Your Guide to Open-Source Business Models

Open Source + Service

What it means: Companies sell support and services around open-source software.

Who’s doing it: Compiere (ERP), JBoss (middleware), Red Hat (Linux)

Advantages for CIOs: You pay only for support, not software. The cost to switch providers is relatively low because the source code is available to anyone.

Startup challenges: Difficult to build businesses because switching costs are low, as are barriers to entry. CIOs will always favor large, established vendors over startups unless the startups also control code development. Hard to get venture funding because venture capitalists are looking for sustainable competitive advantage in their investments. Unless the software is complex or mission-critical, CIOs may choose to support it themselves.

Mixed

What it means: An open-source code base with proprietary add-ons.

Who’s doing it: Sourcefire (security), SugarCRM

Advantages for CIOs: CIOs may not need the proprietary stuff, but if they do they’ll already have acquired deep experience with the open-source product before buying the add-ons.

Startup challenges: There’s ample motivation to make the open-source product inferior to the proprietary package, transforming the open source into trial software. If that happens, there may be a backlash among open-source developers and users wanting to see all the code.

Open Source + Buy Off

What it means: Companies offer a proprietary license for their open-source software so that users can modify the software and redistribute it without having to make the code changes available to the public.

Who’s doing it: MySQL (database), Sleepycat (database)

Advantages for CIOs: The open-source software has all the features of the proprietary version.

Startup challenges: Sales of the proprietary version are limited mostly to those companies that want to redistribute it as part of their own hardware or software packages.

Open Source + Aggregation

What it means: Companies assemble various open-source software packages into integrated units that are easier for CIOs to consume.

Who’s doing it: Exadel, Navica, SourceLabs, SpikeSource

Advantages for CIOs: Simplifies open-source integration and support.

Startup challenges: Barriers to entry are low, brand differentiation is difficult, lack of ownership of open-source projects limits the influence of the company in the development of the code.

Open Source + Hardware

What it means: Hardware makers use open source as the foundation for the software that runs their machines.

Who’s doing it: Cisco, Digium, Netezza

Advantages for CIOs: Lower prices on hardware.

Startup challenges: It’s difficult to differentiate on hardware alone, especially when CIOs are looking to standardize their infrastructures.