Free- and Open Source Software Business Models: A Marketing Approach

Transcription

1 Free- and Open Source Software Business Models: A Marketing Approach Dr. Shermin Voshmgir Information systems Department, Vienna University of Economics Augasse Wien, Austria shermin.voshmgir@wu-wien.ac.at Abstract Software industry has two business models: (i) proprietary software, and (ii) free software (FS) respectively open source software (OSS). Business Models for proprietary software development are well defined and easy to understand. They result from pure economically oriented behaviour of business players. The case is much more difficult for F/OSS. Cost and revenue structures of product development differ to a large extent from proprietary software development. Community based innovation and product development has more an evolutionary character than a planable one. Furthermore, the makers of F/OSS focus on technology rather than on the business aspect of their work, which results in great information asymmetries about what open source really is on the buyer side of the market. There is an obvious lack of ex-ante well defined business models for F/OSS. Thus, the aim of this research is to analyse open source software from a business point of view. Key aspects of F/OSS market will be analysed: (i) Total Cost of Ownership, and (ii) Information Asymmetries. Based on these aspects a marketing decision framework for F/OSS business models will be introduced. 1 Introduction Proprietary software is based on the idea that software is a commodity: Selling as many licensed copies as possible, thus obtaining highest possible economies of scale, and maximizes profits. For further maximising profits, new versions are released on a regular basis, even if systems are imperfect (i.e. have security flaws or other bugs). In a quasimonopolistic market, as is the case for desktop operating systems and office software tools, the consumer has no choice but consume and pay. Things are very similar for standardized business software. The case is different for Free Software (GNU.org) or Open Source Software (OpenSource.Org 2002a). F/OSS software in the past have evolved because programmers wrote software to solve specific problems they happened to be facing, or to scratch their personal itch (Raymond et al. 2001). Since the code was open, and distribution free, many programmers got to work on the code. From a user s point of view, in many cases it would make sense to use open source products, but there are many misconceptions about what open source really is. It is assumed to be a hacker thing; the program comes for free or at very low costs, but then what? Will there be any support? Who is liable? What licensing model apply and which consequences do they

2 have? These information asymmetries concerning open source result from the fact that open source players focus more on technology than on the business aspect of their work. That comes naturally with the hacker mentality. The success story of open source products like Linux OS or Apache Web Server is slowly changing the prejudice of many buyers, but pre defined business models are crucial for efficient communication with buyers. The problem with a business model is the need for strategy. Strategy bridges the gap between the ends (goals) for which the firm is striving and the means (policies) by which it is seeking to get there (Porter 1986). Porter (Porter 1996) furthermore argues that strategy is about competitive position, about differentiating yourself in the eyes of the customer, about adding value through a mix of activities different from those used by competitors. Thus, strategy is both about planning and positioning. The problem with strategy, on the other hand is, that it needs to be defined ex ante. It is easy to describe the Linux project ex post; but was it ever planned as what it turned out to be? Probably not. It was more a community based innovation that excelled with quality of work and with the motivation of developers. Many FS and OSS projects in the past have not been strategically planned by defining business models, they rather evolved over time. In some cases they did so very successfully not only from a technical perspective but also in terms of market share. F/OSS projects have been very successful, so why not try and systematically set up open source projects rather than leave it to chance and time? The question is Is there a viable F/OSS business model that can be planned ex-ante like for proprietary software projects? Thus, a differentiated look at F/OSS projects is necessary. The remainder of this paper is organized as follows. F/OSS Research is reviewed in section 2, giving a brief overview of current business model descriptions. Section 3 analyses key aspects of the F/OSS market (i) total cost of ownership of software, and (ii) information asymmetries on the buyer side of the market. Section 4 describes the marketing approach to analysing the F/OSS market for possible business models. Conclusions and implications for further research are discussed in section 5. 2 Current Research Many economist have devoted work to research question concerning Opens Source Software. Feller et al. (Feller et al. 2000) provide a good general overview of OSS with their framework analysis and give an outlook on research questions yet to be discussed. Economic character of open source products as public good has been analysed by Kollok (Kollock 1999) and Raymond (Raymond et al. 2001), by asking questions like Do corporate users contribute code back? and analysing the problem of free riding. Human resource practices and community product development have been analysed by Yamauchi et al. (Yamauchi et al. 2000). Shah (Shah) discusses the different motivations and behaviour of OSS developers. Other studies have analysed open source software adoption criteria from the buyers perspective (Wang 2001). Pros and Cons of security aspects of OSS have been analysed by Witten et al. (Witten et al. 2001). Little work has been devoted to questions regarding Business Models for Open Source Software. Only very descriptive business models have been publicly discussed from an ex post perspective (Hecker 1999; OpenSource.Org 2002b; Raymond et al. 2001): (i) Support Selling: revenue comes from media distribution, branding, training, consulting, custom

