4. 3. 2  Services associated with free software

Considering the services associated with free software, there are many possible businesses because, in general, any services model based on proprietary software (such as those discussed in module 3) can be extrapolated to free software in a fairly direct way. All of the steps described in the chain of creating and implementing a technology solution are viable in the context of open applications. However, the use of free software extends the possibilities and differentiation factors of business models focused on services.

One of its basic differentiating principles is the absence of licensing costs, giving it a clear competitive advantage over proprietary solutions. Nonetheless, in order to take advantage of this factor, it is important for the proposed solution to be cheaper in the long run (considering the "total cost of ownership") and to provide a standard of quality at least equivalent to its proprietary competitors. It is also crucial for companies offering free software services to be more attractive to customers by reducing the possibility of lock-in situations: these providers cannot rely on continued income in a situation with captive customers; instead, they must be based on the continued provision of quality services.

On the other hand, just because a software is free, this does not mean that it will be accessible to everybody. The market for service companies will not diminish due to the availability of free applications or those at no cost, since the task of selection, installation, training and support will always be necessary in corporate environments, and it will be more interesting if the licensing budget is spent on improving service.

As a rule, these types of company are involved in various projects, though not intensively in any. Some will contribute, as is the case of platform distributors, with debugging, especially in areas of customer interest, and on the tasks of integration and ensuring compatibility between different applications. Others, such as those that focus on consulting and selection (with no capacity for development), will not contribute to the projects on which they are based, since their work is usually kept private and will not be visible to the public. In these cases, however, a return can be obtained in the form of the promotion and adoption of the solution on which they work.

There is a vast range of possible models in this category (differentiation with respect to size, solution segmentation – horizontal or vertical – industry segmentation, specialisation in a particular service: custom development, selection, consulting, integration, training, etc.), and most companies will offer a combination of the possible services. First of all, we will look at the special features of free software in the different stages of implementation of a technology solution, before turning to the specific typologies of business models, which group certain services in a particular way.

Custom developments

Free software offers companies a compromise on the question of "to buy or to develop". These companies can start with a free standard product and, either internally or through a development company, build the necessary adaptations to suit their needs. Both the service companies that we will look at now and the product-oriented ones we saw previously will receive offers to perform this type of customisation. However, making these adaptations privately, without trying to incorporate them into the master project, can be problematic when it comes to maintaining compatibility between the adaptations and subsequent versions. Hence, working with the community, designing the new features so that they can appeal to more people, and incorporating them into the main code of the project will save a lot of work and complications.

Selection

The presence of a wide range of applications within the (economic) scope of any company makes selection a critical task. Not only will it be necessary to find products that better suit the needs of the client company, they must also evaluate the health of certain projects, the pace of debugging and new releases, and their stability. For corporate environments, a project with a lot of movement and a rapid rate of adoption of improvements may not be the best, since a stable product that will not change significantly over time may be more appropriate.

Installation and integration

Additional reading

D. Woods; G. Guliani (2005). Open Source for the Enterprise: Managing Risks, Reaping Rewards.

Although this phase also generates needs in commercial environments, free software has a special business opportunity in this field: its lack of packaging and final finish. InOpen Source for the Enterprise, Woods and Guliani allude to the concept of "productisation" as one of the main shortcomings of free software for achieving widespread adoption. The term refers to the degree to which the application has been packaged and prepared for end users, with the development of automatic installers, graphical configuration interfaces and sufficiently detailed documentation which, in short, allow for its installation and use by inexperienced users.

