Successful Free Software Businesses

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Tim O'Reilly
Oct. 27, 2002 04:14 PM
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A thread from last month on the Free Software Business mailing list, entitled Successful FSBs re-emerged the other day.

Back in September, I had responded to a question about whether O'Reilly could be considered a "free software business", and argued for more inclusive definitions than were being bandied about on the list, suggesting that free software advocates look at various types of allied businesses that depend on free software.

Stephen Turnbull wrote:

There is a sort of Laffer curve for definitions. If they are too strict, the applicable cases are too few, and only academic specialists are interested. I'm certainly biased in that direction; I both try to correct for it and admit it explicitly on a regular basis. But if they are too weak, then everything qualifies and S/N goes to pot as everybody jabbers about what interests them in terms they have more or less private definitions for.

For example, Tim says he wants to include Amazon, which clearly has unnecessarily chosen the proprietary road on occasion (Amazon wins on title coverage, economies of mass purchase, and stock management including fast delivery; "one click" ordering just isn't that big a deal).

I replied:

FWIW, I didn't say that Amazon was *now* an FSB. I *did* say that any definition of FSB that ipso facto excluded exploration of google, yahoo!, amazon, and host of ISPs as FSBs was prejudicing the very question that the thread was purporting to ask: what can would be entrepreneurs learn from "successful FSBs."

The tragedy, I've argued, is that amazon, google, et al don't consider themselves FSBs and act accordingly. And for me, "accordingly" is explicitly and judiciously engaging with open source projects they depend on, NOT making everything they do open. And of course, it's an even greater tragedy that folks thinking about what makes a "successful free software business" are arguing about who's pure enough to be considered rather than trying to understand what really works and how.

It is my belief that the most successful business models for FSBs come from the use of the software to deliver software services, not from its resale, or from the resale of supporting goods. The ISP market is the clearest example of this model, in which companies charge a monthly fee for access to services based on free software (Bind, Sendmail or equivalent, Apache, and various elements of the TCP/IP stack). But by extension the concept applies to companies leveraging free software further up the service stack. There's a huge amount to be learned from studying such companies, including the kinds of margins you can get from services built on commodity software (vs. from proprietary software that isn't shared by competitors.)

I believe firmly that the economic message of free software is to develop business models that assume relatively fungible commodity software, and to get your money from services based on that software. The challenge is to understand whether (or when) you get your marketplace advantage from an additional layer of proprietary software, and when you get it from things external to the software itself. (By analogy, in the hardware market, Dell gets its advantage not from unique proprietary extensions to commodity hardware, but from economies of scale, superior logistics, and the lower cost structure of its direct sale business model.)

Even worse than when the companies that ought to be seen as part of the free and open source ecosystem are disregarded is when the natural business model of a piece of free software is signed over wholesale to a hostile monopoly. I'm thinking of Verisign/Network Solutions. Running domain name registration services *is* the natural business model for BIND, but no one in the FS business realized it until too late. If FS advocates had been thinking more about software as service, we would have avoided the whole ICANN fiasco, and had a competitive domain name registration system based on commodity free software.

Of course, it's also true that domain name registration wouldn't be as profitable for a host of players as it is for a single monopoly player (even now with regulated competitors nipping at the edges), but that's beside the point.

I keep hammering on this point because I think that software as service *is* the future. We're moving into a world in which software that runs on a single isolated platform is going to be the exception rather than the rule. Almost all software will have an online service component. Microsoft completely gets it. What was Passport but an attempt to create identity services? MyServices had a whole host of forward-looking services. But Microsoft is having trouble getting traction, because they think like a monopolist, and the market has seen that movie before, and doesn't like the ending. (But Microsoft will be back, hopefully with a more open version, but it will likely still not be as open as many of us would like.)

To my mind, anyone who wants to think about "successful FSBs" should be thinking about the range of services that will be part of the future "internet operating system" and what businesses could be built on those services. Go study .Net and the MyServices vision, and ask yourself how many of those components are mirroring things that are already out there as free software. While the free software pundits are arguing over who is an angel allowed to dance on the head of this pin, we are fortunate that there are individual developers building software that does look forward to the future.

For one example, take a look at a proprietary company like groove, which is building various kinds of groupware services--not just software, but the services that make that software work, such as management and synchronization of an "XML cloud"--and ask yourselves whether similar services could be built, say, on jabber, or even Apple's lightweight rendezvous/zeroconf framework.

Or take a look at Ping Identity Services (http://www.pingid.org/) and other folks trying to build digital identity alternatives to Passport. They aren't "free software" per se, but they are fellow-travelers who ought to be engaged in the discussion.

