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OSS Business Models …Touch & Go. Ren é F. Reitsma Jan. 25, 2007. OSS Business Models Overview. OSS & Business: a love/hate relationship? Revenue side: OSS businesses: Hecker’s/OSI’s four OSS business models. Hybrid & complex models: e.g. , SAP/IBM. Does the market buy it?

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OSS Business Models…Touch & Go

René F. Reitsma

Jan. 25, 2007


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OSS Business Models Overview

  • OSS & Business: a love/hate relationship?

  • Revenue side: OSS businesses:

    • Hecker’s/OSI’s four OSS business models.

    • Hybrid & complex models: e.g., SAP/IBM.

    • Does the market buy it?

  • Cost side: Businesses using OSS:

    • Cost accounting issues.


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Do OSS & Business ‘go together?’

  • OSS is collectivism/ideology/cult…all and any of which are bad for business:

    • Threat to free enterprise.

    • Cooperation inferior to competition.

      • Ignores peer review (Raymond, The Cathedral & the Bazaar).

  • Rejection of intellectual property rights:

    • IP protects property & investments.

    • Threat to innovation.

  • Direct threat to proprietary vendors.

    • Linux/OSS as a ‘disruptive’ technology.

    • Halloween documents (Microsoft, 1998).

    • Steve Ballmer (Microsoft, 2001): “Linux is a cancer that attaches itself in an intellectual property sense to everything it touches”


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OSS & Business: From Free to Open

  • 1984 – 2007: Richard Stallman & Free Software.

  • 1998: Open Source Initiative:

    • Free software does not sit well in the business community.

      • Free-of-charge cannot possibly be good.

      • Ideology-driven software is suspect.

    • Raymond: “Stallman’s wholesale attack of intellectual property in software… is lousy marketing.”

    • “We realized it was time to dump the confrontational attitude that has been associated with "free software" in the past and sell the idea strictly on … pragmatic, business-case grounds…”

  • “Open Source” stuck.


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(F)OSS & Business

  • Richard Stallman (1984): GNU Manifesto: “Programmers need to make a living somehow.”

    • “A manufacturer introducing a new computer will pay for the porting of operating systems onto the new hardware.”

    • “The sale of teaching, hand-holding and maintenance services could also employ programmers.”

    • “People with new ideas could distribute programs as freeware, asking for donations from satisfied users.”

    • “Users with related needs can form users' groups, and pay dues. A group would contract with programming companies to write programs that the group's members would like to use.”


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OSS Business Models

  • Late 1980s —1990’s: OSS Businesses established

  • Frank Hecker (1997—Netscape):

    • Netscape Source Code as Netscape Product.

    • “if the business benefits of releasing source code outweighs the benefits of keeping it private, then companies should seriously consider whether, when and how to release source.”

    • Introduces several business models.

  • Business Models (http://www.opensource.org/advocacy/case_for_business.php):

    • Support sellers. Sell services for OSS users:

      • Cygnus Solutions (founded 1989; merged with Red Hat Inc. in 1999).

      • Red Hat Inc.


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OSS Business Models… Cont.’d

  • Loss leader. Give away something to sell something else:

    • Adobe reader, FrameMaker reader, Authentic (Altova), IE, Netscape Communicator, etc.

    • Is this a marketing rather a business model?

  • Widget frosting. Sell hardware, make it attractive with OSS utilities, drivers, etc.:

    • VA Linux (now VA software).

    • IBM/HP workstations.

  • Accessorizing. OSS accessories:

    • O’Reilly & Associates Inc.

    • ThinkGeek.com… taken over by Andover.net… taken over by VA Software.


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OSS Business Models… Cont.’d

  • Multimodel & hybrid model companies:

    • Linuxcertified Inc.:

      • Support.

      • Linux laptops—what model would this be?

      • Training (support seller).

    • International Business Machines Corp.

      • Rethinking the current IP systems & business approaches.

      • Customers want Linux on their IBM machines.

      • Sell system design & development & turn-key solutions.

        • Systems themselves can be open source.

        • OS is open source.

      • Support third party vendors such as SAP on Linux & IBM.


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OSS Business Models… Cont.’d

  • Larry Augustin (VA Software, SugarCRM, MedSphere, etc.)

    • Compressing the cost of the computational stack:

      Apps; e.g., SAP

      Servers (Web, database, etc.)

      OS

      Hardware

  • Cost savings (not a real business model)

    • CUPS (Common UNIX (Cisco Universal?) Printing System).

    • DEC accounting system.


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OSS & the Market… Volatility

  • Red Hat Inc.:

    • Founded in 1993, Raleigh, NC; 1740 employees, worldwide.

    • IPO: 1998 (NYSE, RHT).

    • Fiscal 2007 3rd Quarter:

      • Revenue: US$105.8M (45% up year-over-year).

      • Subscriptions: US$88.9M.

      • Net income: US$14.6M; 7% of revenue; US$0.07/share.

      • Share price: ≈ US$22.

      • P/E ratio ≈ 80 (IBM ≈ 20; Microsoft ≈ 21; Google ≈ 50).

      • Volatility… What causes the big swings?

  • What about VA Linux/Software (LNUX)?


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OSS Cost

  • Businesses create income in two basic ways:

    • Increase revenue and/or lower cost.

  • Big question: does using OSS lower your IT cost?

    • OSS world: yes! — Proprietary world: no!

    • No generally accepted OSS cost accounting practice.

    • Assignment: three Linux vs. Windows cost accounting studies:

      • Cybersource (2004): Linux wins.

      • Gartner (Yamamoto Krammer, 2005): Windows wins.

      • Yankee group (2005): Windows wins.

    • Describe and critique the cost accounting methodologies of each of these three studies.


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OSS Cost… Cont.’d

  • Cybersource: Explicit cost model:

    • Advantages:

      • Explicit (theory-based) cost model.

      • Can be individually modified.

      • Separates cost structure from cost amounts.

    • Disadvantage:

      • Validity of the model.

      • Equivalence among alternatives? (e.g., SQL Server vs. MySQL).


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OSS Cost… Cont.’d

  • Cybersource: Explicit cost model:

    • Advantages:

      • Includes explicit cost model.

      • Can be individually modified.

      • Separates cost structure from cost amounts

    • Disadvantage:

      • validity of the model.

      • Equivalence among alternatives? (e.g., SQL Server vs. MySQL).


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OSS Cost… Cont.’d

  • Gartner/Yankee: Opinion survey, non-structural cost model:

    • Advantages:

      • Provides a ‘community’ or ‘average’ view.

      • Easy to collect.

      • Intangibles (security; reliability; freedom!), easy to collect as opinions.

    • Disadvantage:

      • Poor correspondence between ‘average’ and an individual firm.

      • No real cost model; independent cost categories & ‘importance’ weights


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OSS Cost… TCO Woes

  • Yankee Group (p.2):

    “…more than 50% of the respondents said that they had performed a thorough TCO analysis. But when asked to calculate their specific Linux & Windows capex and maintenance costs,… 75% could not answer explicit questions.”

    “The absence of such crucial financial information makes it difficult for corporations to make informed purchasing decisions and it heightens the risks when choosing technologies that are ill suited to their business needs.”


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