As a general rule, commercial software comes more packaged and finished than the free software developed on a voluntary basis. The installation scripts, administrative interfaces and documentation are usually more complete for a proprietary commercial product than for a free software product of the same age. While this lack of product completion is irrelevant for technology enthusiasts – indeed, it can even be more attractive because the adaptation and administration can be more direct and personal – to cross the chasm and reach the corporate client, free software must have a higher degree of packing and finishing. According to Woods and Guliani:

"A broad oversimplification about open source versus commercial software is that open source represents primarily an investment of time, and commercial software represents primarily an investment of money. Any organization setting out to use open source must set aside some time for research and experimentation. "

Dan Woods and Gautam Guliani. "Open source for the enterprise"

This time investment for completing an open-source application or selection of applications offers an important business opportunity both for platform integrators and developers. Hence, a good symbiosis could be established between the private sector and non-profit free software projects in which the investment would be spent on more monotonous work, leaving the more creative and innovative work to the volunteer community while also allowing the simultaneous creation of more mature products that are more likely to attain a high level of adoption.

Furthermore, both the modularity of free software and its coexistence with proprietary systems can generate serious compatibility problems, which require painstaking integration. The generalisation of standards will be beneficial for minimising the adverse effects of combining different software elements.

Technical certification

The inherent features of the finish of free software also allow for the possibility of certification by integrators and external consultants. This can take two forms: certification of compliance with international standards or certification of suitability for specific technology environments. The certifier provides assurance that the package meets a series of requirements and is legally responsible for their compliance.

Hence, the certifier provides an intermediary responsible for a set of solutions, an essential factor for many new technology departments of software consumer companies. Often, when an information technology department arranges support and maintenance, it is not only hiring a method of resolving incidents, but also a person or company to which it can attribute the problems or failures that may arise. The decision to adopt a particular free software solution without intermediaries to offer guarantees puts all of the burden of success or failure on the department itself, which may prefer for the intermediary to assume this responsibility.

Additional reading

S. Sieber; J. Valor (2005). Criterios de adopción de las tecnologías de información y comunicación. IESE.

<www.iese.edu/en/files/6_15211.pdf>

Training

Training can be a source of easy income. In addition to the fact that the open development model makes the information on a product available to everybody, most free software projects lack formal training programs, meaning that anyone can enter the business. Many established companies whose business is training have added free software programs to their offer.

Support and maintenance

We have already seen how support and maintenance services are an important source of revenue for companies engaged in the development of a free product, but they also form part of the offer of companies that only provide horizontal services, as we shall see below.

As we said earlier, the possible range of service companies is vast, with models being developed on the basis of specialisation in certain services, a type of applications, local market or large scale, etc. We will study three typologies in detail. Firstly, platform distributors, as they were one of the first business models implemented with free software and are fairly representative of a number of major companies in the sector. Secondly, we have chosen two examples at either end of the scale: large integrators and small niche micro-enterprises. Between the two, we have the other possible business models, which focus on the provision of services.

4. 3. 2. 1  Platform distribution companies

The activity of this type of company is concentrated on the integration and selection of components to generate a comprehensive software solution. The diversity of applications and results generated by the free software development model requires integrated teams to give cohesion and ensure the compatibility of the parts. This has given rise to the emergence of different distributions developed by different actors. This activity is also an obvious potential business model.

Platform distribution companies use a similar model to application development companies and service providers, but the selection and integration of a broad product base, as opposed to development, lies at the crux of its work.

Companies using this model generate and distribute integrated software packages, mainly for corporate customers. The platform generated is the company's core product, which generates one major problem: product differentiation is very difficult because it is freely accessible.

Besides distributing software under a traditional model through the sale of packaged CDs, these companies often supplement their offer with services such as installation and quality support, often through a subscription system. Their added-value is based on reliability and trust, conveyed by the brand that represents them. They offer to fill in the gaps that a free software product may have for corporate environments, which seek an appropriate, stable and reliable solution – even at the cost of features and performance.

Thus, their potential customers will be medium and large enterprises, which require maturity and stability, professional support and a viable ecosystem of solutions. The investment in software is amortised over five years, so a company that is going to invest in software will need to know that – at least for this period – it will have support for these products. Given the extra costs associated with switching from one technology solution to another, having support that lasts beyond the amortisation period is highly desirable.

