The Economics of Open Source Software




Picture this:
You walk into a restaurant, take your pick from the menu, and enjoy a nice meal. When it comes to paying the bill, you are billed less than 30% than usual and what’s more you are provided all the secret recipes & instructions for preparing the cuisine back home. While your head is reeling wondering if this were a dream, you are told that the food you just ate was prepared by chefs’ free-of-charge :-)

It has baffled me as to how the very premise of ‘software product’ business vis-à-vis ‘source code’ is made available ‘for all’ and how there is an ever increasing number of individuals & corporations ready to devote time & energy to build and share ‘source code’ ‘free of cost’. This article is an attempt to understand how the ‘Open Source’ software philosophy has evolved and what motivates individuals & corporations to embrace ‘Open Source’ in various forms (read as different licensing  models).

Today almost all large & medium software corporations have a ’play’ in the ‘Open Source’ community in some form. It is interesting note how even Microsoft (predominantly ‘EULA’-based product business model) have been compelled to go ‘Open’.

In a nut-shell how do ‘Open Source’ products/companies generate revenue?
·       Providing integration, hosting & support services (Acquia)
·       Selling subscriptions to updates and support (Red Hat)
·       Embed the software in hardware/products (Android)
·       Offer free software & services online, earn thru advertising (Google)
·       Selling proprietary components to segments of the user base (Funambol)
·       Selling premium plug-ins, applications, services and themes (WordPress)
·       Selling the software under a commercial license and releasing the code under an open source license simultaneously, aka Dual licensing (MySQL).

How Open Source Communities have evolved to become the source of new ‘game changing’ technologies & products?
It is no secret that some of the greatest ‘foundational’ technologies were conceived in academic & research institutions (MIT, Berkley, AT&T Bell Labs …). Environments such as these with low or no presence of revenue & time pressures have often known to bring out the best new & radical ideas key for innovation. With no concerns towards ‘ownership/credit’, ‘appraisal ratings’ is known to naturally foster true ‘team’/’community’ spirit resulting in better collaboration.
Extending this theory to the World of today with a developer community of several thousands and the power to share & interact over the internet, it is only natural that ‘Open Source’ model has evolved allowing individuals to collaborate (without inhibitions) and not surprisingly being the source of most new disruptive technologies & concepts.


The motivation for embracing ‘Open Source’: 
For individuals:
  • The excitement of being part of something new & cool.

  • Opportunity to contribute to popularly known Open Source products and build an ‘internet identity’ for oneself.

  • Possibility of gaining new skills & knowledge for better career options.

For Corporations:
  • A ‘time tested’ platform to build further upon and create differentiators in the space.
Eg: Hadoop is increasingly becoming the platform of choice for corporations to develop BigData solutions, while building the same from scratch would be lot more expensive & risky (what if it fails?).

  • A pool of skilled resources (Open Source Community) who are ready to help in the development process and offer technical advice/inputs at no extra charge/cost.


  • Influencing key ‘Open Source’ platform design decisions with the possibility of long term benefits for the company.

With the increasing ‘commoditization’ of software, it is a reality today that Open Source Model offers an entire Eco-system critical for individuals & corporations to contribute, build upon and offer ‘differentiators’ for their customers.

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