Making Money in the Bazaar, Part 1

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

Open Source is software which has been freed. It allows bits to be copied and reused endlessly. It allows inspection of the source code. It allows new innovations to be built upon old, without having to duplicate past efforts. It is free software with the emphasis on freedom.

This past year has seen an explosive rise in visibility for this curious market. The computer world at large has gained at least a limited understanding and respect for its workings. Much of this attention would have been unimaginable even a year or two ago.

During this time, Open Source has been put under heavy scrutiny. While certain technical benefits are undeniable, every analysis invariably confronts two simple, critical questions: “How does one make a living on free software?” and “Who is motivated to innovate?”

The strength of the answers to these questions will determine if Open Source will achieve its full potential for the greatest possible audience. It must be economically viable.

I will attempt to answer these two questions by surveying the field of current business models and analyzing their financial strength. I will also speculate on future innovations that may alter these dynamics.

Business Models

Money rests on the axiom that every man is the owner of his mind and his effort ... Money permits you to obtain for your goods and your labor that which they are worth, but not more ... Money is your means of survival.

—Ayn Rand, Atlas Shrugged

The obvious challenge of Open Source is that it may be copied freely, even if purchased initially. So a $10 Linux disc may legally be used to install one machine or a thousand machines. At first glance, it would seem no incentive exists to put effort into improving such a product. Because of this characteristic, Open Source is often equated with a kind of communism: a system that offers something for nothing and exploits the labor of others without rewarding them; in short, a system that is unsustainable because it causes people's self-interest to conflict with the greater good.

These concerns should not be dismissed out of hand, nor taken as factual. The truth is much more complicated. Central to these concerns is the lack of exclusive copyright protections. Copyright and patent laws are not inherently part of the free market; they are intended to create limited monopolies for the companies which own the rights. This is done to reward research and to encourage innovation.

Open Source is a voluntary system that waives exclusive ownership of software in exchange for other benefits. These benefits include wider adoption, faster collective innovation and a level competitive playing field. This makes for a frictionless, dynamic and highly competitive market without the very profitable “vendor lock-in” that is facilitated by traditional copyrighted software.

Despite the resulting competitiveness, several business models have proven to be profitable. These models leverage the unique new possibilities afforded by Open Source, in return for their sacrifice of certain copyrights.

What is still unclear is how these models will generate as much innovation and value as traditional software companies, given the handicap that a person's work can benefit his competition as much as it benefits himself. As we'll see, one of the surprising things about free software is where the innovations have originated.

In the following sections, I'll introduce the markets that are producing innovation and jobs today. These are the research, service and customization economies and the many business models that fall into these groups. Nearly all companies are hybrids of several different business models.

Table 1.

The Research Economy

Open-source corporations are important growth engines, but to date, they have built mostly upon the efforts of others. The bedrock of the market is the thousands of individual students and moonlighting professionals who make small and large contributions every day.

These developers are not paid for their efforts. They begin a project with no promises or commitments. They work at their own pace, use their own judgment and set their own priorities. They are the university researchers and basement scientists of software, working together to make their contribution to the world.

Often, these developers are only learning or honing their craft, so many projects fail. Yet out of this soup of individual and group efforts rises some of the best software available today.

Through the Internet, these successful efforts can be instantly copied and put into use world-wide. They can be enhanced and customized by thousands of others. They can continue to evolve like an organism, adapting to new software and hardware architectures as the years go on.

The first and most unshakable answer to “Who will innovate?” is the students and moonlighters, motivated by their desire to learn and create and inspired by the energy and clarity of tackling new problems. The profit-oriented market may fail, but these software research activities will go on. Slowly, surely, they will continue to add to the body of free software available to the world.

Yet despite the best efforts of the students and moonlighters, their software has common flaws. Development goals are driven by the author's own needs, resulting in software “by developers, for developers”. The threshold at which a developer is satisfied with ease of use is much lower than for typical users. These are truly research projects, with all the beauties and warts that implies.