1) Professor, Database and Information Systems (DBIS), Johann Wolfgang Goethe University, 60486 Frankfurt, Germany, Computer Science Institute (email: [email protected]) and Copenhagen Business School (CBS), Department of Informatics
A Framework Analysis of Business Models for
Open Source Software Products
with Dual Licensing.
Working Paper, CBS/INF, No. 1, January 2007
Jesper Holck, Roberto V. Zicari
1)Copenhagen Business School Department of Informatics
Howitzvej 60
DK-2000 Frederiksberg, Denmark.
Abstract
Aim of this research is to identify the key ele-ments that play a significant role in the success of business models for companies which produce
software products based on open source using
dual licensing. For that we have defined a new framework analysis that can be used to evaluate existing and new business models.
Index Terms—Open Source Software, Databases, Licenses,
Dual Licensing, Business Models for Open Source Software, Software Products, Innovation, Commodity Products.
I.
I
NTRODUCTIONRecently we have seen a growing interest in busi-ness models based on open source software, and in this paper we will focus on a subcategory of these: dual licensing. In dual licensing models, the company owns the copyright to an open source software product and receives its main income from selling product licenses. Even though the product is open source and thus can be freely copied, customers may want to buy a “closed li-cense”, as this gives them the right to embed or include the open source software in their own products without having to make these “derived” products open source also.
II.
E
CONOMICD
YNAMICS OFS
OFTWARE McKelvey observed that “software development is representative of a larger category of knowledge-intensive products and sectors … Unlike inform-ation, however, software can and is increasingly often sold based on the tasks it can perform, not the underlying code” [1].Software shares many similarities with R&D in-tensive sectors where the production cost is low compared to the cost of discovery, development and testing. For a software producing company, the production and distribution costs (i.e. making CD copies, printing manuals, distribution to
resel-lers) are usually very small, compared with the cost of creating the software program.
McKelvey also noted that software is sold on a particular kind of market, where commercial products often compete with free software, so us-ers of a given software product are not necessarily buyers [1].
This is also true for other “knowledge products” on the Internet, an obvious example being the free encyclopedia Wikipedia competing with equiva-lent proprietary products like the Internet edition of Encyclopedia Brittanica.
These free and commercial products can be viewed as competing in terms of users, as a large number of users can be important to create mo-mentum for further development [2, 3].
This is clearly the case for the communities of open source developers on the Internet, where each individual can be seen both as a user and a producer of the software. Their role in the soft-ware development process, especially in testing and suggestions for improvement, is fundamental. Internet communities are also important to initiate development of complementary software and fu-ture products, thus potentially attracting even more future members to the communities.
Philip Armour stated it in [4]: “Software is not treated as a medium, it is treated as a product, and this is the problem. The product is not the soft-ware, the product is the knowledge that goes into the software”.
III.
O
PENS
OURCES
OFTWAREIt is important to note that open source software is not in the public domain and without copyright. In contrast, the copyright holders use their copyright to transfer certain rights to users of the software:
• Free Distribution: The right to make copies of the software and distribute these.
• Source Code: The right to access to the soft-ware’s source code.
• Derivative Works: The right to change the software.
The copyright holders are usually the program-mers, but may also be companies. The mechanism used for this transfer of rights is an open source
license; we will later deal with these licenses in more detail.
Two other elements play important roles for open source software:
• Community, the existence of a virtual group of users and developers, actively engaged in using and improving the software
• Development Model, a highly iterative life-cycle where many developers in parallel contribute with additions and changes to existing source code
Even though the principles of open and freely distributable source code were already widely ad-hered to at universities and government institu-tions back in the sixties, the term “open source” was first coined in 1998. At that time some of the more mature and well-known examples of open source software were Linux, FreeBSD, Apache, Perl and the many Gnu tools.
Key business/technological questions at that time were [5]:
• Is open source really a new way of building software?