Hence, generating trust is fundamental to their business strategy and must include the development of a brand that conveys added reliability to a free software product. Given that their business model is based on a product freely accessible to anyone, these companies seek to develop a strong brand as a differentiating factor that will allow them to gain market shares over the same or very similar products.

Although these companies do not usually focus on the development of specific applications, they do often contribute to projects that they draw on by debugging, and develop new products only when necessary to expand the market for their product.

Red Hat

The archetypal example of a platform distributor is Red Hat, Inc., and this is also the model followed by Novell with SUSE, Canonical with Ubuntu, and Caldera Systems with Caldera Linux.

New distributors

New distribution companies have recently emerged, offering more specialised software bundles for more limited markets. SourceLabs, SpikeSource and Wild Open Source are examples of such initiatives. SourceLabs, for example, offers certified collections of software usually used together, such as Linux, Apache, PHP and MySQL. Wild Open Source, on the other hand, customises distributions for use in high-performance contexts or embedded systems. Along with the certified bundle, the companies offer maintenance and support services for their selection, just like traditional subscription companies.

The main challenge for this type of company will be to define software collections that are wide-ranging enough to maintain a sufficient customer base while being able to provide support for all elements in the bundle.

Corporate data on SpikeSource, Inc. Prepared with statistics from Hoovers (http://www.hoovers.com)

Company name

Spikesource, Inc.

Head office

Redwood City, CA. (United States)

Website

www.spikesource.com

Creation date

2003

No. of people employed in 2006

80

Turnover in 2007 (million)

SpikeSource is a representative example of the business potential generated by the lack of finish of free software products. Set up in 2003 by one of the most important venture capital firms of the Internet boom – Kleiner Perkins Caufield & Byers – SpikeSource launched its first products in April 2005. In October 2006, the company announced its expansion into Europe through a network of local solution providers and technology partners.

Murugan Pal, founder, summarises the company's activity as follows:

SpikeSource's goal is to facilitate the adoption of open source software in the enterprise through testing, certification and support services. We innovate, automate and optimize advanced testing techniques as part of our core competency."

(Murugan Pal. "Participatory Testing: The SpikeSource Approach". http://www.oreillynet.com/pub/a/network/2005/04/07/spikesource.html)

As differentiating factors with classical integrated solution distributors like Red Hat, the company highlights its efforts to promote testing automation and its combination of specific applications that can be installed on different platforms and operating systems. It includes versions for different operating systems, both free and proprietary, and incorporates closed software in some products.

In addition to its bundles, such as SpikeWAMP-1.4, which includes the latest versions of PHP, MySQL and Apache (for Windows installation), and "SuiteTwo", which integrates a wide range of embedded collaborative applications, and "Web 2.0" features, it recently launched a platform for developers on which they can test and integrate their applications, thus obtaining SpikeSource certification and a better software finish (productisation) as a result.

The work of this type of company can be very positive in increasing visibility and promoting the adoption of free software solutions, and SpikeSource has tapped into this. The company makes great efforts to show that its work benefits the free software community – and that it does not simply exploit it – by including well-known figures from the world of free software, such as Brian Behlendorf and Larry Rosen, on its advisory committee as endorsements. It has also developed a website for developers (http://developer.spikesource.com), where it offers its automated testing services for integration and compatibility on various platforms.

Nonetheless, the automation software used by the company combines parts that have been released with parts that remain closed. In this case, reserving a portion of the code is a strategy to protect its differentiation and keep competition from comparable services at bay. This decision reveals that rather than losing revenue from licensing (which, as we have repeatedly seen in this subject is not a real obstacle), the use of free software affects the company's possibilities of differentiation – and hence, business. In the case of SpikeSource, the effort invested in its testing applications will be rewarded not by the sale of licences for this software but by the protection of its differentiating factor from other companies offering similar services.

