Making Money in the Bazaar, Part 1

A look at the business models in use today and how they work.
The Service Economy

In the cases where beauty has outweighed warts, a critical mass of technical and non-technical users has been built. Apache, Linux, Perl and many other programs have made this breakthrough to mass market utility. This expanded base of consumers has driven the need for many support services built around the software. These services add polish and value to the base provided by the initial project.

No one is required to pay for any services. Given only a Net connection, they can download what they need and figure everything out themselves. However, many consumers find their time more valuable and therefore seek services to make their lives easier. This is where “commercial” Open Source steps in to distribute the software, provide technical support and educate users.

Distribution

The Internet is great for downloading small software, but for larger products it is too slow. Also, finding the software you want among the jungle of projects on the Web can be difficult.

From this need rose companies like Red Hat, Caldera, SuSE, and Walnut Creek. On one convenient CD-ROM, you have an organized collection of the best available software applications. These companies are achieving significant revenue and earnings with these services.

Opportunities exist for further specialization. LinuxPPC has made a solid business out of focusing on the PowerPC market. A small company could take this further by taking one of the most popular (Dell, Linux, eMachines) PCs and producing a distribution that is tailored and tuned to that hardware. It could guarantee that all devices are recognized and install flawlessly. It could optimize every program to the particular processor used on that machine. You could imagine Intel co-marketing and co-developing with a software company to optimize for their latest chips.

Open Source can be a key in the drive towards mass specialization of computer products and services. As the overall size of the market increases, more opportunities will be created in these small niches and sub-niches. All of this is made possible by the full access to source code that free software provides.

Technical Support

When a single company owns exclusive rights to a software product, it is obvious where the most informed technical support comes from: if you buy a Microsoft product, you go to Microsoft for technical support.

The fact that Open Source does not have an exclusive support provider has repeatedly been portrayed as a weakness. This is a fundamentally flawed notion. Rather, Open Source allows a whole market of support providers to compete on a level playing field of equal access to the code.

Through this heightened competition, the level and quality of support is capable of rising above the best standards of today's closed software market.

Red Hat, LinuxCare and many other companies and individual consultants have stepped up to serve this market. Early in 1999, IBM recognized these extraordinary opportunities and announced Linux support and consulting services. The competition between these companies will become intense, and customers will be well-served.

If open-source support services can achieve their full potential, it will become a major selling point for corporate users and consumers. Innovations in providing these services will provide the foundation for many viable new businesses.

Education

O'Reilly & Associates has built a booming book publishing business which topped $40 million in 1998. More than half of this revenue was from books about free software topics.

As the market grows in size, more educational services will be needed. These are significant opportunities, since any educator, author or consultant can delve into the inner workings of the code to produce definitive training materials for a subject. By working on and teaching about specific areas, a valuable reputation can be created. (See Table 2, Linux Consultant Survey.) Several of the most successful consultants built their businesses by being a recognized world-wide expert in a particular technology.

The Customization Economy

The next step beyond servicing existing software is the creation of new applications to solve outstanding problems. This may be in the form of hardware devices that come preconfigured for a particular need. Or it may be through employees or consultants who configure and enhance software for particular needs.

In a world dominated by a single vendor, there are limits to the innovations a new product can provide because of high prices, too few features, too many features, logo requirements, etc. Many interesting new applications are suddenly possible when these shackles are removed. You just need freedom to customize.

Hardware Bundles

Hardware preloads and bundles are some of the most compelling uses of free software, because the cost of developing or enhancing free software for the machine can be included in the price of the hardware.

One example is the Cobalt Qube (http://www.cobaltnet.com/). This is a space-age blue 18.4x18.4x19.7cm server appliance running Linux on a RISC processor. It is a general purpose workgroup server for e-mail, Web, etc. Having full access to the Linux source code gave Cobalt the capability to fully customize the software for this uniquely simple but very powerful hardware platform. (See “Cobalt Qube Microserver” by Ralph Sims, October 1998.)