• Is open source a repeatable and reliable methodology?
• Why would companies produce open source software and in that way give their products to competitors for free?
• Is open source a threat to current methods for building software and doing business? From the perspective of a software vendor, the key questions were [6] (and partially still are):
• Is open source a reliable model for conduct-ing software development for commercial purposes?
• Are open source software business models sustainable in the long term?
• How will open source software businesses face the developmental and marketing diffi-culties associated with what Moore [7] calls “crossing the chasm” from early adopters to the mainstream?
Since then things have changed, open source is now a business strategy with broad applicability;
for some IT companies open source has become a strategic vehicle to use against competitors. A recent special report on open source by Busi-ness Week [8] forecasts that “the open-source movement is making another big thrust forward. Entrepreneurs, investors, and many analysts say they’re confident that all of a company’s business software—representing hundreds of millions in sales—will soon be available as open source.”
IV.
O
PENS
OURCEB
USINESSM
ODELS McKelvey [1] studied on a theoretical level the main characteristics of a business model for open source software such as Linux that she called “Network-based development of knowledge, with node control, which is not linked to firm-based control of economic returns.”She characterized the business model as “software development which develops through open net-works, much like public knowledge, although there are nodes of control. Development runs par-allel, or else instead of commercial proprietary development. Here, both individuals, communities of programmers and firms can be important for different aspects of organization and control.” In her model of Linux, she illustrates that software development and economic returns are decoupled from control of one firm, and instead rely on the action of many, distributed developers.
She points out how Linux is an example where one set of knowledge (i.e. the software) gains in popularity and in number of users, thus attracting people interested in appropriate benefits according to other economic models (e.g. selling “distribu-tions”, bundles of software, service, manuals etc.). The model relies on some sort of attraction so that individuals (i.e. developers) and organizations (i.e.
firms or projects) invest their time and energy into developing the software.
She defines what she calls “nodes of control”; in the case of Linux referring to the early role of Linus Torvalds as overseer of a large, cooperative development process. One can easily generalize the concept of nodes of control to any firm or or-ganization that coordinates a distributed coopera-tive software development process.
She also points out how both individuals, commu-nities of programmers, and firms are important for different parts of the process.
Asif Khalak defined an economic model for im-pact of open source software [9]. He analyzed the effect of introducing an open-source software product onto a proprietary market in an idealized setting. He discovered that demand structure strongly influences the effect of open-source. Not surprisingly, he suggests that the open source model works at best when the demand is for low prices.
Krishnamurthy in a recent study classified busi-ness models for open source into four models [10]:
• Distributor
• Software Producer with a non-GPL Model • Software Producer with a GPL Model • Third Party Service Provider
In his study, he calculates the potential profit of open source Products using two dimensions:
• Customer applicability: the proportion of the market that can benefit from the soft-ware
• Relative product importance: how important a program is to the functioning of the user’s computer.
In his research, products with highest profit po-tential are classified as having high relative prod-uct importance and high customer applicability. Krishnamurty suggests that so-called open source high-profile nichers may have potential to become profitable [10]. These are commercial product companies based on open source, and regarded very highly within their specific market niche; however, beyond that, they are not well known.
V.
O
PENS
OURCED
UALL
ICENSING Producers of open source software have gone through a complex process of defining adequate licensing schemes. The licensing scheme is a key element directly affecting the profitability and even the existence of any business based entirely (or partially) on open source software. A brief re-view of the main licensing schemes offered for open source is shown in exhibit I.One of the most popular licensing schemes for open source is the GNU GPL, even though it has proved difficult to build up viable economic mod-els based on this. An important aspect of GPL (copyleft) is that whenever a GPL-licensed piece of software is (partially) included in a new soft-ware product, this new product must also be under GPL.