4. 3. 2. 2  Large integrators

Large systems integrators or solution generators are one of the types of company that stand to gain the most by basing their business on free software, given the direct cost savings, and the subsequent possibility of reaching more customers.

Clients usually look for companies that can provide solutions to an information and communication technology (ICT) problem and are not concerned with implementation details. A complete solution will combine hardware, software and services, making the process easier for the customer, who need only contact a company to solve its ICT problems and not have to worry about compatibility between providers. Therefore, everything that the company can save on software costs by using free software can be transferred to the costs of services, which will enhance the solution. The company can slash prices to increase its potential number of customers, or simply enhance its profitability. This type of large integrator, which generally works on complex projects, can maintain its prices due to the barriers to the entry of other competitors.

The figure below illustrates this situation, outlining the demand curve for comprehensive solutions and provider costs.

There are many consulting and selection firms, including Ayamon, Enomaly, Navica, OpenLogic, Optaros and X-tend. Large integrators include IBM, Sun and HP.

Corporate data on IBM. Prepared with statistics from SoftwareMagazine (www.softwaremag.com) and Wikipedia.

Company name

IBM

Head office

Armonk, NY

(United States)

Website

www.ibm.com

Creation date

Its origins date back to 1896. In 1924, it changed its name to IBM

No. of people employed in 2007

394,540

Turnover in 2007 (million)

$91,423

Twenty years ago, IBMwas one of the strongest advocates of intellectual property rights for software. Its argument was that without strong copyright protection, there would be no incentives for companies to invest in software development.

Now, although it has retained the bulk of its proprietary software, IBM has launched major campaigns in support of free software, offering considerable financial contributions to the development of Linux and other applications, and the release of applications such as the Eclipse development platform and part of its AIX operating system.

IBM's current business model focuses on the sale of high-end hardware, proprietary software on Linux and the provision of integration services for corporate clients. Although IBM has been one of the world's leading software manufacturers, its programs have usually been marketed as a combined solution with its own hardware. As a result, the company has little to lose from lack of differentiation in the software that it uses: given the barriers to competitor entry in mainframes, the use of low-cost software allows the company to cut its prices and extend its range of customers without undergoing a loss of differentiation that would significantly increase its competition.

Thus, its use of Linux allows IBM to offer a lower overall price for its hardware and services, while also providing a common platform on which to build and sell applications and special services. Along these lines, we can also mention the savings made by the company through the use of an operating system with wide prior adoption – in marketing, distribution and sales terms – as well as the reduction in risk and investment in development. Moreover, the public image benefits obtained have also been significant.

Naturally, IBM's free software activity involves a more complex strategy that affords it a better competitive position on several fronts. From strategies based on the use of free software to enhance the marketing of its proprietary products (such as "loss leaders" and free kernel plus proprietary accessories) to gaining a better position than other big software providers.

The use of free software has given IBM more independence than other large companies, such as Microsoft, and a better position over direct competitors like Sun. The latter has, for a long time, based its business strategy on the combined sale of hardware plus "better than average" operating systems and would therefore have more to lose in the event of cost-cutting and the presence of equivalent low-cost software.

4. 3. 2. 3  Software services: small and micro-enterprises

Another basic phenomenon sparked by free software is the transfer of knowledge and technology. Investments in training, development and technology, both on the scale of large companies and at individual level, is available through developments that are open to anyone with an Internet connection and a certain knowledge.

This phenomenon can have a major impact on technology transfer between countries that are more or less developed, and internally, between large multinationals and local micro-enterprises.

The possibility of free access to both the code and decisions on design and development offers great potential to small technology companies, which can be in contact with and adopt the most innovative technology backed by large financial investments.

Given their size, these companies generally base their activities on specific niches and require only a few customers to stay in business. The possibilities of market segmentation are endless, but one common factor is that of closer and more personalised attention (many customers prefer to be the big customer of a small business than a small customer of a large multinational).