3 development, and post-sales support instead of traditional software licensing fees. (ii) Loss Leader: a no-charge open-source product is used as a loss leader for traditional commercial software. (iii) Widget Frosting: applicable for companies that are in business primarily to sell hardware but which use the open-source model for enabling software such as driver and interface code. (iv) Accessorizing: companies which distribute books, computer hardware and other physical items associated with and supportive of open-source software. (v) Service Enabler: open-source software is created and distributed primarily to support access to revenue-generating on-line services. (vi) Brand Licensing: a company charges other companies for the right to use its brand names and trademarks in creating derivative products. (vii) Sell It, Free It: a company's software products start out their product life cycle as traditional commercial products and then are continually converted to open-source products when appropriate. (viii) Software Franchising: This is a combination of several of the preceding models (in particular Brand Licensing and Support Sellers) in which a company authorizes others to use its brand names and trademarks in creating associated organizations doing custom software development in particular geographic areas or vertical markets, and supplies franchises with training and related services in exchange for franchise fees of some sort. These types of business models are very descriptive and have no methodology that uses common criteria for assessing of describing those models. 3 Key Aspects of F/OSS Business Models A business model is architecture for product, service and information flows, including a description of the various business actors and their roles. Furthermore it analyses and describes the potential benefits for various business actors, to validate feasibility of a project success and describes the sources of revenue. F/OSS Products, as well as the needs and demands of potential buyers are diverse. This diversity needs to be examined in detailed from different aspects:(i) Total Cost of Ownership: analysis of cost structure from buyer s perspective; (ii) Information Asymmetries on the buyer side of the market. 3.1 Software Costs from a Buyer s Perspective Depending on the type of software, costs structures will differ, resulting from 5 cost aspects: (i) Cost of licence: here it is important to consider costs for future software upgrades as well as hardware upgrades. F/OSS can often use older hardware more efficiently than proprietary, yielding in smaller hardware costs and sometimes eliminating the need for new hardware (Wheeler 2002); (ii) Cost of Customisation: Highly standardized product like typical office software have no need for customisation. Less standardised products like SAP etc. need more customisation to meet the demands of customers; (iii) Training costs depend on complexity and novelty of software; (iv) Support Costs depend on licensing agreement i.e. the costs included in the licence, as well as competition on the support market; (v) Opportunity costs result from lack of sufficient training, poor software support, or poor software performance as regards to security, flexibility, and scalability aspects. License/Upgrade Costs Customisation Costs Training Costs Support Costs Opportunity Costs Figure 1: Cost structure of Software (Total cost of Ownership)

4 3.2 Information Asymmetries The author believes, that great information asymmetries exist with the persons within companies who make the software purchasing decision. There are many terms like free software, open source software, shareware, freeware, etc. which are easily confounded. (i) Do decision makers know the exact definition of F/OSS? (ii) Do they know about the different licensing schemes and their legal implications? (iii) What kind of positive or negative prejudice exists towards open source? (iv) Do decision makers consider the total cost of ownership of F/OSS when purchasing rival proprietary software? (v) How important are brand name of a software and liability aspects? Based on these core questions a questionnaire is being developed to find out whether and to what extent information asymmetries exist. The result of this survey will be integrated in the business model decision framework presented below. 4 Marketing Framework for F/OSS Business Models Is F/OSS possible for any software development project? When can it be a successful? What are the factors that determine success of an open source product? The marketing approach presented here can help answer these questions, by trying to identify the critical success parameters of a software product. Three categories of the decision framework exist: (i) type of software; (ii) type of customer; (iii) critical success factors from a marketing perspective. The first two categories are permanent. The third category varies depending on the marketing aspect analysed (product, price, place, promotion). 4.1 Category 1: Type of software The first question that needs to be answered is: What types of projects are suited for OSS development? Category 3: Critical success factors (4 P s) Category 2: Type of Customer User oriented Software Operating Systems Server Programms Security Software Tools Category 1: Type of Software Figure 2: First category of F/OSS business model decision framework: Type of Software

