In this part of our series on An Open Source Business, let’s take a look at our friends in the online music space and see what we can learn from them.
The Deal recently had an article about online music startups which should strike a chord with anybody who’s thinking about or trying to make a business out of open source. Look at what they had to say:
“huge numbers, lots of hype, a surfeit of hope and a major chance of failure… some of the business models are inherently economically unfeasible… It’s completely unsettled and more and more fragmented…The rules of the industry and the economics of the industry have completely changed…Technological advances offer more and more delivery mechanisms, user options and wizardly new features…However, just who can make money off all this is almost as uncertain now as it was five years back…Everyone is gambling there will be a way to monetize distribution of recorded music, But no one has come up with the solution…Last year’s great hopes are this year’s busts.”
Sound familiar? It should. In a nutshell, open source business models share the same strategic problem that these online music startups have: how do you make any money when most of what you provide is available for free? Let’s look at the ways:
Free the Software, Sell the Services
Just about every commercialized open source project follows this business model. The software is free, but the developers charge for services such as support, training, customization, and software development. Sometimes the services are “productized” into manuals, seminars, installation CD’s, and packaged support, but the idea is the same.
This model works well…to an extent. For example, we’re the main developers of opentaps Open Source ERP + CRM, and we’ve found that users are indeed willing to engage us for opentaps-related services because of our experience and knowledge with the system. However, we’ve also found that users are willing to hire us mostly for customizations which are unique to their needs. We’re still responsible for the architecture and user interface of opentaps ourselves, and that’s why since the release of opentaps 1.0 we’ve invested in everything from integrating Spring, Hibernate, and the Google Web Toolkit to building a Domain Driven Architecture.
Like the Free Version? Please Pay Us for Even More!
Many open source software developers, and virtually all open source software companies funded by venture capitalists, engage in the “commercial/open source” model. An open source edition is available free of charge to attract potential users, and a fancier commercial version is available for pay.
This is not an easy business model. Let’s go back to music as an example. I like Pink Floyd, but if you gave me The Dark Side of the Moon for free, would I pay you for Ummagumma, The Final Cut, and every other song by Pink Floyd? No, I wouldn’t. (Another example is travel: how many people actually pay for First Class?)
But perhaps the best evidence that this is a difficult business model comes from the commercial open source companies themselves. Compared to a few years ago, their websites are de-emphasizing the open source version (sometimes you really have to look even to find the download page), and their “community edition” licenses are increasingly restrictive.
Nevertheless, I think this is a model which could be very successful if two conditions are met:
Be careful, though: if you execute this model incorrectly, you could easily lose the goodwill of your open source users and unwittingly give away a viable commercial product for free.
The Alchemy of Open Source
There is a famous story of the Stone Soup, where many free ingredients came together to make an amazing finished product. Lest you think it’s just a fable, Red Hat and Ubuntu do exactly that–they’ve combined major open source projects such as Linux, Gnome, Apache, Firefox, Thunderbird, OpenOffice, and MySQL and built major businesses from them.
This is the business model we’ve chosen for opentaps so far. We’ve built opentaps from major open source projects such as Apache, Funambol, Google Web Toolkit, Jasper Reports, Pentaho, MySQL, PostgreSQL, and too many others to name here. We’ve had to be patient at times, but over the years, we’ve grown as all those other projects have matured. Amazingly enough, these open source projects have put us years ahead of many commercial ERP systems technically and enabled us to build opentaps sustainably, so that we now have a fully integrated ERP and CRM system with business intelligence, ecommerce, and mobility integration without any VC funding.
But this is not an easy business model to execute. You must be willing to understand other open source projects and have the technical ability to work with them. Most importantly, you need patience. With this business model, you are growing with the community of open source projects.
In the End . . . Just Make it Better
No matter what business model you choose, ultimately you’ll succeed if you make technology easier and better for your users. In the online music world, there actually has been a great success story — iTunes. They’ve done it by making downloading music easy and fun. So learn from them. If you can make software easy and fun, you will be successful. Next to a great product, the business model is just a footnote.
In the next part of An Open Source Business, we’ll take a look at marketing strategies for open source software.
In the previous installment of An Open Source Business, we talked about how to determine if an open source project could also support a successful business. Now let’s look at how to build a successful commercial open-source project.
Before starting your project, ask yourself:
What will make a commercial open source project successful?
Believe it or not, most developers get this question wrong because of two myths about software — and doom years of work before they’re begun.