It is interesting to recall what back in 1999, Bill Joy, at that time chief scientist at Sun, commented when asked if Sun would consider GPL for li-censing their products [11]: “I can’t license all of Sun’s intellectual property under the GPL, be-cause it just won’t work. I don’t see any reason why I should give somebody access to stuff that cost me millions of dollars to do. We’re spending over a billion dollars a year in research. I can’t just throw it all on the street… If I make code available under the GPL, I’ll lose control of it…The GPL just doesn’t solve my business problem at Sun. I would like all of our intellectual property to be available in source form, but I can’t economically do that under the GPL.”
In the attempt to find viable business models for open source, partial open-source licensing models were introduced with the following characteris-tics:
• Open source software can be mixed with non-free software
• Modifications can be taken private
• The software produced can be re-licensed by anyone
• Special privileges for the original copyright holder over other developers’ modifications The most notable among the partial open-source models is dual licensing. Dual licensing is based on the idea of simultaneous use of open source and proprietary licenses; companies using dual licensing can be seen as using both pure-play and hybrid business models [12].
The dual licensing scheme has generated new business models for commercial companies. Among commercial, established companies using dual licensing we can mention Sleepycat (rela-tional database), MySQL (database server), Troll-Tech (application development framework and tools), and db4objects (embedded object
data-base). Revenues are typically generated by selling
commercial licenses.
Mikko Välimäki has analyzed dual licensing and observed that by offering dual licensing [12]:
• “Copyright and control of the core product development is held in one hand, the origi-nal developer.
• The ability to license the product with other terms than open source requires full owner-ship of all rights to the product.
• The users of the free license have an option to obtain a proprietary license. If a software product with an inheriting copyleft clause is embedded to become a part of another prod-uct then the combined prodprod-uct should be distributed for free. A proprietary license may free the user from this restriction. In this way, third party product businesses be-come also possible
• The development community does not have development power to start competing products (forks).”
Välimäki also identifies three elements that in his view are necessary for successful dual licensing [12]:
• The existence of network effects, only possible with a large community of users. • Price discrimination.
• No major requirements for the enforcement of copyright.
According to Välimäki “GNU GPL license seems to be a viable marketing tool in dual licensing”. The acceptance of partial open-source models is neither straightforward for established proprietary software product companies, nor for developer communities identifying open source software with free software.
VI.
A
F
RAMEWORKT
OA
NALYZEB
USINESSM
ODELSW
ITHD
UALL
ICENSINGIn this section we suggest a new framework for analyzing the potential success of open source business models based on dual licensing, offering both GPL and a commercial license.
We focus our research on commercial software product companies using open source software under the dual licensing scheme.
In our framework we look at the following dimen-sions: • Revenue Generation • Dual Licensing • Products/-Technology • Entry Market • Synergy • Community • Price • Software Development • Spending
• Organization and Management
• Custom Support
• Sales and Distribution Channels
• Financial Support
• Market Strategy
We will in the following examine each of these in turn.
Revenue Generation
The number one challenge for any business model is revenue generation. In particular for companies selling software products, revenue is mainly gen-erated by selling licenses to end users and to com-panies that embed the software product into their own products (“embedders”).
Both end users and “embedders” can evaluate the software product by simply downloading and testing a free copy from the Internet. “Embedders” may also find it important to evaluate and exam-ine the freely available source code, as this code will be included in their own software products. However, a high number of downloads does not necessarily lead to a high number of sales; it has been reported that on average only 2% of custom-ers who have downloaded software for free will eventually end up paying for it [8].
According to Marten Mickos from MySQL the numbers are even more extreme, only 10% of
downloads cause the installed base to grow; the other 90% are upgrades of existing installations or just for testing and playing around. And from the installed base only around 0.1% end up as paying customers. MySQL does not perceive this as a major problem though, as those who do not pay would not pay anyhow, and in fact help MySQL by adding to the installed base and recommending MySQL to potential buyers [13].
That software can be downloaded and tested for free may both help in qualifying the downloader into a potential buyer and in indirect qualification, where the downloader does not him/herself buy the software, but recommends the product to a potential buyer.
