"FOSS Business Model Broken" — Former OSDL CEO

liraz writes "Stuart Cohen, former CEO of Open Source Development Labs, has written an op-ed on BusinessWeek claiming that the traditional open source business model, which relies solely on support and service revenue streams, is failing to meet the expectations of investors. He discusses the 'great paradox' of the FOSS business model, saying: 'For anyone who hasn't been paying attention to the software industry lately, I have some bad news. The open source business model is broken. Open source code is generally great code, not requiring much support. So open source companies that rely on support and service alone are not long for this world.' Cohen goes on to outline the beginnings of a business model that can work for FOSS going forward."

Comments

Well, duh

[David Gerard]

Do IBM sell software? No, they sell you a solution. They'll sell you Linux, AIX, Solaris (IBM is Sun's second-biggest seller after Sun themselves) or Windows.

Don't sell "software", sell "a solution to the customer's problem." This sounds cliched, but it's amazing how many people and companies work around actually doing so.

Re:Well, duh

[David Gerard]

Then the article's saying "too bad for them." Proprietary boxware is on the way out. Proprietary vertical market stuff gets toward "solution" selling. (Certainly at the prices they charge. Honestly, the more it costs, the worse it appears to be in quality ...)

Re:Well, duh

[lgw]

Don't sell "software", sell "a solution to the customer's problem."

I think that's key. The point in TFA was "open-source code is typically of such high quality that you can't make money selling support". While I htink that's a bit self-serving, as there's *planty* of crap open-source code out there, it's almost universially true that open-source code that lots of people use converges on "so high quality you can't sell support" over time. (This as opposed to commercial software that sometimes gets it exactly right, but then goes on to break everything in the next release because you *have* to have a next release.)

IBM does very well selling consulting services. "Open source" is a nice way of saying "we're going to take the code you pay us to write and use it to solve the next guys problem too". And of course that works out well for everyone, since this customer benefits from all the previous companies. Cunsulting firms do that *anyway*, of course, but calling it "open source" gets it all above board *and* lets unrelated people benefit.

Re:Well, duh

[LWATCDR]

"Honestly, the more it costs, the worse it appears to be in quality ...)"
Not really. Your looking at the per seat price.
Let's take two examples. One is a program for managing say a U-Storage location vs Office.
The U-Storage vendor might charge $2000 for their program while Office costs say $295.
The U-Storage software vendor might sell 200 a year. Microsoft will sell what? Make it a million so the Math is easy.
So the total cost of Office to the Planet is $295,000,000 while "expensive" vertical cost only $400,000. That might seem like a lot but then you have to think about marketing, paying the Programming staff, and support costs which will be much higher per customer for the vertical.
That expensive is software is actually very cheap when you look at the that way.
That is the advantage of boxware. Buy charging for every copy you can spread out the cost of development.

Re:Well, duh

[Phemur]

Do IBM sell software? No, they sell you a solution.

Actually, they do. $19B dollars' worth. That's a lot of software, or about 20% of their total revenue (for 2007, at least). Services (or solutions) revenue is tracked separately.

Granted, the software IBM sells is a solution to a problem. But to say that IBM doesn't sell software is like saying Gap doesn't sell clothes; they sell a solution to the nakedness problem.

Re:Well, duh

[abigor]

It arose because writing custom solutions for everyone was an expensive disaster. Even the customisation of "packaged" enterprise apps like SAP is a disaster. Are you even in the software industry? You sure don't sound like it.

Re:Well, duh

[Anonymous Coward]

While logically correct, your point is totally nonsensical.

I personally DON'T CARE what the package costs across the entire planet.

I care what the software costs my business.

Why does nobody understand why this doesn't work?

[Gavin Scott]

Open Source development is an absolutely amazing and powerful tool... ...for everyone in the world whose livelihood comes from something *other* than selling software.

Bankers need to run their banks more efficiently so they get together to cooperatively develop some banking application software that makes them all work more effectively and efficiently. This is the magic of co-op software development. There are other people who have the same problems you do, and if you get together you can produce really useful software for vanishingly small cost, and the result can be replicated without limit or expense.

Bankers don't, on the other hand, create free, zero-income banks.

Commerceial software companies making free software is, and always has been, a really dumb idea.