Another is the Snap! network storage server from Meridian Data (http://www.meridian-data.com/). It's a fixed-function server appliance that shares disk space on the network. It is built from custom hardware combined with open-source software. Consumers don't need to know it uses free software; they just need to know what it does. Customers expect the price of network storage to scale with the price of disk storage, so the hardware and software costs of using a proprietary software system could have greatly reduced the attractiveness of the product.

Obviously, one big advantage is having no per-device software royalty. This is particularly true for price-sensitive, high-volume products. In a few years, we may find dozens of companies embedding open-source operating systems and applications on millions of small, fixed-function hardware devices.

IT Professionals

Beyond hardware devices, there is a need to customize and adapt software applications to the exact business processes and needs of an organization.

This always requires some custom work. Most medium and large organizations have a crew of IT professionals whose job is to customize hardware and software to make the business run more smoothly. These professionals like to start with the most functional products possible and customize from there. This has meant proprietary software in most cases.

Recently, open-source software has achieved levels of functionality that match proprietary software in many cases and has the advantage of not being tied to one vendor for support or product updates.

Rather quickly, it may become cost-effective to customize free software, rather than pay for thousands of licenses of commercial software on which to build. This shift in the market will require a growing number of professionals who specialize in open-source software.

This is perhaps best reflected in the salaries of IT Professionals. A 1998 salary survey of 7189 professionals asked which operating system they primarily used. Of those who reported Linux as their primary OS, their salary was $61,027 US vs. an overall average of $60,991. Linux salaries had increased 16.5% from the previous year, representing the fastest salary increase of any system (source: Sans Institute).

In-house staff is not the only option. Again, because of the freedom to inspect and study the software down to the lowest levels, a competitive industry is able to grow to serve whatever needs arise. The resulting alternative to in-house staff is a competitive market of independent consultants.

Consultants

When the cost of the software goes to zero, the value is in customizing for specific problems. Consultants already make their living providing these per-hour or per-project services. Open Source is not a sacrifice; it is an opportunity.

One example is comprehensive support. Most business want a single point of contact to take full responsibility for getting a project done. With closed source, contractors are at the mercy of bugs and limitations in the operating systems and applications they purchase. In effect, they cannot guarantee success. They do not have full control of the technology.

With Open Source, they have complete access to solve every problem, no matter what level or layer it occurs in. A small company with a skilled force of engineers can provide a level of comprehensive application-to-operating system service that only IBM or HP or Sun can provide today, and probably at much lower prices.

To get an understanding of the size and health of the Open Source consulting market, those registered in the Linux Consultants HOWTO were surveyed. They were asked the following questions:

  1. How many consultants at your company are involved with Open Source work?

  2. Approximately how much money did your company (or yourself, if independent) earn in 1998 on Open Source-related work? (Convert to US dollars)

  3. In 1999, based on numbers from recent months, how much do you expect this to increase/decrease? (as a percentage)

  4. In 1999, do you believe it is possible to make a living doing Open Source consulting work? (yes/no)

This is a very diverse group of VARs, integrators and consultants. Over 50% are from outside the U.S., where the cost of living may sometimes be lower. In most cases, open-source work is just a piece of the total business. While this is certainly not a scientifically rigorous study, it does give some flavor of the market.

Table 2.

A key point from the survey is the importance of being a “jack of all trades.” You must focus on serving the needs of the customer, including doing work on closed source. In 1998, the median earnings per consultant on Open Source alone were not enough to make a living, and only 12.7% of the consultants made more than the $61,027 salary of IT professionals mentioned above. Business has picked up dramatically in recent months, however. As a whole, the consultants were very bullish on the coming year.

Figure 1. Survey: Distribution of Earnings

In the previous sections, we've covered the current business models that provide a living for employees, and innovations for consumers. There are certainly strengths, but the market is still tiny compared to traditional shrink-wrapped software. Young companies with new ideas are needed in order to grow the market.

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