When looking at sources of revenue, it is impor-tant to break down the end user category further:
• Enterprise end users: employees using the software as part of their work
• Individual end users: people using the soft-ware for individual purposes.
These two groups are intertwined and interact; someone who is an individual end user at home may be an influencer at work, for instance.
Typically enterprise end users contribute heavily to the revenue generation, whereas individual end users don’t, as they seldom will pay for the soft-ware. The individual users may, however, have important roles in the decision-making processes in enterprises. Having adopted products at home, they will put a pressure on the enterprises in which they work to adopt the same products. And, because they add to the products’ installed base, they also through network effects increase the companies’ value of these products.
The combination of the viral nature of the World Wide Web and the role of a large user and devel-oper community can form a powerful promotion channel at virtually no cost for the open source vendors, further increasing the size of the com-munity. The larger the community, the more chances are that customer will pay. A large com-munity is therefore an important factor for the success of the business model.
We should note however that there are no research results available that clearly demonstrate this as-sumption. On the contrary, some of the most
popular open source products (Apache, BIND, Linux) seem to be the ones with fewest paying customers (proportionally).
We have defined the following parameters to help in discovering and quantifying the above relation-ships: community of members t time over downloads p # # 1 = , the number of
downloads over time t, with respect to the total number of members of the community.
downloads sales p
# #
2 = , the number of sales with
re-spect to the total number of product downloads
downloads evenue r p
#
3 = , revenue generated with
re-spect to the total number of product downloads.
Dual Licensing
The economic incentive of redistribution makes dual licensing an important element in a success-ful business model for software products that are often embedded in other products. But dual li-censing may also be relevant for end users. In this case the commercial license can be seen as a sup-port model and will mainly be attractive to enter-prises. So the dual licensing scheme allows two flows of revenue: from “embedders” (in case the product is suitable for that) and from end users. This is not a general rule, however. For MySQL AB, dual licensing does not lend itself to sales to end users, it only applies to embedders. For end users MySQL has a different model – the sub-scription model [13].
It is important to note that most members of the open source software developer community per-form an important support function but do not generate revenue directly.
In case of MySQL (having 50,000 product downloads per day [14] and 10 million active in-stallations [15]), most community members are non-paying users who help building a large com-munity, but most of the revenue is derived from the 0.5% with MySQL embedded licenses [16]. This confirms the assumption that the dual license is an attractive feature for redistribution.
On the other hand, the revenue generated by MySQL Network subscription1 (for end users) is steadily increasing [16]; this can be seen as an in-dicator that a large community may be a good base for revenue generation.
Thus we can identify different categories of pay-ing customers:
• End users, including
o Buyers: Users who buy the software product with a non-GPL license, typically “enter-prise” end users
o Subscribers: As in the case of MySQL, end users of the GPL-licensed product who pay for the services included in the MySQL Network Subscription [13].
• Redistributors who buy the software with a non-GPL license and embed it into their own product(s).
We have defined two more parameters that can be useful to quantify the relation between reve-nue and business model:
members community buyers p # # 4 = , the percentage of
community members who buy a product license.
buyers evenue r p
#
5 = , the “average customer value”,
ex-pressed as the generated revenue with respect to the number of buyers.
An indirect source of revenue might come from the rest of the Community members, the non-buy-ers. We can therefore see relationships as follows:
# #
#
-Size of community downloads buyers direct revenue non buyers indirect revenue
→ →
→ ⎧
⎨ →
⎩
That is, we expect that a large community will lead to a large number of downloads, in turn in-creasing the numbers of both buyers (leading to direct revenue) and non-buyers (and indirect reve-nue). We should however note that research has not yet shown a direct link between downloads
1
MySQL Network subscriptions include enterprise-grade support, automatic updates (MySQL Update Advisor) and Technical Alert Advisor, which notifies customers about issues related to their specific computing environments. The Network subscription also offers warranties and indemnification for MySQL’s database [17].
and revenue generation. One factor to consider is a possible large time lag (of several years) be-tween first download and becoming a paying customer, which makes difficult to prove the cau-sality [13].
