If you’re going to do something, do it well
I’ve been thinking a lot lately about open source business models. The project I’m most often associated with, Elgg, developed a business some two years after the project itself was founded. Now that I’m considering a new project, I’m exploring what it might mean to create an open source model that has a business model baked in from day one. Not as a loss leader or the engine for a consultancy company, but as the core of a scalable business that turns a profit proportionally to the popularity of its end-user product.
An image problem
Particularly on the web, open source isn’t cool anymore. For a while, in around 2004-2006, the success of projects like WordPress and Firefox meant that new, web-based open source projects were coming out fast and strong. The former arguably gained its market share after Movable Type, previously the market leader in blogging, imposed an ill-conceived commercial license. Five years later, although new projects like StatusNet and Diaspora are getting headlines, and WordPress is going strong as the basis of at least 12% of all websites, most new open source efforts are on behind-the-scenes technical infrastructure like CouchDB and node.js.
Furthermore, open source in general faces a demographic problem. Only 1.5% of open source contributors are women, for example, compared to the already questionable 28% in mainstream software.
Yet off the web, end-user open source projects are growing, often in conjunction with a strong business model: think Ubuntu, Android, Boxee et al. However, on the web, WordPress’s parent company Automattic is the only company I can think of that’s significantly bringing in revenue (estimated to be $30-40 million annually, and breaking even).
I believe in open source, but I also believe that for open source projects to be sustainable, they need to be able to fund their developers and be emotionally rewarding. I think there’s a place for a friendly open source project that’s both accessible to new users, and to the kinds of people who would not ordinarily contribute, while both turning a profit and having a good time.
Routes to success
There are a bunch of different commercial open source models out there. Here are a few, in increasing order of commercial viability:
- Donationware. Some projects solicit donations from their users, charity-style. Although this may result in a few hundred dollars here and there, it’s not going to make a significant contribution to payroll; people mostly won’t pay for something unless they absolutely have to. Asking for donations bases your business on goodwill alone.
- Advertising. Think Firefox, which makes around a dollar per user per year from its integration with Google search. Products like Vuze also contain advertising. For stand-alone apps, products like OpenCandy can bring in real cash. Open source web apps, however, are very easy to edit and customize. While that’s a strength and a net positive, it means that adverts – perhaps embedded into an admin system, for example – are very easy to remove. Once again, you’re reliant on goodwill, unless the advertising is present on the open source project’s community site. Elgg has a page where users can find third-party hosting, and makes money from affiliate links. Meanwhile, many have forgotten Matt Mullenweg’s foray into search engine spam before WordPress settled on a business model, which speaks more to the difficulty of making money with open source than Matt’s ethics. (Automattic is a great company, and he’s proven himself to be a great guy.)
- Consultancy services. Many projects provide tailored customization features to individual customers. This can be profitable, but isn’t particularly scalable: because each customization or advisory report is bespoke, your potential profit is capped by the number of human-hours your team can put in. Effectively, you become a digital agency, with your open source product acting as a way to draw attention to yourself. Think of your software as a fridge. If GE had to design a new fridge for each customer they had, they’d never make any money, and fridges would cost $100,000. Instead, they design a fridge once and sell hundreds of thousands of them for $500. Fridges scale; bespoke consultancy does not.
- Freemium hosting. This is the model used by WordPress, StatusNet and others: allow anyone to create a free, hosted account, and charge for professional extras like analytics features and support. Determined, technically savvy users can still download and install the software themselves (this site runs WordPress on my own server), but using the commercial offering is often a simpler, more sustainable way to go. This is a slow burn, but WordPress has shown that if you create a product with enough critically reliant users, it can work.
- Physical, commercial products. Boxee sells an actual set-top box in conjunction with D-Link, which is doing well. Android is a red herring here: while it certainly sells phones, with the exception of Google’s Nexus range, where the company presumably takes a cut, the operating system is provided for free to handset manufacturers. The real money comes through search advertising.
What’s the right path?
I’m not sure there is a correct solution for open source web projects – except to avoid #1 and, preferably, #3. Here’s what I’m thinking at the moment:
Open source projects are continually bombarded with feature requests. Fundry, the crowdfunding site for software projects, is very interesting to me as a platform for these, and as a contributory business model for open source development. The site allows users to add new feature requests and back them with money. The development team can then choose which ones to undertake. The core team would probably have to seed the Fundry page with a number of features to begin with, but with a little momentum I think it holds some promise. It’s also a great way for community members to practically contribute without creating code, documents or designs.
