Making Money in the Bazaar, Part 1

A look at the business models in use today and how they work.
Funding New Companies

Capital is the fuel for companies that will serve any new market. This money may come from the on-going operations of the business or from banks or investors. What is the current environment for getting this funding?

Venture capitalists, the investment partnerships that fund high-risk/high-return companies, are skeptical so far. Their analysis of these opportunities keeps coming back to a critical point: Open Source, by definition, eliminates the barriers of entry to a market. How can a company build a sustainable market advantage if their work can immediately be used by a competitor?

Table 3.

Given this limit on the upside, only a limited number of open-source companies have received funding. These companies have identified key factors to protect them from competitors. For Red Hat, it is a strong brand. For Sendmail, it is having an open/closed mix in their software product line. For a company like Cobalt Networks, it is combining closed hardware with open software. As this market matures, more companies may achieve profitability and attract investment dollars for everyone.

Until then, companies must bootstrap themselves. Ironically, this is feasible because of those same low barriers to entry that scare off investors. An open-source company can build on the past efforts of others, meaning less capital is required to start the company.

Problems to be Solved

In summary, what are the problems that companies must solve in order to grow the market in new directions?

  • The financial motivation for innovation must be stronger. Most of the current successful business models other than consultants make money off “secondary” services, rather than the software development itself.

  • Open Source is still largely “by developers, for developers”. To achieve mass market success, it must become more customer-driven and consumer-friendly.

Traditional software products harness the free market to solve these issues. Consumers pay to buy a software product if it meets their needs, which means it must be very polished. Successful products are profitable for the companies that create them. Unsuccessful products die off. Through these mechanisms, good developers make a living and consumers get good choices.

Open Source needs to create systems to provide these consumer checks and balances.

The Search for Solutions

The business models described throughout this article are by no means a comprehensive list. This is a young market we are only beginning to understand. It could yet defy the skeptics and evolve into something that serves customers better and is financially strong.

Part two of this series will explore one particular possibility in this universe of interesting but unproven ideas—a consumer co-op for software contracts. It uses the Web to let consumers commit funds up front to pay for the development of specific applications, feature enhancements or bug fixes critical to them. Resources are pooled, so each person pays only a small portion of the total cost. It is a system compatible with, and tailored to, Open Source. I will analyze this idea in detail, describe an attempt to create a web service which provides the necessary mechanisms and speculate how this system might affect the progress of the open-source market.

With this idea and many others, the open-source market is a fascinating mix of possibilities and dangers. In recent years, it has grown from thousands to millions of users. Several profitable companies are now serving the needs of these consumers.

The next few years will certainly see continued innovation from the open-source research community. From the business side, it remains to be seen whether the current momentum will continue or be struck down by market realities. It may very well depend on the innovations created by the upcoming generation of open-source entrepreneurs. It's a free market. May the best products win.

Bernie Thompson has worked in both “evil empires”: IBM and Microsoft. He also was published in the very first issue of Linux Journal. Please send any comments or requests to bernie@veriteam.com or see http://www.veriteam.com/.

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