I would go so far as to say that very few open source startups will ever get anywhere near to $1 billion. Not because they are incompetent, or because open source will “fail” in any sense. But because the economics of open source software – and therefore the business dynamics – are so different from those of traditional software that it simply won’t be possible in most markets.

Via Knut Staring:

Glyn Moody, who talks with Red Hat CEO Jim Whitehurst, about the question: Why No Billion-Dollar Open Source Companies?

… has a cogent analysis of the value destruction and creation cycle achieved by open source software (and which would be true for open and shared designs as well).

Glyn Moody (excerpt):

“His answer was a good one. He said that he did think that Red Hat could get to $5 billion in due course, but that this entailed “replacing $50 billion of revenue” currently enjoyed by other computer companies. What he meant was that to attain that $5 billion of revenue Red Hat would have to displace software that currently costs $50 billion. Selling $50 billion-worth of software – even if it only costs $5 billion – is somewhat hard, which is why it will take a while to achieve.

I think this is the first time I’ve heard someone as senior as Whitehurst admit something rather profound: that open source solutions save money for customers by doing away with the fat margins for existing computer companies – and thus shrink the overall market. Opponents of open source like to paint this as “value destruction” that takes money “out of the economy” – as if free software went around burning down offices and warehouses.

What they fail to grasp is that the 90% savings do not just vanish like the smoke from those supposed conflagrations. That money is still in the economy, it’s just spent on other items: free software allows people to use their hard-won money for things other than operating systems, office suites and applications. In developing countries, for example, it might mean more funds available for education or health.

…

As Whitehurst pointed out, open source software typically costs just 10% of the proprietary equivalent, and so the profits – and outflows – are reduced proportionately.

Whichever way you look at it, open source is good news for companies and consumers: they pay less in the first place, and as a result even less leaves the local economies – which means that more can be spent with indigenous companies on locally-produced goods and services.

However, there is a very important corollary to this – the point that Whitehurst made several times. Indeed, practically his opening words were: “selling free software is hard”. A knock-on consequence is that it harder – roughly *ten* times harder – for an open source company to grow to a given revenue level than it is for the corresponding proprietary company.”