If you find yourself in this position, my suggestion is to move up the food chain towards applications of the software you've developed. Eventually you'll find a level where people have problems they're willing to pay to have solved because they're not common enough to make an open source / co-op solution viable.

If your business plan reads:

1) Invent really cool new product.
2) Give it away for free.
3) Enable the community to do all their own support and enhancements.
4) ????
5) Profit!

let me save you some time and point out that there is nothing you can put in step 4 that leads to step 5.

Open source development is not a segment of the software indusrty, it's a segment of the every-other-industry.

G.

The FOSS Business model

[WillRobinson]

The model of investor expecting to make a quick buck off FOSS is broken. Not FOSS.

Re:The FOSS Business model

[lorenlal]

Finally! I'm so sad that I had to go halfway down the page to get at this one...

Working with FOSS isn't going to lead you into a business hole. Businesses still need someone who can monitor, upkeep, fix, and add to the machines that power their business. If you happen to write FOSS to do those things, you can make money by still doing work for said customer. If you merely use tools that are out there done by other coders, then you are still providing a service for the business/customer.

The break in this article (and many like it) happens when said supporting company goes "public." Suddenly, profit margins must be maintained, P/E ratio enters the equation... Quarterly performance is the measurement of your business, not "am I doing a good job?" FOSS has its place in business, and in business models. You can make it your job to contribute to the community, or to utilize it, to help generate cash for the business that runs on it... Just don't expect your stock to split anytime soon.

Something that I've learned: The business always has needs. They might not know what they are, and they will be different in 6-12 months. The needs will always exist, they will always require someone to implement them, and then maintain them... FOSS often provides a solution to those needs... Even if the code could be perfect, and you could, theoretically, never have to maintain that FOSS solution, you'll be needed to implement someone else that the business now needs.

Great code NOT EQUAL TO ease of use

[MSTCrow5429]

Open source code is generally great code, not requiring much support.

The code itself might be great, but generally, the front-end (which I'm distinguishing as separate from the back-end nuts and bolts "code") is a mess. Installation and use difficulties are generally greater in randompackageX off of SourceForge than, say, MS Word or FoxIt. There are some OSS programs that are near hitchless, like Pidgin or Firefox (had noticeable problems with crashing on exit in Vista, though), but if you go beyond the star players, you'll quickly find this argument doesn't hold up to empirical scrutiny.

Re:Great code NOT EQUAL TO ease of use

[bit01]

but if you go beyond the star players, you'll quickly find this argument doesn't hold up to empirical scrutiny.

Nonsense. My linux installation has more than 1500 packages installed and more than 26,000 packages available, most of them a 2 click install, covering stable, user recommended releases of the vast majority of decent open and free source available. I have never been short of documentation either, though sometimes it is not as well organized as I would like.

Sourceforge and freshmeat have a lot dead, unfinished and bleeding edge projects. So what? That's what open source is, the development process is out in the open. If you want to download a development build then go right ahead but don't pretend you're not a developer.

Closed source vendors love to pretend that their software and their development process is all sweetness and light. They're lying; they have every bit as much crap but because it's closed source it's often hidden.

---

Beware deceptive astroturfers.

"Open Source" is not a business model

[MarkusQ]

The open source business model is broken.

It isn't a broken business model. It isn't a business model.

Saying the open source business model is broken is like saying open source doesn't work as a cheese sauce. It also isn't a very effective screw driver. On the other hand, I have yet to hear a business model you can dance to.

--MarkusQ

Re:Here's a great paradox for ya..

[QuantumG]

Wow. The commercial software mindset really is taxing isn't it? You don't push custom features upstream.. upstream won't even accept them unless they are something everyone would want..

That's great

[Sycraft-fu]

So long as you are content to have a number of kinds of programs never be open source. If your solution is "Bundle with hardware if you want OSS and need money," ok then don't be surprised when people who's market doesn't deal with hardware chose money over OSS. I'm talking about things like games, or, say, video editing software. Things where you neither want or need additional hardware. Things where the idea is to use the hardware of a general purpose computer to do what you want.

This accounts for most software out there. While there's certainly things like, say, a firewall app/OS or something that it is perfectly valid to bundle with hardware, there's plenty of things that are just programs to run on a normal computer, no other hardware needed or wanted.

