One of the first authors to write about the business prospects of free software was Frank Hecker in 1998 with "Setting Up Shop: The Business of Open-Source Software". In his article, he takes four OpenSource.org categories and adds others, analysing them on the basis of:
Which companies implement this model?
What types of licence are appropriate?
What opportunities for differentiation does the model offer?
What opportunities does the model offer to set prices based on perceived value rather than on actual costs?
The table below summarises this classification, adding another characterisation parameter, which, though not expressly mentioned by Hecker, is a key feature: how is the company revenue generated?
Model |
Source of revenue |
Type of licence |
Opportunities for differentiation |
Price opportunities based on perceived value vs. costs |
Cases |
---|---|---|---|---|---|
Support sellers |
Sale of related services (covers all types of services, from custom developments to training, consulting, etc). |
GPL |
Quality, price, and simplifying and improving the user experience. |
Limited. Possible if it has a good reputation. |
Cygnus Solutions Red Hat Caldera |
Loss leader |
Sale of other proprietary products |
BSD or Mozilla |
Based on the product. |
Possible. |
Sendmail Netscape |
Widget frosting |
Sale of hardware |
Based on hardware: functionality, performance, flexibility, reliability, cost... |
Limited. The hardware pricing system is typically based on costs. |
Corel VA Linux |
|
Accessorising |
Sale of physical products (books, etc). |
Product quality (books, etc.) and loyalty from "pro-free software" users. |
Limited. Brand reputation can allow prices to be raised slightly. |
O'Reilly & Associates |
|
Service enabler |
Sale of on-line services provided by the program |
GPL or Mozilla |
Back-end attributes, creation of unique and useful services. |
Possible if a unique and inimitable service is created. |
Netscape |
Sell it, free it |
As a cyclical "loss leader" |
BSD or Mozilla |
Software functionality (while it remains closed). |
Possible until the product becomes an interchangeable asset (at which point, it is released) |
–hypothetical– |
Brand licensing |
Sale of name rights. The version co-exists with the "generic" branded version. |
|
Value added, for example, through additional validation and testing of the non-brand product. |
|
–hypothetical– |
Software franchising |
Sale of franchise and percentage of franchise revenue |
|
As a support-seller and brand licensing |
Possible if it has a good reputation. |
–hypothetical– |
Hybrids (licences are neither free nor pure proprietary) |
Limit code availability: sale of licences under certain conditions |
Trolltech Qt |
|||
User-based treatment on – sale to commercial users |
Open Group |
||||
Treatment based on use – sale for commercial use, or sale for use on certain platforms |
Qt |
In The Black Cauldron, Eric S. Raymond also outlines the role of free software in business, focusing, among other aspects, on how free software affects the "use value" (value as an intermediate product) and "sale value" (value as the end product) of the software, proposing a taxonomy based on which of the two the company exploits.
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For more information, see:
http://catb.org/~esr/writings/magic-cauldron/
For Raymond, only sale value is affected by a free software model, so his classification describes models based on use value and models based on indirect sale value, in which free software makes the sale of another product or service viable:
Models based on use value
Cost sharing (for example, Apache)
Risk sharing (for example, Cisco)
Models based on indirect sale value
Loss-leader/market positioner
Widget frosting
Give away the recipe, open a restaurant
Accessorising
Free the future, sell the present
Free the software, sell the brand
Free the software, sell the content
As we can see, in the models based on indirect sale value, Raymond includes those of Hecker, plus one new one "Free the software, sell the content". In this model, the value lies in the information provided by the software platform, which is the information sold through subscriptions. The software is released, meaning that it can be carried over to different platforms, thus expanding the potential market of the real product: the content.
Though he proposes it only as a hypothetical model, Raymond anticipates the "social website" concepts and paradigm shift proposed by O'Reilly in his article "Open Source Paradigm Shift."
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For more information on "Open Source Paradigm Shift" see:
http://www.oreillynet.com/pub/a/oreilly/tim/articles/paradigmshift_0504.html
However, he does not recognise the role of the Internet as a platform or the subsequent "software as a service", considering that the value of releasing the software will lie in carrying it over to other platforms, thus contributing to its diffusion and market expansion.