Originally Published: Tuesday, 23 May 2000 Author: Matt Michie
Published to: featured_articles/Featured Articles Page: 1/1 - [Printable]

Better Business Models for Open Source?

An extraordinary amount of time has been spent analyzing various open source business models. The business models that have been adopted so far have been: selling support, selling the software, selling documentation, or bundling with physical products. With a couple of financial quarters behind them, how are the Linux companies doing? Do the numbers show any model being clearly superior?

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An extraordinary amount of time has been spent analyzing various open source business models. The business models that have been adopted so far have been: selling support, selling the software, selling documentation, or bundling with physical products. With a couple of financial quarters behind them, how are the Linux companies doing? Do the numbers show any model being clearly superior?

It is difficult to get a good handle on how well each strategy is currently performing. The Linux industry is still very new, and most companies have adopted several of the models. However, this article will attempt to give the reader some perspective on the current status on each company and which models they are using.

One of the most talked about strategies for making money on free software is to sell support and services. There seems to be a trend in the entire software industry to move to this business model. Since Linux is freely downloadable, this seems like a good strategy. Businesses want to know that there is someone available who can respond to technical problems. Managers seem to sleep better knowing they can call someone when stuff starts to hit the fan.

IBM is probably one of the most looked to leaders in the support and services model. In the first quarter of 2000, IBM drew in $7.6 billion of revenue from its service division. The Linux company which positioned itself most directly in this market is Linuxcare. Unfortunately, Linuxcare appeared to have some management troubles and had to cancel their IPO as well as lay off some staff. It is tempting to draw some conclusions about this business model when applied to Linux, but it would be unfair to attribute Linuxcare's problems to the business method.

Red Hat also has positioned itself in the services model, although it also sells a boxed copy of its software distribution. In the latest quarter ending February 29, 2000, Red Hat had $13.1 million total revenue, with 37% or $4.9 million coming from services. Interestingly, although trying to strongly position itself in the services/support model, RHAT generated more revenue from selling the packaged distribution. Though compared to SCO, whose support accounts for only 5% of revenue, RHAT seems to be doing okay so far.

Another Linux company selling packaged distributions is SuSE. Their distribution is most popular in Europe. In the most recent figures I could find, they generated $5.0 million selling their software in fourth quarter 1999. To gain some perspective, OS/2 Warp long heralded as a "dead OS" generated over $100 million of revenue over 5 quarters for IBM! Obviously, Linux sales are growing at a higher rate than OS/2, but it is interesting that sales of OS/2 could generate more revenue than Red Hat or SuSE has seen to date.

The company most widely known for selling documentation for free software is O'Reilly & Associates. Since the company is privately owned, there are no public financial figures. However, the company has been in business since 1978, writing manuals for open software since 1984. This suggests that writing quality documentation is a very workable business model. It seems reasonable that ORA has seen their business grow with the advent of the Linux movement.

The final business model is bundling with something physical such as hardware. This is the primary business model of VA Linux. Revenues for second quarter of 2000 were $20.2 million with only 1.5% or $300,000 coming from professional services. This business model seems to be working well for VA Linux. To date this has generated the most revenue within the Linux sector. Even more interesting is the small percentage coming from services.

So far, the often touted services model doesn't seem to be generating much revenue for Linux companies. Selling distributions seems to be better, but actually selling hardware or documentation seems to generate more revenue at this time. The Linux market is still quite young, and it is likely we'll see growth in all of these models. We can probably expect to see other business models appear as the market matures.

Probably the companies that end up with the most revenue will use some hybrid of several of these. Hopefully, the Linux sector will continue to grow and we'll see the public companies start to make a profit.

Matt Michie is a Computer Science student living in New Mexico. He maintains a small web page at http://daimyo.org.





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