For programs like these, the response from many OSS advocates has been "Sell support!" However that doesn't work in a lot of cases. If you program is well written and easy to use, people won't need support by and large. Some of my favourite software packages, OSS and commercial, are ones where I don't need support of any kind. They do their jobs and are easy enough to use I need to additional help beyond what's included.

So what then? What do you do if your software is both a good product, and not one that uses hardware? Currently, the options seem to be "Open source it and give it away for free," or "Close source it and make money." In some cases, people can afford to do the former but not all. The "Just give it away for free," sounds like a nice idea when you are a broke student who would be receiving said free software. It sounds like less of a good idea when you are a programmer with a family to feed who would be getting no paycheck if you do.

So you run in to a large category of programs where you don't have a viable model. Support isn't a viable model since people don't need it. Bundling isn't a viable model since that isn't what your software is for.

Re:That's great

[Anonymous Brave Guy]

I keep hearing how FOSS is the way all software is heading. However the problem is it does not address niche markets.

I disagree. I would argue that substantial, high quality FOSS — good enough to rival traditional commercial software — has only developed in certain niche markets.

It's not hard to see why: lots of geeks want programming tools and media players and basic office software and communications tools and an OS to run it all on. You can build up a critical mass of skilled volunteers to get such projects up to a decent level in a reasonable period of time.

However, in either markets that aren't really geek niches (such as the boring business software that companies rely on for their administration) or markets that require substantial resources other than just geeks hacking away (such as game development), there is neither a significant body of useful FOSS at present, nor any indication that such will appear any time before the sun runs out of power. In the first case, there is no particular incentive for geeks to give up their time to build boring stuff if they're not being paid to do it, and in the latter case most geeks don't have either the time or the skills required to do a good job without collaborating with other professionals (who will expect to be paid for their own contribution).

So, since FOSS doesn't look like being a particularly useful model for commercial development in these areas, and in the geek niches software is already being given away for free by others so there isn't much scope for making money developing competing FOSS products, I tend to agree with the article's premise: FOSS just isn't particularly useful as a basis for building a business.

Re:Here's a great paradox for ya..

[MightyYar]

As long as features are being added, bugs will occur. In a sense they are an infinite resource, since I can't think of much in the way of commonly-used software with no feature development. Hell, Windows XP has been "feature frozen" for years now, and yet I still get updates. Or - to use a non-MS example - Python 2.3 went final in the summer of 2003, and yet there was an update this year - almost 5 years after it was "feature frozen". (For reference, Python is up to 2.6 - and their 3rd RC for 3.0)

Re:Here's a great paradox for ya..

[Tubal-Cain]

I think the solution is to push for a plugin system in the upstream. I makes downstream customization easier for everybody.

Re:Here's a great paradox for ya..

[MightyYar]

As long as they do their job then there is no need to update them.

No question, but the world changes around these machines. In an industrial setting I've seen a couple examples of this...

One example is a computer that controlled a visual inspection machine that ran Win 3.11. Worked great until Y2K! In addition, the newer hardware doesn't always run that version of Windows and it was becoming a problem. Additionally, the company was changing to a new file server that Win 3.11 didn't like. Eventually, the whole big thing had to be replaced because the stupid little Win 3.11 machine didn't cut it anymore. Had Win 3.11 been open source and a consultant was able to change it, the machine would probably still be operating.

Another example is at a plant where all of the flow control was done through old DOS programs hooked into serial-based equipment. These days, you simply can't buy the serial-based stuff any more... everything has ethernet. Additionally, it has become very hard to find modern PCs that will talk to the old hardware at all. As a result, all of that old DOS stuff is obsolete and being replaced. If the old DOS software was open source, it could just have been hacked to add ethernet support.

Anyway, my point was just that the tech world changes pretty fast, and a business may THINK it wants stable, unchanging software... but I bet that isn't the case. After all, when's the last time you saw a text-based ATM?

Not a Factory

[bill_mcgonigle]

Don't sell "software", sell "a solution to the customer's problem." This sounds cliched, but it's amazing how many people and companies work around actually doing so.

Yeah, this guy seems to think the the 'support' model equates with the kind of technical support he might get on the phone at an 800-number.

In my business, anyway, the open source support I sell is really business support. Companies want to know how improve their business with software, and I can help them figure that out, and open source is most often the best answer. I usually save them a bunch of money, deliver a robust solution, and pay some bills by doing so.