The Two Myths
Here’s the myth that many commercial software companies have:
“The best software is the one with the most features. If we could just get more features in our program, we’ll be able to get more customers and topple Microsoft.”
And here’s its equivalent at many open source projects:
“The best open source project is the one with the most people. If we get more people in our project, we’ll get more contributions and more features, and then we’ll be able to topple Microsoft.”
And What’s Wrong with That?
For commercial software, the number of features is not as important as ease of use. Sure, I want my software to do what I need–but then that’s it. Don’t confuse me with all those other screens, menus, and buttons. I’ve got a life and want to get back to it.
For open source software, the most important thing is having good code. Every project needs more users and more developers, but without the proper technical foundation to absorb them, an open source project could easily hit a wall. (I actually wrote about this almost exactly two years ago under “The Limits of Open Source.”) A successful open source projects must be extensible, stable, and technically interesting — otherwise, who would want to work with your code base?
Now Here’s the Hard Part
If you want to have a successful commercial open source project, you need to do both. You need to create software that is both easy to use and is technically strong. It should have enough features to be useful, so that your project could support your business. Longer term, though, your project — and your business — will succeed only if your software is easy to use and well written.
This may sound like a tough balancing act, but it’s exactly what has worked for opentaps Open Source ERP + CRM. Sure, our users are looking for a program with enough features to meet their needs. But why do they choose opentaps? Because they find it easy to use, and because they like its strong technical architecture. This is why we’ve invested so much in giving opentaps a stronger technical infrastructure and making it easier to use — and we’re just getting started. If you like opentaps now, then just wait — you ain’t seen nothing yet!
In the next installment of “An Open Source Business“, we will look at competitive strategies for an open source project.
At the beginning of every road, the possibilities always stretch infinitely to the horizon. So it always seems when one is starting a business as well. But could your open-source project actually support a business as well?
The answer is not always “yes.”
On the surface, even the concept of an “open source software business” seems to be an oxymoron. “Open source” means software that is freely available for users to download, use, and distribute. A “software business” means charging for that software, be it from licensing, support, or documentation. So how could an open source project be used to build a software business?
To answer this question, we need first to understand why both commercial and open source software models work in the first place. Commercial software offers features. In return for my money, this shiny package will (hopefully) offer me out-of-the-box features that meet my needs. Open source software, on the other hand, offers code. I can go somewhere, get the source code for free, then customize and extend it as I need. The software freedom that Stallman originally talked about is really a freedom through code: I am “free” with open source software not because I got the software free of charge, but because I have its source code, so I can change it to suit my needs. Therefore, commercial software will appeal to people who are looking for stable, easy to use, and supported features, whereas open source software will appeal to people who are looking for well written source code to modify or customize.
Not all software have both groups of people. For example, there are certain types of software which practically nobody wants or needs to modify or extend, so open source has a limited value proposition (other than being free of charge.) In this case, you might be better off releasing your software as shareware: give it away for free, but keep the source code, and then ask people to pay for an enhanced version. (A modern alternative to this model would be to offer it free online and sell ads.) Conversely, there are some types of software, especially in the open source world, which are really not intended to be used out of the box and therefore are only valuable to programmers willing to work with the code. These might work adequately as open source projects, but you will probably have a very difficult time making a business out of them.
Therefore, to have an open source software business, you need to find a type of software where there are people who need the source code and where there are people who would pay for out of the box features, stability, ease of use, and support. We think we’ve found it with business applications software, such as ERP and CRM software. Virtually all ERP software, even multi-million dollar commercial packages, must be customized, so our users will appreciate having access to the code. Ease of use, stability, out-of-the-box features, and support are things that business users are used to paying for as well. It was this thinking which led us to create the opentaps Open Source ERP + CRM business applicaitons suite.
If you think you have found such an open source project, I will write more about how to build software for both open source and commercial users in the next installment of our series on “An Open Source Business.”
When I tell people that we specialize in building open source software, they always ask “Can you make money doing that?”
We’ve been doing just that for over 5 1/2 years. It started with just one person who fell in love with open source, and today we have a team of full-time developers working on opentaps Open Source ERP + CRM.
Now, I’d like to tell you more about how we did it in a new series called “An Open Source Business.” I will tell you how we build our software, support our community, and made a business out of it. There are no gimmicks and no path to quick riches here. If, however, you believe in open source and have a passion for creating great software, I hope that we can help you build a sustainable business that gives you the freedom to do what you love.