wreck coming, and this is simply my personal advice to you, before the trains actually collide.

Sell the 'Pro' version

[bill_mcgonigle]

Lots of companies are garnering interest in their software by having an open source tier and then a tier with more features in it that costs money. This increases interest and customer base size at the low end, possible eating into some low-end sales, but appears to be creating more high end customers to offset that loss for the vendors who are doing it.