Granted, that's not what most 'investors' are looking to do - they want to mass-produce support scripts for that 800 number and charge $40/call. But in my case, what people are really buying is my ~20 years of IT experience and knowledge and its application to cutting-edge technology, which can't get mass produced by the end of next quarter.

The broken business model is applying factory thinking to knowledge work.

Aaaaaaww...

[KlausBreuer]

A CEO in BusinessWeek is talking about a concept "failing to meet the expectations of investors."

I've heard that a *lot*. Usually means "I don't understand this, but I like to babble".
So you think you cannot make as much profit on FOSS? Isn't that sad? Perhaps you could make more money selling home loans - something your reality-dysfunct cow-orkers all seemed to agree on, some time ago.

Usually it's not worth listening to managers talk.

Re:FOSS movie

[thtrgremlin]

Evidently not. There are many objectives and purposes of FOSS, while boxware has only the purpose of selling units. That is tough to compete with because boxware, from an investor perspective (person investing in the company selling it, not the ones buying it) it is successful when they sell so many units, and fail if they sell too few. Very straight forward.

FOSS in every way is more complicated. Investors of Red Hat want to see subscriptions sold, but that also depends on who you would call an investor. Many people profit from Red Hat's work, and any FOSS progress is perpetual. Red Hat will always live on in a way because of its nature. People can always expand and support Linux no matter what happens, By contrast, whatever way it could happen, if Microsoft one day went belly up, EVERY investor, stock holders and users are totally burned.

So another contrast. The purpose of Windows is for the software to be sold. The purpose of Linux / FOSS is to be productive. FOSS doesn't need to be profitable by the box as much as it needs to be useful, and proprietary software doesn't need to be as useful or productive AS MUCH as it needs to sell box units.

When we are talking about a movie company, there are two routes to go. Movies are not FOSS, remembering that the last 'S' means software. Movies make more sense under a CC license if you want it to be that type of free, but that is something else entirely. FOSS v. proprietary for a movie studio is the argument of whether or not the company is going to use make all their own software (very impractical, they are not a software company), or pay someone to give them the software they need. On a larger scale, individual companies can make their own software (again, makes no sense cause not a software company) or movie studios as a whole can pay one big company to provide for all their needs. In a way this can make a lot of sense, but has certain limitations when it is proprietary. The FOSS solution says use this open model, build upon it as you need, BUT if you share that code or want to sell it, you need to "share-alike". This means that movie studios can meet their own individual specialized needs, and have the benefits of a community that is 'invested' in having quality software. There is also the motivation and hope that if you choose to share parts / tools that are good for you, others will build upon it and improve upon it making it the best software possible. So if 100 movie studios work together sharing their best in-house tools for making quality movies, then many things happens. You have great software everyone can use. The software is superior than what any one company could develop. The tools are more flexible than could have been possible by one company, and profitability will come down to the ability for companies to utilize that software to make a good movie. Software engineers got paid for their work, the software is very valuable, but 'worthless' as a stand alone package. So now the questionable investment is whether or not it is going to be worth your money to invest in someone looking to make money contributing to such a project that is not directly involved in the movie production itself. Red Hat is such a company (for another industry, of course), but when such business models 'fail', the ability to quantify the failure financially for that company is 'simple' (sort of) but not for the software as a whole, something MUCH more complicated.

But again, the only thing special here is that when proprietary boxware fails, it fails for EVERYBODY and entirely. FOSS just can't be judged the same way, even if it is something very difficult for people design a business model around.

And I'll just say it now before anyone needs to point it out, I do casually program and use Linux but I am not a software engineer, and certainly not involved in the industry beyond consumer and fan. This is just my observation and opinion as an outsider with a strong belief (even if a naive one) in FOSS.

the importance of the GPL

[jabjoe]

I don't think this guy understands why the GPL is so important. It's sticky. You can't lock away your improvements/fixes. All the increments get added to the whole. Without GPL critical mass is much harder for a project to reach. Don't wish to start a fight, but I think this is why the number of GNU/Linux users/drivers/work is significately greater then that of BSD. Irritating though Stallman is, he has come up with a set of rules that logically lead to open source critical mass. As programmers we should be able to take a set of rules and see the out come.