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A primer on Open Source business models

Ahead of the upcoming panel discussion ‘Building an open source business‘ at FOSS Backstage run by Jos Poortvliet and I, it’s useful to review the commercial models most commonly applied by Open Source projects. These can provide a framework of understanding and common vocabulary to facilitate effective debate. Originally published on the FOSS Backstage website.

Among the hundreds of Open Source businesses operating today a handful of commercial models are reused. Erik S. Raymond described thirteen models in his seminal 1997 publication The Cathedral and the Bazaar. While these models were largely theoretical, hist list is comprehensive and insightful.

Models described by Erik S. Raymond
• Cost sharing • Free the Future
• Risk spreading • Sell the Present
• Loss-Leader/Market Positioner • Free the Software
• Widget Frosting • Sell the Brand
• Open a Restaurant • Free the Software
• Give Away the Recipe • Sell the Content
• Accessorising

A more scientific approach was taken by Linus Dahlander in his 2005 paper Appropriation And Appropriability In Open Source Software. The models were reduced to five, grouped into three types of offering (‘Software as a Service’ does not appear in Linus’ original table and has been added).

Simplified models by offering
Type Sub-category Explanation of how it works in OSS
Products Licensing Licensing the right to use the software, i.e., adding a proprietary part to the open code or allowing the customers to use the source code as they wish
Black-boxing Bunching several pieces of OSS in a hardware solution
Services Consultancy Consultancy work based on an area of expertise, be it a product that the firm releases or a community-established project
Education Education based on an area of expertise, be it a product that the firm releases or a community-established project
SaaS Software as a Service, access-based pricing to software products, providing recurring revenue
Support Support Support based on an area of expertise, be it a product that the firm releases or a community-established project

Because most software companies rely on controlling access to the binaries and source code of their applications, and Open Source firms necessarily give away this control voluntarily, an existential question for these firms is how they capture, or appropriate, the value of their offerings. Linus summarises the range of ways Open Source businesses extract value from the software they produce.

Means / protections for appropriating value
Category Sub-categories Explanation of how it works in OSS
Patents (IPR) Institutional protection in terms of temporary monopoly granted to novel, useful and non-obvious innovations. Often granted to algorithm in software, but functions is also used and heavily debated
Copyright (IPR) Institutional protection that grants creators exclusive right to reproduce, prepare derivative works, distribute, perform and display the work publicly
Secrecy Keeping secrets within the firm, primarily by closing the code
First-mover advantages Network externalities, first-mover advantages Early entry to the market, which can create advantages by acquiring superior resources and capabilities
Complementary assets Getting a large user base using complementary assets such as distribution, marketing in conjunction with the innovation

Taken together these commercial models and means of appropriation form a convenient framework for understanding the strategies of leading Open Source firms such as these.

Models and means of appropriation of Open Source firms
Company Offering Model Means of appropriation
Red Hat Service Support Complementary assets; First-mover advantages
Jenkins Service SaaS Secrecy; Complementary assets
phpList Service Saas Complementary assets
NGinx Product Licensing Secrecy; Copyright
Nextcloud Product Licensing Complementary assets; First-mover advantages
Mautic Service Saas Complementary assets
openNMS Service Support Complementary assets
Collabora Service Consultancy First-mover advantages; Complementary assets

For a different take on these models, consider Mozilla’s ‘A framework For Purposeful Open Source‘ – a 40 page document published last month.

So, what do you think ?