Thursday, January 27, 2005

How Do You Make Money from Open Source Software?

David Skok, a partner at VC firm Matrix, sketched out the options at a recent Mass. Software Council session, “Open Source -- Is it Entering the Mainstream?” Matrix was the lead investor in JBoss, with the sole investor board seat, so he knows whereof he speaks. Let’s face it: VCs spend more time than the average bear on the making money topic.

Skok cited four models:

Paid support (e.g., Red Hat and JBoss) -- If you follow open source at all, you are probably familiar with the Red Hat and JBoss models, where most of their revenue derives not from selling software, but from varying levels of support packages.

Dual license (e.g., MySQL) -- The approach taken by the popular open source database company MySQL offers the software under the General Public License (GPL) for open source developers. The catch with the GPL license is that if you bind closely to GPL code in your application, you must also GPL your code. For companies that decide they want to sell their application that incorporates MySQL, the organization offers a traditional paid license. Visit their site for a detailed explanation.

Upgrade to proprietary software (e.g., SourceFire and Sun) -- I’m most familiar with this approach, as Sun uses this model with its tools line, offering an entry point with the open source IDE NetBeans. From there, if developers want all the bells and whistles, they can move up to Java Studio Creator or Java Studio Enterprise. The same holds true for OpenOffice.org; users who want support and advanced features buy StarOffice.

Offer a hosted service (e.g., SugarCRM) -- Skok noted that not long ago he’d felt application software would not be a likely area for open source to prosper, but he now feels that this startup may be onto something, with its hybrid model.

Skok noted that when a Forrester survey survey asked respondents about the benefits and concerns associated with open source software, 57% cited lack of support as a key concern. This explains why Red Hat and JBoss are doing well with their model. Skok says JBoss is getting 10,000 leads per month.

Another interesting point -- it’s a given that lifetime sales and marketing costs for a software product are high (up to 55% of the expenditure). Skok estimates that if you have a successful open source development community contributing to the software, you can cut maintenance costs by up to 20%.

According to an Evans Data Corp study, more than 1.1 million developers in North America are spending at least some of their time working on open source development projects. So it seems that there are plenty of developers out there willing to invest the time.

More on open source next time…

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