5 Thus, it will be necessary to take a differentiate look on what different categories of software exist. This is particularly important as different types of software have different cost structure, from a buyer s perspective Considering the costs aspects outlined above, 5 software product categories are identified: (i) User oriented Software: anything from office software to business applications; (ii) Operating systems; (iii) Server Software, (iv) Security Software; (v) Software tools: They differ from other software applications to the extent that they tend to be small and are intuitively to use software programs (i.e. image viewers, zipping tools, etc.) 4.2 Category 2: Type of Customer The second aspect of the decision framework is about differentiating the type of customers. (i) (ii) End-user - customers that consume: are individuals who use software for private, noncommercial purposes. Typically, they have little technical knowledge, buying power and market knowledge; Customers that consume and develop: this is the case for companies, or agents of these companies. This type of customer has higher buying power and might have higher technical knowledge (applies to bigger companies with IT departments). Individual developers are a subset of this category. They have better IT knowledge than end-users, high market knowledge but less buying power than companies. Category 3: Critical success factors (4 P s) Category 2: Type of Customer End-user customers that consume Companies customers that consume & produce Individual Developers customers that consume & produce Category 1: Type of Software Figure 3: Second category of F/OSS business model decision framework: Type of Software

6 4.3 Category 3: Critical Success factors As stated above, a business model needs to analyse and describe the potential benefits for various business actors. This can be done best by taking a look at F/OSS from a marketing perspective. (i) Product: here it will be discussed what complementary products or services can be offered. i.e. books, trainings, consulting, customizing, and support; (ii) Price: this aspect is important to decide upon the pricing strategy of an F/OSS project. Possible strategies are skim the cream pricing, good value pricing, penetration pricing, and for free (iii) Promotion: advertising, sales promotion, personal selling, public relations; (iv) Place: Download, retail, distance selling (physical), magazines and periodicals. (Kotler et al. 2001). The examples of the critical success factors are by far not exhaustive. Category 3: Critical success factors (4 P s) Category 2: Type of Customer Promotion Place Price Product Category 1: Type of Software Figure 4: Third category of F/OSS business model decision framework: 4 P s Taking a look at Product, we have seen in the past, that even if the F/OSS comes at no costs, or low costs, there are still possibilities to make business with F/OSS. The software comes free with the code, but third party vendor or service companies like Red Hat Linux sell their value added services; in particular by modifying the source code to the needs of customers, as well as providing training and consulting services. The first two categories are permanent. The third category varies depending on the marketing aspect analysed. The next chapter will exemplify the decision framework analysing the critical success factor Product with its four occurrences described above.

7 5 Examples for a Decision Framework F/OSS products will be analysed for each software type (category 1) and each type of customer (category 2). The types of products listed above are secondary products to the primary product F/OSS. Books are any sources that help understand, work with, or modify a certain software. They can be purchased in retail, via web (for free or for royalties). Trainings can be anything from online to offline. Support can take place in many form: web, helpdesk, or user-to-user support. Customizing and Consulting can be offered before and during implementation. The parameters in the boxes indicate the quantity of existing products on the market: Many: big quantity and wider variety of products. Moderate: moderate quantity of offers, no oversupply. Little: some products/services are offered, but very little selection. End-user customers that consume Books Training Customizing Consulting Support User oriented Software many many moderate many Operating System many many many many Server Software many many Moderate many Security Software many moderate Moderate many Tools many moderate Little moderate Figure 4: Assessment of existing products on the market for End-users Books: Private customer can chose from a wider variety of offers from books (with fee and for free). OSS Books are available for free via Internet or can be purchased from many online shops or retailers; i.e. Linux Info Center offers all books via links from its own website. Trainings are offered for pretty much any software type. Depending on previous level of knowledge The costs of such trainings do not differ much from trainings for proprietary software. Consulting and Customizing: Usually third party service providers like RedHat or SuSE offer such services. Private customers usually do not need such services, as the software they use need little adapting. Support: Many Third party service providers offer a wide variety of support possibilities. Online for more general requests, and an advanced support service for special requests, with call-back possibilities.

