Case studies

Many open-source advocates are entrepreneurs. As many of you know, open source has already produced its first round of millionaire techies with Red Hat's initial public offering. RedHat assembles and tests the thousands of parts that compose a Linux distribution, selling the CDs and installation support through retail channels. The company also sells support and consulting services to corporate Linux users and distributors. The RedHat IPO is special in that recognized open-source developers had the opportunity to get their share of the deal through eTrade's online brokering service. Other companies, such as Turbo Linux, are working eagerly to get on the same train as RedHat.

VA Research has made it to the end of the rainbow by selling pre-configured hardware, as well as support and consulting services to help make the most of open-source software, especially Linux. VA Research is reportedly one of the fastest-growing companies in the US. There are several other large companies and many smaller ones that provide services like those of RedHat and VA Research.

Companies like O'Reilly make money selling printed versions of open-source documentation, and publications like Linux Journal, Linux Magazine, and other printed and web-based publications feature articles about Linux and other open-source software, profiting from the sale of ad space. Some of these publications become desirable acquisitions because of their large reading audiences. Such is the case with *Linux Today*, an online publication featuring a collection of Linux news headlines drawn from the printed and online press. The business was acquired last month by the larger internet.com. At five million page views and 400,000 users per month, Linux Today meant business.

There are many other examples of businesses profiting in various ways from open source. News of startups, acquisitions, and IPOs arrives at an almost daily rate. You can check out *Linux Today* to keep informed.

In their own words

"But those are entrepreneurs," you might object. "What about the programmers? Are they profiting from open source?"

Well, I sought a couple of them out for comment. I caught Greg Wilkins of Mortbay Consulting Ltd. just before he left for a vacation trip. Greg is author of the feature-rich and very successful Jetty, an open-source Web, Servlet, and JSP server written in Java. (Note: I've contributed both code and advice to the development of Jetty.)

I asked Greg if Jetty was contributing to his company's revenues and, if so, how.

"Jetty contributes very little directly to our revenues -- a few support contracts only. However, there is a big payback in terms of our consulting work," he replied. "It is a great reference and an excellent introduction to our work, and that keeps our down time to a minimum. But the big payoff comes from our work on projects using Jetty, for which we receive full consulting rates -- in London and Sydney, that's 25 to 75 percent higher than normal contracting rates."

I also asked Greg why he had decided to make Jetty open-source, and what had been the net business effects of that decision.

He told me that he had written Jetty as an entry to the original Java programming contest sponsored by Sun, and that it had won the Australian prize. For a few years his company reserved the rights to commercial use. As a consulting company, though, it had neither the resources nor the motivation to become strongly product-oriented.

"We decided that the best way to profit from Jetty was to make it as widely used as possible," Greg confided. He said this allowed them to get assistance with its maintenance and they believed its quality would improve through community involvement. Greg added, "And we were right. Jetty has easily paid for itself many times over."

I also approached Chad Hower of Phoenix Business Enterprises, with whom I had recently had an e-mail conversation. Chad is the author of the Winshoes open-source set of Internet components for Delphi. I asked Chad the same questions I'd asked Greg.

"Marketing developer tools is very hard," Chad told me, "especially those targeted at single-vendor development environments like Delphi. There is easier money to be made elsewhere. Winshoes, like other projects of mine, was more a product of need and love of programming than anything else. There were no good Internet components for Delphi when I wrote Winshoes."

Chad felt that trying to market Winshoes would have been risky. His time, he explained, was better spent at what he did best: software development. Having nothing to lose, he made Winshoes opensource as an experiment. What has happened since has far exceeded his initial expectations. Winshoes has brought the company many contract offers, as well as frequent requests for Internet consulting work.

"Many developers just sit on code like this," Chad observed. "I encourage them to make the sources open and see what happens. There's nothing to lose, and a lot to gain."

