Making money on open source

Is it possible to make money in the new open-source economy? Yes, but it is probably not possible to make billions of dollars selling software anymore, at least not as likely as it was in the past. Mind you, this is not a pessimistic outlook. Only Bill Gates and a handful of others would be unhappy with anything less than billions of dollars. The rest of us do just fine.

This outlook is not inspired by the way Linux stocks took a dive during the past year. Look into the growing revenues of many Linux companies and you'll see the volatility of Linux stocks had almost nothing to do with their success. It had almost everything to do with the fact that investors initially went crazy and overreacted to the Linux revolution. At this point, most Linux stocks have settled into a realistic price range, which is healthy for both the stock market and the companies.

Clearly, the real money to be made in the future is not on software but on hardware and services. Hardware is an especially ripe market, although it is already a crowded one. You'll notice that even as Linux distributors re-evaluate their business plans, companies such as VA Linux Systems continue to grow at a nice clip because their income is not dependent on the success of the distributors. If anything, IBM has showed its confidence in Linux, intensifying its Linux support even while Linux stocks faltered. Hardware companies have nothing to fear by supporting Linux and everything to gain because they pay little or nothing for the privilege.

But there's more to hardware than computers. Linux already enjoys success in the US as the basis for hardware appliances like set-top boxes such as the excellent TiVo set-top TV recorder. That market has a lot of potential - much more than the prospect of starting another company to compete with Compaq, IBM, VA Linux, and the rest.

Another market with perhaps the biggest potential for Linux is embedded systems. Linux isn't the perfect embedded OS, but it's fast, tight, and free. You can't beat free, especially when the margins on devices can be low or even dip into negative numbers. (It is not unusual for companies to intentionally lose money on game consoles and other devices that use embedded operating systems, since they make money elsewhere.)

Software companies are in a much more difficult position. It is increasingly difficult to sell people something they can get for free. And as products such as Open Office and Mozilla mature, free software is about to displace more than just the OS market.

I recently had a chat with Shawn Gordon, president and CEO of The Kompany, a software outfit that develops and sells Linux development tools and productivity applications. The Kompany has a number of strategies for making money. One of them is to give away a fully functional software package for which proprietary add-on modules are available, and then charge for the add-ons. This strategy really isn't unlike the support-based business plan, in which you give away the software and sell the support. The only difference is what you offer as added value after you've given away the software.

I think this is a good strategy. The problem, however, is that the free open-source community will eventually replace all software with free software, which means all proprietary modules will eventually be trumped by free alternatives.

Gordon disagrees, arguing that it's easier to pay a few bucks for a module than it is to rewrite it from scratch. That's an excellent point, and he may be right. Perhaps there is a price/difficulty threshold that free software advocates will not cross.

Of course, it is difficult to maintain that this threshold exists in view of the huge and successful efforts that have produced some very complex and robust software. Mozilla is probably the most significant example that the price/difficulty threshold may not exist.

The competition for Mozilla is free, so there should be no initiative to build Mozilla. Yet people still felt compelled to work on Mozilla as the alternative.

I have a feeling nobody has quite figured out how to make money on software in the open-source economy, just as we're still figuring out how to make money on the Web. But I suspect we'll find out in the next year or two.

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