We suggest another parameter to distinguish be-tween direct and indirect sales:
sales total sales direct p # #
6 = , which expresses the number
of direct sales with respect to the total number of sales, including indirect sales generated by actions of non-buyer community members.
Software Products
We now consider the software product offering. An important distinction which may affect the success of a business model is between:
• Commodity products
• Innovative products
In our definition, commodity products are prod-ucts with functionalities and benefits that are al-ready well understood and accepted by a large majority of the target entry market; innovative products on the other hand are products with less well understood and accepted benefits and func-tionalities.
The type of product has an influence on the size of the community: Commodity products have poten-tial to appeal to a large community of users, whereas innovative products initially tend to be used by only a small community.
An important question here is whether an open source company with dual licensing has a good chance to succeed as a technology innovator or should instead focus on a commodity product. On this point, venture capitalist Danny Rimer ex-pressed a strong view in a Business Week inter-view [18]: “Open-source companies absolutely can’t have a new, innovative technology. They have to be smarter approaches to existing technol-ogy. They have to be technologies that developers and buyers already understand. Open source is about coming up with an alternative that’s cheaper, not going after a new area.”
Rimer also identified the following requirements for a successful business model based on open source [18]: “The existence of a large active
community. It has to be a commodity product, the company has to produce software that is com-monly understood by users. It has to have a price cushion. The open source alternative should be considerably cheaper than the closed software al-ternative and still allow for a price cushion so that over time open source companies can charge more but still remaining interesting to customers.” This is the perspective of a venture capitalist. For Rimer, the above requirements apply for compa-nies aiming at a revenue potential of $100 million a year.
At present, no or few commercial companies based on open source software have proven able to build a big business beyond supporting Linux; MySQL with $40 million in annual revenues may be a notable exception.
An important case that seems to contradict Rimer’s definition of a successful business model for open source software is the Apache web server software. According to Netcraft, 62% of all Inter-net web sites run Apache today, compared with 31% running Microsoft Internet Information Server [19].
If we look at the value proposition of Apache, we notice that they offer a product that is:
• cheaper than their direct competitors’ • very reliable and matches market
require-ments
In our framework, the Apache web server can be characterized as an innovative product with price differentiation and a large developer community (more later in this section under Price and Com-munity).
Apache’s software is not intended for redistribu-tion and is only offered with a “pure” open source license; this seems to confirm the notion that dual licensing is most useful for products for redistri-bution.
On licensing, the Apache Software Foundation (ASF) declares:
“The ASF will not dual-license our software be-cause such licenses make it impossible to deter-mine the conditions under which we have agreed to collaborate on a collective product, and are thus contrary to the Apache spirit of open,
collabora-tive development among individuals, industry, and nonprofit organizations.” [20]
So ASF sees dual licensing as incompatible with the way (a part of the) open source community of developers operate. Because of the direct correla-tion between the developers’ community, their active participation and support, and the success of any business model based on open source, this is a very critical issue that must be considered be-fore deciding on a business model.
We asked Christof Wittig (CEO of db4objects, a commercial open-source software company using dual licensing), what is, in his experience the re-action of the open source developers’ community on dual licensing. He replied: “It’s always a ques-tion about the upfront contract. We were always commercial/dual licensed and are open (and con-sistent) about our economic incentives, and people respect that. Don’t forget that all community members make their living with software, so it’s not that any of these guys are altruists themselves. It’s always the deal: What are my benefits, what are the costs, what are the alternatives.”