8 Companies consume & produce Books Training Customizing Consulting Support User oriented Software many many many many Operating System many many many many Server Software many many many many Security Software many many many many Tools many moderate moderate moderate Figure5: Assessment of existing products on the market for Companies Books: Corporate customers using F/OSS buy books to enable their employees, understand, work with, and modify F/OSS products. Online versions of boos, are probably more a complementary product. The most important publishing company for F/OSS is O Reilly. Trainings: There are many possibilities for corporate customers to consume trainings in the OSS field. As stated above, prices are similar to those for proprietary software. Costs are not prohibitive, if companies really want to further train their employees. Consulting and Customizing: Some companies offer full service consulting an customizing, i.e. CoreBiz, a service of Linux Information Systems in Germany. Most corporate customers are small and medium sized enterprises and tend not to have highly specialized IT personnel. Thus, outsourcing of these services is the only way for such companies to work with F/OSS. Therefore consulting and customizing services are vital to F/OSS penetration. Support: A big variety of support services exist for F/OSS products. Anything from: productive level, emergency call-back, software support for business solutions, groupware server, development support, etc. Individual Developers consume & produce Books Training Customizing Consulting Support User oriented Software moderate little many little Operating System moderate moderate many moderate Server Software moderate moderate many moderate Security Software many many many many Tools moderate little moderate little Figure 6: Assessment of existing products on the market for Individual Developers

9 Books: The quantity of relevant literature for individual developers is probably not very big, since they have very good IT know-how and often need very special information, that cannot be found in general books produced for the mass market. Information flows very much online via online communities, and in discussion groups: General information via Internet, professional journals, and books have complementary character. Trainings: This type of customer is not likely to attend many trainings, since they usually have the knowledge, or are used to self-study. Consulting and Customizing and Support: individual developers are the group of users who are most likely to modify the source-code, thus the need of consulting and customizing is almost non existent. In case of support needed, they will most likely try to contact other developers vial mailing lists for support. 6 Conclusion and Outlook Since licensing schemes of open source software differ widely from proprietary ones other ways of generating revenues and profits need to be found. Doing this successfully requires selecting a suitable business model and executing it well. The business model approach presented in this paper can also be applied for any kind of software. Since F/OSS products do not generate mayor revenue streams with licence fees, other aspects need to be considered. The three dimensional matrix depicts the different parameters that one needs to consider when trying to implement a viable F/OSS business model. Further research is needed to ask other questions like. Which F/OSS business models are sustainable in the long term. How can F/OSS business face the tremendous developmental and marketing difficulties to approach late adopters and not stick to only early adopters. 7 References Feller, J., and Fitzgerald, B. "A Framework Analysis Of The Open Source Development Paradigm," International Conference on Information Systems 2000, Brisbane, Australia, 2000, pp GNU.org "GNU Project web server," Free Software Foundation, accessed , Hecker, F. "Setting Up Shop: The Business of Open-Source Software," IEEE Software:January/ February) 1999, pp Kollock, P. "The Economies of Online Cooperation: Gifts and Public Goods in Cyberspace," in: Communities in Cyberspace, P. Kollock (ed.), Routledge, London, Kotler, P., and Armstrong, G. Principles of Marketing, (9 ed.) Prentice Hall, OpenSource.Org "Open Source Initiative," accessed , 2002a.

10 OpenSource.Org "Open Source Initiative," 2002b. Porter, M. Competitive Strategy Harvard Business School Press, Porter, M. "What is Strategy?," Harvard Business Review: Nov-Dec Raymond, E.S., and Young, B. The Cathedral and the Bazaar: Musings on Linux and Open Source by an Accidental Revolutionary O'Reilly & Associates, Shah, S. "Advancing the Research Agenda on Opens Source." Wang, H. "Open source software adoption: A status report," IEEE Software), Mar/Apr Wheeler, D.A. "Why Open Source Software / Free Software (OSS/FS)? Look at the Numbers!," accessed: , Witten, B., Landwehr, C., and Caloyannides, M. "Does Open Source Improve System Security?," IEEE SOFTWARE:September/October) 2001, pp Yamauchi, Y., Yokozawa, M., Shinohara, T., and Ishida, T. "Collaboration with Lean Media: How Open-Source Software Succeeds," ACM Conference on Computer Supported Cooperative Work (CSCW2000), Philadelphia, 2000, pp