Making Money In Open Source: Does It Matter?

Yesterday, I attended the GigaOm bunker series on Open Source and Cloud Computing. The event had two panels, one featuring Larry Augustin of SugarCRM and Jim Zemlin of Linux Foundation and the other with Joe Tobolsk, Rich Wolski, Shelton Shugar and Tom Hughes Croucher. There were some interesting discussions on both panels and an overall agreement that open source is beneficial for cloud computing (in the words of some of the participants, the single most reason for the very success of cloud computing). But there was one question that turned out to be controversial and it is about who makes money from Open Source. Derrick Harris from Giga Om Pro offers a good coverage of this question and the ensuing discussion in this post. During the event, I had fun observing the debate and I thought I will offer my views here.

Roughly, the participants in the discussion can be split into three camps. On one side, there were those who went gaga over how open source is successfully making money and, on the other end, there were skeptics who were wondering why Open Source is not making big bucks like their proprietary counterparts. In between these two camps were the so called “moderates” who argued that open source need not make big money but they enable others, like Web 2.0 vendors and the current day cloud vendors, make big bucks. They even showed the example of how open source is single handedly keeping Wall Street running and, thereby, helping some people make really big bucks.

My thoughts about Open Source making big money are summarized below

• The biggest mistake made by most of the participants in the room is to view Open Source as a business model. This is not something new. Ever since Open Source started gaining traction in the business world, various players involved in the game tend to view Open Source as a business model. In 2007, in response to a debate between various pundits on the true nature of Open Source, I had argued that Open Source is not a business model but a philosophical platform on top of which various business models play the game. In that blog post, I had compared Open Source to basic science and I would love to dig a bit more on this comparison here. If you tend to view basic science as a business model (many people in the industry tend to see everything using the lens of monetization and, even in a capitalistic country like US, it is not necessary), you will realize that it is one of the biggest money losing endeavor in this world. However, basic science is the single reason why we, as a society, have advanced to what we are today, including in the area of commerce. Basic science didn’t make money but it enabled the society to progress through innovation and allowed businesses to make money by productizing the results of basic science research. Essentially, basic science acted as a platform acting as an enabler of innovations and led to various business models based on these innovations. I see Open Source in a similar vain. Open Source is a platform that enables innovation by sharing of source code and allows some businesses to make money by layering a business model on top of it. Some business models may work and many might just fail depending on whether the business model is compatible with the nature of Open Source. Failure of a particular type of business model does not imply the failure of open source itself. I don’t believe in having a metric to measure everything (do we have a metric to measure happiness yet?). But, if we ever have to have a metric to measure the success of open source, that quantity will be proportional to the amount of innovation it has enabled and independent of the money that was directly made from open source itself. If we grasp this point about the true nature of open source, then Simon Crosby’s comments about the presence of proprietary components in many successful open source products will be hardly surprising. In this world view, having proprietary addons to the open source core is one of the successful business models on top of the Open Source Platform. This is not the only one and there are others including Redhat’s approach. There are many more to come in the future. Business models on top of open source may come and go but the basic philosophy will stay intact for a long time to come.
• Another mistake, in my view, is about the metric they use in measuring the success. They tend to use the yardstick they use in the proprietary world to measure the success of Open Source. One of the biggest success of Open Source from an economics perspective is the commoditization of software. The proprietary vendors made big money by the exclusivity enjoyed by their products and, in most cases, the lack of viable competition. This offered them the leverage to charge exorbitant prices to their products. The very freedom offered by Open Source breaks the spine of this exclusivity enjoyed by these software vendors. In fact, this freedom opens up an unique opportunity for more than one business to profit from the same software. The inability of vendors to charge sky high prices and the forking of business opportunities by many people will ensure that the idea of big bucks doesn’t enter the Open Source world.
• This point is more political than technological. The American idea of capitalism measures the success of capitalism in terms of the number of people who won big but my idea of capitalism is not about winning but about creating opportunities for individuals to compete. In my world view, there may not be one single big winner but many winners having their own piece in the marketplace. The comparatively moderate economic success of companies running their business on top of open source platform fits this worldview of mine. Open source empowers businesses of all sizes to compete in an equal footing, with each getting a piece of the pie based on many factors including the availability of some unique features which users found compelling, fanatical support, etc.. This spreading of opportunities ensures that no single business is hugely successful but it creates many successful businesses. Some people in America may call it socialism but it is capitalism for me. Empowering more and more people to compete in the marketplace is capitalism IMHO and open source does it very well.

Well, these are some of my thoughts on why Open Source is not making big money like their proprietary counterparts. Open Source is a philosophical idea that fosters innovation and enable many business to compete in the marketplace. Like basic science, it may not make big money but it will enable big ideas which, in turn, may make big money. Like any commoditized marketplace, the money is not going to be huge for any single player. It is important for us to understand the true nature of open source. If we understand it correct, we can better utilize this platform to innovate better. If you are a business looking to make big money with software, then open source is not the right path for you. You are better off with proprietary approach. Open source will still survive by the very itch in the hands of users (read companies in the cloud based world).