Secrets of Successful Free Software Businesses

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Tim O'Reilly
Sep. 29, 2002 09:34 AM
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Over the past few weeks, there has been a running debate on the free software business mailing list over what makes a successful FSB. A lot of the discussion has focused on rules for excluding this business or that, such that only "pure" FSBs qualify. I've found this discussion fairly frustrating, since it a priori eliminates the pragmatism that can in fact make a free software business successful.

From my point of view, this discussion came to a point in a recent exchange that I had with Stephen Turnbull, the maintainer of xemacs, and a frequent contributor to the list.

Stephen wrote:

    I think it pretty unlikely that someone would choose to focus on free software as a "core competence" unless they (a) like to handicap themselves, just to prove they can really do it, (b) have a core competence in software that is already free (and presumably somewhere upstream there is a Type (c) somebody), or (c) they're doing it for ethical or lifestyle reasons.
I replied (and don't I wish that I could make some small edits -- a benefit of blogs over mailing lists -- but apart from formatting, this is as dashed off in email):
    But I don't think that free software is a handicap, even in business. It's a strategic advantage, when applied strategically! It's a handicap only if applied dogmatically.

    This is my whole point to the list: the secret of being a successful FSB is to use free software where it's appropriate, and not to use it where it isn't, and to understand the dynamics of the markets it creates.

    Free software and open source tend to:

    1. Fill niches where commercial vendors haven't yet identified a market. (This is my alpha-geek argument). Hackers build tools that vendors don't yet supply. When the market gets big enough, vendors go after it with tools that make it accessible to a wider audience. If the vendors were blind long enough, then the free software may have become too widespread to displace, in which case the dynamic below kicks in.

    2. Commoditize markets. (The open design of the IBM PC is an even better example than Linux, which hasn't yet succeeded to the same level.) In commodity markets, brand, being the lowest cost provider, and supply chain management become more important advantages than controlling IP.

    3. Allow people versed in computers to share information more easily, lowering the barriers to entry and advancing innovation. This is open source as the late 20th century equivalent to the long tradition of scientific publishing.

    These are the three most important dynamics around free software/open source. RMS's postulated ethical imperative to let users modify the software they use is really a subset of my third point above, but to my mind, a far less useful one.

    There are a couple of conclusions I'd draw from these three principles if I were starting an FSB:

    • If you're trying to leverage principle #1, you can run a nice cottage business staying ahead of the big guys, surfing the wavefront of innovation.
    • If you're trying to leverage principle #2, scale matters.
    • If you're trying to leverage principle #3, you're probably not doing this strictly for business purposes (unless you're in a business that has product derived from knowledge flow, like I do).

Tim O'Reilly is the founder and CEO of O’Reilly Media Inc. Considered by many to be the best computer book publisher in the world, O'Reilly Media also hosts conferences on technology topics, including the O'Reilly Open Source Convention, Strata: The Business of Data, the Velocity Conference on Web Performance and Operations, and many others. Tim's blog, the O'Reilly Radar "watches the alpha geeks" to determine emerging technology trends, and serves as a platform for advocacy about issues of importance to the technical community. Tim is also a partner at O'Reilly AlphaTech Ventures, O'Reilly's early stage venture firm, and is on the board of Safari Books Online, PeerJ, Code for America, and Maker Media, which was recently spun out from O'Reilly Media. Maker Media's Maker Faire has been compared to the West Coast Computer Faire, which launched the personal computer revolution.

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