Economic Free Software Perspectives

This article by Carlo Daffara appeared in the August issue of the Open Source Business Resource, dedicated to free software-based “Tech Entrepreneurship”.

It has a well-researched typology of the prevailing free software based business models.


“How do you make money with free software?” was a very common question just a few years ago. Today, that question has evolved into “What are successful business strategies that can be implemented on top of free software?” To properly answer this question, it is important to distinguish between the legal, procedural and business model aspects of free/libre and open source software (F/LOSS) and how those aspects interact. For example, the licensing aspect influences the development strategy, the kind of development community that can be created around a project, and the potential business models that can provide a monetization strategy for a company that is interested in adopting an open source project as part of the internal company strategy.

This article provides the most recent results from the FLOSSMETRICS project and its recent survey of the business model of more than 200 open source companies.”

Here are the conclusions regarding the prevailing business models that have been identified by this study:

“We present the results from the February 2009 update of the FLOSSMETRICS study on free software-based business models. After an analysis of more than 200 companies, the main models identified in the market are:

Dual licensing: the same software code distributed under the GPL and a proprietary license. This model is mainly used by producers of developer-oriented tools and software. It succeeds thanks to the strong coupling clause of the GPL that requires derivative works or directly linked software to be covered under the same license. Companies not willing to release their own software under the GPL can obtain a proprietary license that provides an exemption from the distribution conditions of the GPL. The downside of dual licensing is that external contributors must accept the same licensing regime. This has been shown to reduce the volume of external contributions, which are limited mainly to bug fixes and small additions.

Open core: this model distinguishes between free software and a proprietary version which is based on the free software with the addition of proprietary plug-ins. Most companies following such a model adopt the Mozilla Public License which allows explicitly this form of intermixing. This model allows for greater participation from external contributors without the same requirements for copyright consolidation as in dual licensing. The model has the intrinsic downside that the free software product must be valuable to be attractive to users, yet at the same time it should not cannibalise the proprietary product. This balance is difficult to achieve and maintain over time. If the software is of large interest, developers may try to complete the missing functionality in free software, thus reducing the attractiveness of the proprietary version and potentially giving rise to a full free software competitor.

Product specialists: companies that create or maintain a specific software project and use a free software license to distribute it. The main revenues are provided from services like training and consulting. This model leverages the common assumption that the most knowledgeable experts on a software product are its developers. Developers can provide services with a limited marketing effort by leveraging the free redistribution of the code. The downside of the model is that there is a limited barrier of entry for potential competitors, as the only investment needed is the acquisition of specific skills and expertise on the software.

Platform providers: companies that provide selection, support, integration and services on a set of projects, collectively forming a tested and verified platform. GNU/Linux distributions can be classified as platforms. These distributions are licensed for a significant part under free software licenses to maximize external contributions and leverage copyright protection to prevent outright copying. These licenses do allow cloning, the removal of copyrighted material like logos and trademark to create a new product. The main value proposition comes in the form of guaranteed quality, stability and reliability, and the certainty of support for business critical applications.

Selection/consulting companies: companies in this class are not strictly developers, but provide consulting and selection/evaluation services on a wide range of projects, in a way that is close to the analyst role. These companies tend to have very limited impact on free software communities as the evaluation results and the evaluation process are usually a proprietary asset.

Aggregate support providers: companies that provide a one-stop support on several separate free software products, usually by directly employing developers or forwarding support requests to second-stage product specialists.

Legal certification and consulting: these companies do not provide any specific code activity, but provide support in checking license compliance, sometimes also providing coverage and insurance for legal attacks. Some companies employ tools to verify that the code is not improperly reused across company boundaries.

Training and documentation: companies that offer courses, on-line and physical training, additional documentation or manuals. This is usually offered as part of a support contract, but recently several large scale training center networks have started offering OSS specific courses.

Research and development cost sharing: a company or organization may need a new or improved version of a software package and will fund a consultant or software manufacturer to do the work. Later on, the resulting software is redistributed as open source to take advantage of the large pool of skilled developers who can debug and improve it. A good example is the Maemo platform, used by Nokia in its mobile Internet devices. Within Maemo, only 7.5% of the code is proprietary, with a reduction in costs estimated at 228M$ and a reduction in time-to market of one year. Another example is the Eclipse ecosystem, an integrated development environment (IDE) originally released as free software by IBM and later managed by the Eclipse Foundation. Many companies adopted Eclipse as a basis for their own product, and thus reduced the overall cost of creating a software product that provides developer-oriented functionalities. A large number of companies, universities and individuals participate in the Eclipse ecosystem. As recently measured, IBM committers constitute around 32% of the Eclipse project and 43% of commits, with individuals accounting for 15% of commits and 29% of committers, while a large number of companies like Oracle, Borland, and Actuate participate with percentages ranging from 1% to 7%. These results, similar to those obtained from analysis of the Linux kernel, show that a healthy and large ecosystem reduces engineering costs significantly. This is the largest actual “market” for free software, as demonstrated by the fact that 56.2% of developers are using at least some free software within their own code.

Indirect revenues: a company may decide to fund free software projects if those projects can create a significant revenue source for related products which are not directly connected with source code or software. One of the most common cases is the software drivers needed to run hardware. Many hardware manufacturers distribute software drivers at no charge and some manufacturers distribute some of their drivers under a free software license.

Loss-leader: is a traditional commercial model, common also outside of the world of software. In this model, effort is invested in a free software project to create or extend another market under different conditions. For example, hardware vendors invest in the development of software drivers for free software operating systems like GNU/Linux to extend the market of the hardware itself. Other ancillary models include: i) the Mozilla Foundation, which obtains a non-trivial amount of money from a search engine partnership with Google, estimated at 72M$ in 2006; and ii) SourceForge/OSTG which receives the majority of its revenues from ecommerce sales of the affiliate ThinkGeek site.

We found, confirming previous research from the 451 Group, that at the moment there is no significant model, with companies more or less adopting and changing models depending on the specific market or shifting costs. During 2008, a large number of companies shifted from an open core model to a pure product specialist model to leverage the external community of contributors.

According to the collected data, among free software companies the fully free software approach is still prevalent, followed by the open core and the dual licensing models.”

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