Free Code for Sale: The New Business of Open Source

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These companies have to be extremely lean and mean to go up against comparable proprietary software companies. "CIOs expect to pay less for open source," says Forrester’s Goulde. "It has to provide 30 to 50 percent savings." That would seem easy when the software is free, but the software usually isn’t free for the companies that support it; many must provide their own employees to lead, manage and code the open-source products. The unpaid community that appeared around Linux took many years to develop and is the exception rather than the rule. Worse, venture capitalists don’t like the services-only model because the margins on service are invariably lower than those for proprietary software. "The venture community is committed to getting a disproportionate amount of return on its capital," says Moore. "At some point, the company [they invest in] has to have sustainable competitive advantage." This helps explain why open-source companies have been slower to grow than their proprietary counterparts.

Another limiting factor is that it’s next to impossible to build a business around open source in niche markets or in vertical industries. Only a small percentage of downloaders will pay for support from vendors (for example, Snort has 100,000 regular users, but only 800 have signed up for support), and developer and user communities won’t grow unless the software is used by many, many people. So big, successful open-source products have certain things in common: They are broadly applicable across many types of companies and industries, and they tend to be in areas that companies don’t believe provide a competitive advantage (such as infrastructure) because everyone—including competitors—will have access to the software source code.

Yet even if the open-source software qualifies on all these fronts, building a business around it will still be difficult unless the software is complex and is an important part of keeping the business running. In this case, CIOs, especially those in small or midsize companies with small staffs, cannot afford to go without commercial support. Indeed, support is consistently the biggest concern of CIOs on Forrester Research’s surveys, according to Goulde. "We need a vendor to take a portion of the risk if we’re going to go with any software package," says NIH Federal Credit Union’s Drake.

And CIOs always prefer to go with a big, established vendor for support rather than a small startup. That’s why MySQL, for example, has formed partnerships with Hewlett-Packard and Dell to support its open-source database. MySQL takes a cut of the proceeds, and CIOs get the warm-and-fuzzies from knowing that a big vendor is standing behind the product, according to MySQL CEO Marten Mickos.

Yet the combination of CIOs’ nervousness about small vendors and the venture capital community’s reluctance to back open-source software means that CIOs will see more and more mixed-source sales pitches in the coming years. It pays to vet these vendors carefully (see "Your Open-Source Checklist," Page 52).

The ROI of Trust

For his part, Roesch believes that the Snort community will survive. "Check Point needed education about why it’s important to keep it open, and they get it," says Roesch. Part of that education was that the open-source development model creates relationships between project owners and users that cannot be duplicated in the proprietary world. "A lot of the guys buying Sourcefire software are people who started using Snort in college, and now they’re bringing it into their companies," he says. "It’s hard to quantify the value of being able to go into a sales meeting against big vendors like Cisco and having someone [from the prospect company] ask for your autograph."

But that relationship, based on mutual trust and forged over many years, is fragile. If Check Point were to shut down Snort and close the source, says Roesch, "you would lose the goodwill of the community overnight.

"Getting these people’s trust takes years," he adds. "Losing it takes minutes."

Copyright © 2006 IDG Communications, Inc.

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