However, that alone is unlikely to allow anyone to eat (particularly looking at the current level of funding pledges – at the time of writing, Fundry itself has only managed to raise $128).
Another model might be to outsource the hosted freemium service, in a way that’s tightly integrated with the open source community site. A potential user might visit the project site and see a great big “create your site” button; on clicking that, they are led to a third party (or given a choice between third parties). An affiliate commission would be provided by the chosen service provider.
Commercial support services are a viable option, and can be deeply embedded both into the project site and the software itself (as a clear “get support” button). Commercially hosted value-added services, like Automattic’s Akismet anti-spam service, are another.
Most likely, a commercially successful open source project will use a combination of these. But what do you think? Is there a glaringly obvious open source business model that most projects have missed? And does profitability have a place in the open source movement to begin with? Let me know in the comments.
10 responses to “Making money with open source”
Don’t forget an “App Store” (hopefully i’m not breaking Apple’s attempt to patent that yet). Building a product that others can extend and sell parts for, which you create a central repository and take a cut of.
Personally, I think #3 sounds like the most interesting way to make money from your project. You get to think of new ways to utilize your project to fit someone else’s needs that may have never occurred to you otherwise.
I’m not sure how the first of your suggested solutions differers from the consultancy/services model which (we both agree) is undesirable – except that you get less money, it is arguably less scalable, and opens a thorny ownership can of worms should the project accept any community patches / partial patches (I can see this one issue alone killing a project unless it is VERY carefully managed from the outset).
Equally the commercial support option is in effect consultancy, which doesn’t scale.
The app store model is nice, if you’re the guy who controls the platform and can act as gatekeeper. For the individual we’re in the world of long tail pocket change here, and if the price is high and/or the platform is in any way open it is all to easy to bypass the gatekeeper altogether.
You should talk to Dries from Drupal. He’s doing very well with Acquia, as far as I can tell, and he’s thought a lot about this.
Great post, it’s good to see the options developers have laid out and discussed openly.
Being able to distribute an application (whether desktop or web) and turn it into “…the core of a scalable business that turns a profit proportionally to the popularity of its end-user product” is what we help developers do and exactly what excites and motivates the OpenCandy team. Nothing better than being able to make a living doing what you love.
Best of luck on all of your ventures and be well!
Hey Ben, where do you think that Moodle’s business model or Magento’s business model lie? Don’t they both use different options than the five that you list? I am also interested in your thought on this book: http://www.economist.com/node/17899970 (and the slightly off-putting Economist review).
Why not try to build a successful web site based on your open source software and use ad revenue from the site to contribute back to the project? For open source software such as Elgg – designed to run web sites – this seems like a good model to me, even if creating a popular web site is easier said than done.
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Thanks for the great blog article. Why do you have to choose one? Choose many options!
I’ve tried the first two options before (donations & adware/ads), but it was impossible to make any real money. Donations are too difficult for many people to get approved in struggling small to mid sized companies, unless the employee takes from their own pocket (more often than you might think). Yet, from what I’ve seen, people from socialist countries usually donate more often than Americans. It’s still difficult to put food on the table.
Number three is probably the most profitable for me, but is a hell of a lot of work. On the other hand, working on special customizations of an open source project has often lead me to additional enhancements I never thought of. This improved the open source project and only one company paid for the customization. Many people then were rewarded with the extra enhancements. Yet, this source of income has a limit and soon runs out of steam, leaving you guessing on what’s next.
Option four, Freemium hosting, seems an interesting concept – especially the service based approach. Software as a service (SAAS) has showed some serious potential. I’m currently looking at this option for a popular open source application I developed over 10 years ago that just doesn’t seem to ever end.
I know this article is old, but I am at a place where I am asking myself these questions, especially since it pertains to educational software. Out of the list above, if you want it to remain open source and lucrative, I think #3 is the best option. Nevertheless, I agree that it is not the best option and you will run out of steam if you don’t have a team to support it. But great thoughts on the subject nonetheless.
[…] Great comments on this older piece about how to make money with open source: http://benwerd.com/2011/01/12/making-money-with-open-source/ […]