We also asked him, since Apache is mentioned as an example of an innovatively successful (though maybe not commercially successful) open source product company, if he thinks that their statement on dual licensing has some negative influence on the acceptance of dual licensing for the develop-ers’ community. Wittig’s reply was: “Maybe. But I think you may underestimate the power of open source/community-driven software production and distribution. It is certainly easier/faster to ‘com-moditize’ a well understood mass-market with a low-cost product. But the economics also say: it is cheaper to build and distribute software. If it then happens to innovate, it can only be better. It just takes longer, because we have 2 adoption hurdles to overcome: open source in general (which less and less is a hurdle, but it has been 5 years ago) and [the] product category itself…. But the eco-nomic fundamentals are on your side, and that matters to win a business.”
Looking at the main characteristics of Apache we can see that Apache
• is open source software • is not a commercial company
• receives help from full time staff at large en-terprises
• uses only Apache licensing (Apache License Version 2.0), does not offer dual licensing • has a horizontal entry market (web server
software)
• has major, direct competitors (proprietary software companies) in their market
Possible explanations why Apache does not need to dual license:
• Most of the Apache core developers have steady incomes as they are employed by companies that want Apache’s software. Apache gets its funding through its founda-tion.
• Apache started off with the license they have, and to change it now would require the agreement of all the people who have contributed with code in the past. In contrast
e.g. MySQL, started off with a private com-pany’s software, and could set up any type of licensing they needed.
• Changing licenses is not easy unless you have the developers all agree to assign their copyrights to one entity, so that entity can determine what license changes occur. This is what the FSF does for its GNU code. We asked Chris DiBona, Open Source Programs Manager, Google Inc., why in his opinion Apache does not support dual licensing, like for example MySQL. DiBona’s reply: “The only thing I’d mention is that MySQL doesn’t actually do a dual license in the spirit in which Apache talks about, they have an open source license and a commer-cial license. Yes, two license, but Apache fears that an Apache/GPL or Apache/MPL mix leaves users in a situation where they do not know what software is what and often, dual licensing is just stupid, as the software developer can just choose the least restrictive license.”
The main reason Apache does not use dual li-censing is probably their limited interest in reve-nue generation. Their prime goal is to have very large usage numbers. For such a goal, the most logical model is single-license with an academic (permissive) license – just as they have.
We believe there are two important factors that need to be considered regarding the acceptance of dual licensing in the specific community of devel-opers for whom the product is targeted, no matter of the type of product:
1. The interpretation and explanation of dual li-censing given by the company
2. The willingness of the user community to ac-cept such a licensing scheme
In addition, for companies offering a commodity product:
3. The market must be price sensitive and a con-siderable percentage of users must be dissatis-fied with direct competitors’ proprietary prod-ucts.
For companies offering an innovative product: 4. Open Source software products based on
inno-vative technology have to either solve specific problems not well handled by main stream competitors, and/or expand the market by of-fering a brand new value proposition and ad-dressing a new market segment. Also here the market needs are key for success. Price differ-entiation does play a role as well, but not as strong as in the case of a commodity product.
Entry Market
The next dimension we consider is the entry mar-ket as an important discriminating factor.
We distinguish between companies operating in a
niche entry market from companies operating in a
horizontal entry market.
According to Cusumano [21] a horizontal market is a market across industry or functional speciali-zation, with a broad set of customers. A niche
(also called vertical) market is a market in a cific domain, e.g. specific industry, technical spe-cialty, or specific platform.
For companies operating in a niche entry market, we have identified the following important factors for success:
1. They have to produce highly sophisticated products that solve a specific set of problems for which main stream competitors do not cur-rently have a satisfactory solution.
2. They have to produce products that are opti-mized for the specific niche market, giving a clear competitive advantage compared with full-fledge general versions of similar products done by direct and/or indirect competitors in the broad market they operate.
3. There should be no competitive, dominant open-source or proprietary software products in their niche market
We believe that if the above conditions are satis-fied, and if the software offered is innovative, then operating in a niche market reduces risks and in-creases chances of success.