The more relevant companies of this nature include those that base their differentiation on the use of free software not only for the benefits we have mentioned thus far, but as a statement of intent, as yet another element of a business logic that seeks not to accumulate profit but to generate self-sustaining livelihoods through the provision of services that contribute to the development and well-being of society.

The inner workings of these companies also often reflect this philosophy and approach to business, based on horizontality and transparency. Interestingly, Spain's legal framework provides for a concept of business substantially aligned with what we have described: worker cooperatives, in which there are no financial backers and the workers themselves manage and control the company.

Again, the concept of business ethics is neither new nor unique to free software but takes on a special meaning in this type of company. Often, these small businesses form groups through different types of networks, which is a key strategy for encouraging support and cooperation between them, in line with the ethical and political principles on which they are based.

A considerable proportion of the potential customers are other companies with similar operating principles, organisations with social or political motivations, and government bodies.

Examples of this model include several Spanish companies with a similar type of operation, which have been uniting in the Ikusnet group (http://www.grupoikusnet.com/) under the following principles:

"Our methodology is based on cooperation and 'horizontality' in making and implementing decisions, to the extent that the mode of cooperation itself becomes a productive force that seeks to deliver its effects in the framework of the information and knowledge society."

We can also mention the Madrid-based cooperative Xsto.info (http://xsto.info), a micro-enterprise with less than ten workers. Born at the heart of social movements, it was established as a worker cooperative in 2003. This choice of legal form is, like the use of free software, a statement of intent regarding its operating principles, which are complemented by the website, in line with the following motto:

"There is still time to take part in this social transformation to ensure that it occurs in a participatory, open, free and democratic way".

Among its customers we find local authorities such as Parla City Council, and various types of association, including the Federación Regional de Asociaciones de Vecinos de Madrid (Regional Federation of Neighbourhood Associations of Madrid).

Another very representative example, particularly interesting given its age, is Easter-eggs, which we will now discuss in detail.

Corporate data on Easter-eggs. Taken from its website (http://www.easter-eggs.com)

Company name

Easter-eggs

Head office

Paris, France

Website

www.easter-eggs.com

Creation date

1997

No. of people employed in 2007

15

Turnover in 2006

€800,000

Easter-eggsis a French SME with a consolidated track record that provides services for free software. Founded in 1997, it offers a wide range of services, from the installation, administration and security of GNU/Linux systems to the adaptation of applications and custom developments and consulting, auditing and training. The company offers services for older free software – and still looks healthy: profitable from the moment it was created, it now employs fifteen people and obtained a turnover of €800 thousand in 2006. Its clients include the René Descartes University of Paris (http://www.univ-paris5.fr/) and Europcar, for which it implemented a GNU/Linux migration programme in 3,500 of its agencies.

For the company, the decision to provide services for free software was based on ethical rather than financial principles, and these principles are also what led it to define a very unique method of business operation. In a manner similar to that of the operation of Spanish worker cooperatives, Easter-eggs is fully and solely controlled by its employees. There are no venture capitalists or foreign investment of any sort. An association was set up to implement this organisational system, the Association of Easter-eggs Employees (http://www.easter-eggs.org), which holds a 99.8% stake in the company.

These were the foundations on which Easter-eggs built its business differentiation, defining itself as a "social company" with a central concern for creating a "citizen-based company" that responds to the growing aspirations of citizens who are beginning to realise the limits of consumerism and demand that companies act with purpose. Its operating principles include financial transparency (its accounting records are available for download from its website: http://www.easter-eggs.org/rubrique_10_Comptabilite.html), equal pay and mechanisms for the involvement and co-responsibility of its employees.

As part of its strategy to create networks and bring together small, socially-responsible businesses to provide services on a larger scale and as a method of joint promotion, in 2002, the Easter-eggs association created the libre enterprise network (http://www.libre-entreprise.org), which encompasses approximately sixteen French companies offering free software-based services, all with similar business models.