Greg and Chad are using open source as what some call a "loss-leader": something that you give away to enable further business opportunities. Along similar lines is Digital Creations, a "web solutions" company which built its success on the full-featured applications server currently known asZope. Feeling some growing pains, Digital Creations decided to go after a little venture capital. Finding an investor was surprisingly easy. Even more surprisingly, the investor recommended making the flagship product open source. Digital Creations' value, he suggested, was its know-how. The company concluded that making Zope open source could only open new doors for them -- and it did.

Show me the money!

But those are all entrepreneurs. They're not programmers, are they?

Yes and no. Most of the entrepreneurs behind the companies I've mentioned are open-source programmers, though I'd bet that they currently don't get the chance to hack as much as they did in the past. What you really want to know about is the guys actually pounding out the code, right?

Companies such as RedHat routinely recruit open-source programmers to enhance different aspects of Linux. Because these enhancements go back into the pool of shared open-source code, the direct advantages RedHat gets from them are short-lived. The indirect advantages derive from participation in the larger market that the enhancements help to create. RedHat and others seem to believe that these advantages outweigh the costs.

O'Reilly funds open-source software and software documentation efforts, and hires or contracts open-source software developers to serve as writers and technical editors. Writing and publishing books of their own is another source of income for open-source developers.

All of the companies mentioned above have technical positions staffed with open-source programmers.

Not that open-source developers have much trouble landing programming jobs. Having your name and e-mail address listed in the credits of the Linux kernel, a hardware driver, or a file system implementation seems to be a much better reference than a well prepared résumé -- you may even skip the cover letter. The jobs that these programmers seek and get are frequently compatible with their open-source work.

And don't rule out private funding as a source of income. Who would give money to a bunch of hackers to pound out software that will ultimately be available for free? The answer is companies that get more value out of open source than what they invest in its sponsorship. One such case is the Apache project, started and still funded by a group of Internet Service Providers (ISPs). The group wanted an efficient, reliable, and cost-effective HTTP server whose development they could at least partially control. Universities are also among the institutions funding open source; it helps them reduce costs, and they benefit academically as well.

Last but not least are the cooperative open-source initiatives like sourceXchange and CoSource. These start-ups call themselves "open-source marketplaces." They provide an online infrastructure to connect open-source programmers with those interested in sponsoring open-source projects. Any party -- company or programmer -- can either propose an open-source project or sponsor one by committing a certain amount of money. Programmers respond with proposals for the projects they want to take. Ideally, the process will result in cooperative funding for interesting projects and payment for programmers, all under the constant supervision of the marketplace. All software produced goes back to the shared pool as open source. It's a whole new way of software contracting; we've yet to see were it will lead.

Software: a service industry?

It takes little research to discover that the question is not who's making money from open source, but who isn't. With royalties out of the question, those involved in open-source software have found innovative ways of profiting, either by providing some sort of value-added services or by making important savings based on open source. And new ways of making business out of open source are being invented every day. | Open-source evangelist Eric Raymond -- who became well known for his disclosure of Microsoft's Halloween documents, and is now famous for his analysis of open-source culture in The* *Cathedral and The Bazaar -- has written a new paper analyzing the economics of open-source software. In this paper Raymond proposes that software is "largely a service industry operating under the persistent but unfounded delusion that it is a manufacturing industry," and that the "use value" of software far exceeds its "sale value," as evidenced by the large percentage of software created for in-house use versus the very small percentage written to be sold as merchandise.

Some of you may mistrust Raymond's views because he's patently within the open-source inner-circle. Perhaps you'll find Steve Ballmer, president of Microsoft, more convincing. "Literally, if you go out seven to 10 years from now, not only our business but every software business will have to remake itself into what I call a software service company," Ballmer predicts in a recent interview with CNN Financial.

In the same interview Ballmer also mentions that Microsoft was considering "a modified form of open sourcing" that would allow their customers access to some code. This would let the customers "try to solve their own problems." (Not that Microsoft "customers solving their own problems" is anything new.)

Is the move away from royalties and into value-added software services something fueled by the open-source movement? Or does the so-called friction-free economy of the Internet have anything to do with it? Will the changes only affect programmers involved in commercial software, or do corporate programmers also need to re-evaluate their situation?

Drop me a line with your thoughts at juanco@inpublishing.com.