Wednesday, 15 April 2009

Startups, Open Source and Revenue - Myth vs Truth

Many believe that if you release your software product with the source open, any customer can procure it, better it and sell it thereby eliminating you in the market outright. This is one of the frequent arguments against opening source code and therefore to "Open Source" that many businesses quote.

I believe they will need to cite a case here. Buy Product Once, Get Source and Kill; sounds too easy to be true.

Actually I have source code of some game engines released by id software, and I know gaming companies who compete who have this, yet, I don't see anyone killing "id". I also have pieces of OpenSolaris and OpenStorage from SUN. IBM shouldn't have even made that $7b bid after expressing interest in OpenStorage among other areas from Sun.

I could even do this with "proprietary software" where source is offered whenever I pay (a much smaller sum than net worth of a company.) There are tons of companies who are willing to part with source for higher costs.

Sun wouldn't have "bought out" Virtual Box and MySQL if they could just use the source instead. Buying Out is one of the available "exit strategies" for a cash-strapped startup.

Clearly someone has to prove that Redhat's profits have dropped because Canonical and almost everyone else who has taken on pieces of code has cut into a static pie of consumer market. The truth is software markets are closely linked to a lot of other markets including service markets. These markets grow or shrink dynamically. The whole pie however depends on user base which has been constantly expanding.

For OpenOffice, I think resurrection of Lotus with the OpenOffice source is proof enough that an entirely different company used this. Transgaming's Wine is open-source except for a portion of the DirectX (not all of it) libraries. You could potentially run your own company and beat them, or a "Giant" can have them without buying source. Transgaming emulates Windows libraries on Unixes (starting with Linux and now on Mac OS X.) Does an Apple certified vendor or Apple actually sell proprietary Microsoft Windows Games support? (Not to my knowledge.)

Revenues: Eric Raymond probably has a few tips. Product Engineering outfits do widget frosting, the model that's simple to understand. Some "violate" Open Source citing that they cannot make profits; on similar arguments raised here. Savings as revenue is an oft cited case. Today it is far more relevant. If your cost to create something is potentially reduced you can reduce the price a customer has to pay while you still make a profit.

My former employer did buy software for incorporating into products. My former employer is a profitable product company. However, because we could not modify one small piece of the bought-in black box (with no possibilities to acquire source at any cost) we just had a 25% increase in development life-cycle. That was "Loss." We decided never again to consume anything from "closed source" companies as it potentially created black boxes of uncertainty within our own products.

Open Source is not Free(dom) Software always nor is it Free (Beer.)

Source code (which is open,) is a more primitive formal expression of the binary format of the product which is re-usable and easier to modify than the binary format of the product.

The binary format (executable files) of many products can also be reverse engineered. (Remember Borland!? They did not advocate Open Source but where caught up with Sidekick.) This is also easy for a heavy-weight as opposed to a smaller group.

Myth: "Open Source makes a startup vulnerable to acquisition."
Truth: "Low on Cash makes anything vulnerable to acquisition."

Myth: "Open Source companies suffer a handicap while trying to make revenue."
Truth: "Companies unprepared to serve their customers suffer a handicap while trying to make revenue."

Time, the press stopped incorrect interpretation of Open Source as non Revenue Generating.

Watch this video (at youtube) for Guy Kawasaki's take on "Revenue from Open Source" and "Open Source enabling Startups."