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Online Music and Open Source Business Models

Let’s take a look at our friends in the online music space and see what we can learn from them

In this part of our series on An Open Source Business, let’s take a look at our friends in the online music space and see what we can learn from them.

The Deal recently had an article about online music startups which should strike a chord with anybody who’s thinking about or trying to make a business out of open source.  Look at what they had to say:

“huge numbers, lots of hype, a surfeit of hope and a major chance of failure… some of the business models are inherently economically unfeasible… It’s completely unsettled and more and more fragmented…The rules of the industry and the economics of the industry have completely changed…Technological advances offer more and more delivery mechanisms, user options and wizardly new features…However, just who can make money off all this is almost as uncertain now as it was five years back…Everyone is gambling there will be a way to monetize distribution of recorded music, But no one has come up with the solution…Last year’s great hopes are this year’s busts.”

Sound familiar?  It should.  In a nutshell, open source business models share the same strategic problem that these online music startups have: how do you make any money when most of what you provide is available for free? Let’s look at the ways:

Free the Software, Sell the Services
Just about every commercialized open source project follows this business model.  The software is free, but the developers charge for services such as support, training, customization, and software development.  Sometimes the services are “productized” into manuals, seminars, installation CD’s, and packaged support, but the idea is the same.

This model works well…to an extent.  For example, we’re the main developers of opentaps Open Source ERP + CRM, and we’ve found that users are indeed willing to engage us for opentaps-related services because of our experience and knowledge with the system.  However, we’ve also found that users are willing to hire us mostly for customizations which are unique to their needs.  We’re still responsible for the architecture and user interface of opentaps ourselves, and that’s why since the release of opentaps 1.0 we’ve invested in everything from integrating Spring, Hibernate, and the Google Web Toolkit to building a Domain Driven Architecture.

Like the Free Version?  Please Pay Us for Even More!
Many open source software developers, and virtually all open source software companies funded by venture capitalists, engage in the “commercial/open source” model.  An open source edition is available free of charge to attract potential users, and a fancier commercial version is available for pay.

This is not an easy business model.  Let’s go back to music as an example.  I like Pink Floyd, but if you gave me The Dark Side of the Moon for free, would I pay you for Ummagumma, The Final Cut, and every other song by Pink Floyd?  No, I wouldn’t.  (Another example is travel: how many people actually pay for First Class?)

But perhaps the best evidence that this is a difficult business model comes from the commercial open source companies themselves.  Compared to a few years ago, their websites are de-emphasizing the open source version (sometimes you really have to look even to find the download page), and their “community edition” licenses are increasingly restrictive.

Nevertheless, I think this is a model which could be very successful if two conditions are met:

  1. You must have a very large open source user base.  Think MySQL.
  2. You must segment that user base carefully and identify the unique needs for your “enterprise edition” product.  The need must be fundamental — a little bit of eye candy and a few cool features alone won’t be enough.

Be careful, though: if you execute this model incorrectly, you could easily lose the goodwill of your open source users and unwittingly give away a viable commercial product for free.

The Alchemy of Open Source
There is a famous story of the Stone Soup, where many free ingredients came together to make an amazing finished product.  Lest you think it’s just a fable, Red Hat and Ubuntu do exactly that–they’ve combined major open source projects such as Linux, Gnome, Apache, Firefox, Thunderbird, OpenOffice, and MySQL and built major businesses from them.

This is the business model we’ve chosen for opentaps so far.  We’ve built opentaps from major open source projects such as Apache, Funambol, Google Web Toolkit, Jasper Reports, Pentaho, MySQL, PostgreSQL, and too many others to name here.  We’ve had to be patient at times, but over the years, we’ve grown as all those other projects have matured.  Amazingly enough, these open source projects have put us years ahead of many commercial ERP systems technically and enabled us to build opentaps sustainably, so that we now have a fully integrated ERP and CRM system with business intelligence, ecommerce, and mobility integration without any VC funding.

But this is not an easy business model to execute.  You must be willing to understand other open source projects and have the technical ability to work with them.  Most importantly, you need patience.  With this business model, you are growing with the community of open source projects.

In the End . . .  Just Make it Better
No matter what business model you choose, ultimately you’ll succeed if you make technology easier and better for your users. In the online music world, there actually has been a great success story — iTunes.  They’ve done it by making downloading music easy and fun.  So learn from them.  If you can make software easy and fun, you will be successful.  Next to a great product, the business model is just a footnote.

In the next part of An Open Source Business, we’ll take a look at marketing strategies for open source software.

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More Stories By Si Chen

Si Chen is the founder of Open Source Strategies, Inc. and Project Manager for opentaps Open Source ERP + CRM (www.opentaps.org).