Money
The Future of Software Development: Money
These research questions and answers relate to money or, more specifically, to business models. It belongs to the project of The Future of Software Development.
1. What is the current business model of closed source software?
Of course, the business model of traditional, "closed source" software developers is to sell software - and make a profit off it. However, further research shows that there are slight differences in the way this profit is made. In general, we should distinguish between three categories of software:
- shrink-wrap or off-the-shelf software - the software that you can buy in a shop or from a specialized reseller;
- customized software - software that is adapted to your wishes, from an existing product; and
- custom developed software - software that is developed exclusively for you.
There are quite a few business models for shrink-wrap software. In all cases, a product has been developed, and it is sold to anyone who wants it. A number of constructions can be used to make more money, e.g. helpdesk and assistance revenues, regular updates, additional subscription services, and/or advertising (ad-ware). The balance between revenues from sales and from other constructions can of course be varied, and in some cases the actual product is free. A hybrid form is shareware: you can get the product or a version with less features for free, but you will have to pay if you continue using it. Setting a price is always an important issue, and that is certainly true for shrink-wrap software.
Between the last two categories there is a great amount of overlap, and they are commonly referred to as "custom software". This type of software is used within organizations to do administration or company specific tasks (such as scientific processing). Business models are not really different for these two categories: a developer might want his money beforehand, to cover development costs; during the project, or afterwards through service or update contracts. From this perspective, customized and custom developed software are the same.
However, it does make sense to separate the two. In the extreme case, custom developed software is write-once software. It is never updated, and never re-used in other projects. Customized software, which (again in the extreme case) consists of a large part that is constantly in development, and only a small customized component. There is one important distinction: most custom developed software is sold by the company that creates it, while most customized software is based upon software from one company, and then customized and sold by another company. This is especially true for large software packages such as CRM or ECM systems. In this case, the software developer might employ a totally different business model than the software vendor. In fact, this situation is quite similar to the shrink-wrap model, in which a third party is involved too.
2. What is the current business model of open source software?
Firstly, Open Source does not mean "free". Besides, in English the term free has two meanings; they are usually explained as Free as in Beer (without charge, gratis), and Free as in Freedom of Speech (liberty). Open Source software is only libre, meaning that you have the liberty to change it. And as long as you redistribute it again as Open Source (for example by using the GNU Public License), you can do anything you want with it. [There is the exception of library software which is distributed using the Lesser GNU Public License (LGPL), and which can be redistributed as part of commercial software]
Open Source is also different from Free Software, but only slightly. The term Open Source is used by the Open Source Initiative (OSI), and its official definition differs from that of Free Software, which is a term devised by the Free Software Foundation (FSF). However, the terms can be used interchangeably in most situations. As said, Free and/or Open Source software is software of which the source code is open to see for everyone, and is libre (this also means that Open Source code cannot be patented, at least not to make money). But not all Open Source and Free Software products are Free as in Beer. It is perfectly legal to sell a Free Software product, and make a profit off it; you can buy the Linux operating system on the internet, and you will get a few CDs containing the product and its source code. Free Software can be commercial too.
It is not very smart to sell Free Software like shrink-wrap commercial software, though. Because as long as someone else keeps the product Free Software, he may give it away for free (as in beer) to his friends, or on the internet. But still, you can actually earn a profit with Free and/or Open Source software, by applying the same techniques as with closed source software. Either an additional service is added to the product (helpdesk, update service, subscription - but advertising is not such a good idea, because it can be removed easily by other developers), or it is customized for use in one company - like closed source customized software. Custom developed software can be Open Source too, in which case the developed-for company would have to agree to pay the costs, while another company might get the source for free.
So, selling Open Source software with a profit might be possible. But in reality, for software development most Open Source software organizations (such as the Mozilla foundation, MySQL AB, and Zend) rely heavily on the work of volunteers (the Open Source community), and on donations from big companies such as IBM and Sun Microsystems. Those companies earn money later by providing consulting services for Open Source products, and selling accompanying hardware. Of course, donating money to Open Source projects is also a good marketing option, which is even tax deductible in the US (both OSI and FSF are registered non-profit organizations).
3. How are open source developers rewarded?
In principle, volunteering developers are not rewarded. However, most developers accept donations from the public or from companies, through organizations such as sourceforge.net (backed by IBM, by the way).
Non-volunteering developers work for companies (such as Zend or IBM itself) which earn money by using the business models described above. They get paid just like other software developers.
4. What is the relation between open source and licensing?
(Mainly answered in 2.)
Normally, a software product itself is not sold. Instead, a license is sold, which allows the buyer to use the software product, under certain conditions. For Open Source products, the situation is similar. However, the conditions to which a buyer has to agree are different, the most important one stating that the product should stay Open Source if redistributed, either in whole or in part.
There is one important issue here, though: the issue of liability. Normally, in addition to declining all guarantees about proper functioning of the product, a software developer/company declines all liabilities, except those that he cannot decline due to local laws. This means that a software developer is in some cases liable for damage done by his program. But in the absence of one responsible party, it might be that the last developer is liable - usually the seller of the software.
5. What impact will piracy have?
For Open Source, there is not really a thing like piracy. Of course, one can violate the terms of an Open Source / Free Software license agreement, but that is not necessarily "piracy". There are exceptions, such as for products which are only free (as in beer) for non-commercial purposes. However, that business model is commonly used in combination with other ways to make money, so the damage will probably be kept to a minimum.
For closed source, however, piracy is a real threat. With help of the Internet, Kazaa, Bittorrent, and the hundreds of crack and "keygen" (product key generator) download sites, millions of people use illegal software every day. This reduces the profit that software developing companies could make, and so it reduces the amount of money they can invest in improvement of their products. Also, it raises the prices of their software.
In the future, the same Internet could help software companies make money by providing their software as a service, instead of installing a local copy. Already, more and more software comes in the form of web or intranet services, and the Java, .NET, and even Flash platforms provide ways of communicating with clients and servers over the Internet in milliseconds, while the user sees a consistent, responsive interface. This movement might change business models altogether, and reduce piracy by turning a product into a service.
6. How will open source be profitable? (Donation/ commercial usage)
(Largely answered in the previous questions)
Currently, it seems that many companies which rely on Open Source software development are struggling to make a profit. However, there are sound business models which should work to create a healthy industry. Also, currently a lot of volunteers put their work into projects off which other people make money.
On the other hand, closed source software developers have taken a strong position in the market, and even if their products are more expensive in use, or even less good than Open Source software, they are still seen as the established companies. In fact, despite positive news and substantial donations from companies like IBM, Open Source is seen by many investors as an experiment which, in the end, might work or not - yet few people are willing to put their money into it.
Conclusion: Open Source should be profitable, and the software should be better, maybe even cheaper to use. However, its image inside and outside the industry prevents Open Source products from being seen by many as viable alternatives for existing software.
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