I then quoted Stephen (from his previously linked post):

I agree with [Tim] that Amazon wins if the best platforms are all free, but this is a matter of pissing in everybody else's soup. The point is to make sure that nobody steals a march on you by introducing a much better platform than yours, not that Amazon has a core competence in use of platforms, much less development. But Amazon is basically an ASP, and they want to keep the software concerning their core competences private. To the extent that that integrates with OSS they've pulled in, they are _not_ going to contribute back to the community, and in fact they probably don't want their developers to participate in the community.

and replied:

That's actually not true. The developers there are very open to working with outsiders. I've been working that angle for some time, and making connections for them. But I won't argue your basic point.

Stephen again:

Like Tim himself, Amazon is in the business of relying on IP---it distributes it. Unlike Tim (AFAIK), proprietary IP is also a core competence (I would assume, and their IP strategy indicates that they think so). This is an FSB? I think not.

And my reply:

I agree that Amazon is in the business of relying on proprietary IP, but so is Collab.Net. I'm sure that neither qualifies as an FSB by the narrow definitions espoused here. But there should be a definition that understands more nuance than has been shown in this discussion. For example, even a company like Red Hat, which most people here would (I think) qualify as an FSB, relies on proprietary IP. They get a significant fraction of their revenue from training. Are their training materials all under the GPL, and circulating on the net, able to be used by competing "Red Hat" trainers? I think not. In the end, I think you'll find very few "pure" FSBs.

I would suggest a set of categories, perhaps something like this:

• Company relies on free software for the majority of its revenue and espouses free software ideology and thinks of itself as part of the F/OSS community.

  Examples: Red Hat, LinuxCare, VA Linux (the latter two included for historical reasons)

• Company relies on free software for the majority of its revenue but disregards free software ideology.

  Examples: Uunet and other ISPs

• Company relies on free software for the majority of its revenue but is actually hostile to free software ideology.

  Examples: Verisign/Network Solutions

• Company relies on free software and additional proprietary software or other IP, and thinks of itself as part of the F/OSS community even though not all its software is free.

  Examples: Collab.Net, Sleepycat, Aladdin, O'Reilly

• Company relies heavily on free software and additional proprietary software, but disregards free software ideology and doesn't think of itself as part of the F/OSS community.

  Examples: Google, Amazon, TiVo

• Company leverages free software strategically because it benefits from commodity software, and proactively engages with the F/OSS community even though it gets most of its revenue from other sources.

  Examples: IBM, HP, (Apple), (Sun)

• Company leverages free software strategically, tries to learn lessons from the free/open source software model, but depends on proprietary software or other proprietary IP for the heart of its business model.

  Examples: Microsoft, (Sun)

• Company uses proprietary software model to deliver services, but might be able to leverage open source model to improve its business.

  Example: AOL (Mapquest and AIM (not to mention the core AOL service) are both Microsoft targets, and I predict that both will fall because of AOL's go-it-alone strategy, whereas if they were to embrace at least open standards, and perhaps F/OSS, they could stay ahead of the game.)

  By studying the strategies, successes, and failures of companies in each of these categories, it might be possible to develop some useful advice for would-be free software entrepreneurs. And more importantly from my point of view, we might get more allies and supporters in the fight to keep the next generation of computing open.

  That's my real agenda. I'm convinced that free and open source software have built an amazing open computing platform (i.e. the internet) but that many free and open source advocates haven't thought through where that platform goes next, and the consequences of failing to get people who are building components of that platform to think about their indebtedness to the free/open source software ecology.

In a posting slightly later in the thread, I then wrote:

I've been saying for years that the shift towards commodity software (whether free or just open standards) would lead towards a new paradigm in which money was increasingly made on services. (At one point I was calling it infoware, now I'm saying web services and 'the internet operating system', but the point is similar. People don't pay for the software, but for the services the software delivers.)

This led to an insightful followup by Ian Lance Taylor and more from me.

I won't quote from these latter pieces since they go off in a new direction, debating centralization vs. decentralization, but feel free to go the the archive and follow the thread

 

Tim O'Reilly is the founder and CEO of O'Reilly Media, Inc., thought by many to be the best computer book publisher in the world. In addition to Foo Camps ("Friends of O'Reilly" Camps, which gave rise to the "un-conference" movement), O'Reilly Media also hosts conferences on technology topics, including the Web 2.0 Summit, the Web 2.0 Expo, the O'Reilly Open Source Convention, the Gov 2.0 Summit, and the Gov 2.0 Expo. 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's long-term vision for his company is to change the world by spreading the knowledge of innovators. In addition to O'Reilly Media, Tim is a founder of Safari Books Online, a pioneering subscription service for accessing books online, and O'Reilly AlphaTech Ventures, an early-stage venture firm.

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