However, since the size of the community might affect revenue generation, it is important that for companies who choose to operate in a niche mar-ket with open-source software innovative prod-ucts, that qualification of leads is effective and supported effectively via redistribution channels,
e.g. companies redistributing the software embed-ded into their own products.
Offering a commodity product in a niche market is possible but does not seem to make much busi-ness sense. Instead, a horizontal market should be considered for that.
For companies operating in a horizontal entry market, we have identified the following impor-tant factors for success:
1. They should offer a commodity product (both for redistribution and to end users).
2. A considerable percentage of users must be dissatisfied with competitors’ proprietary products (e.g. price issues, or technical issues such as reliability or performance), increasing the market’s willingness to try the open source alternative.
3. The product must satisfy the needs of the mar-ket and compare favorable with direct com-petitors’ products.
4. They must build a large community. As Asif Khalak in his work on an economic model for impact of open source software points out, “even if open-source is of equivalent quality and is free of charge, it must still gain a ‘criti-cal mass’ of the market share from those dis-satisfied with the product of the market leader” [9].
5. They must have a lower price than the direct competitors and also a price cushion (see later in the section on price)
If the above conditions are satisfied, a company offering a commodity product in a horizontal market has chances to get a significant market share.
The strategies of exchanging/changing the entry market will be discussed later when we look at the market strategy dimension.
An alternative way, suggested by Christof Wittig, to look at the market for open source software, is to consider open source markets not as segmented with the traditional regional or industry view (an end-user view, depending on physical or domain knowledge proximity), but on programming lan-guages, technology stacks and application types (devices vs. websites, for instance). Wittig also suggests that a demographic segmentation works very well: Who is in charge of selecting the tools? That looks very different for a developer at Merrill Lynch compared to a start-up entrepreneur [22]. Although this is a very interesting distinction we will not consider it a subject for future re-search.
Synergy
For a company offering an open source software product, synergy with other open source software products in the same or related markets increases chances of adoption.
This is e.g. the case for MySQL and the so-called LAMP (Linux, Apache, MySQL and Python/ Perl/ PHP) stack. The existence of synergy reflects in a larger user base, which in turns produces greater revenues.
Community
A successful open source software business model requires active support from the developer com-munity. We can give a more precise definition of
active community by looking at the roles played by its members:
• Company-employed core developers
• Other developers, not employed at the com-pany
• Contributors, active in testing, error report-ing, writing documentation, and other re-lated services
• Users of the product, for private or business purposes
• Multipliers, writing product evaluations, do-ing public relations and marketdo-ing, act as referential, participate in forums etc.
Inactive members of a community may: • Download but not use the product
• Not download the product, just keep them-selves informed.
An in-depth discussion of the various roles of open source community members can be found in [23], further investigation on this issue is outside the scope of this paper.
An important factor for success is the ability for the company to create a single coherent commu-nity out of the various communities with interests in the product: the free open source developer community, the community of developers at commercial customers, the product core develop-ers at the company, etc. All of these developdevelop-ers collaborate using the Internet in a virtual coherent community associated to the product and its tech-nology. The feeling of belonging to the specific community is an important factor motivating members to take an active role.
This is important since the size of the active com-munity is directly related to the entry market size and the source of revenues. We suggest a pa-rameter to measure this:
community of Size community active of Size p6 = .
Dual licensing has interesting, positive aspects in this respect: the GPL-license facilitates creation of an open source developer community, and can be used as an efficient marketing and referential in-struments; at the same time the non GPL-license allows to add commercial developers and end us-ers to the community.
Price
Price is an important factor for the success of any business model. For dual licensing we consider
two price-related aspects as important for a suc-cessful business model:
• Price differentiation: the product must be cheaper than the direct proprietary com-petitors’.
• Price cushion: the possibility to over time increase the product’s price while main-taining price differentiation.
Price differentiation and price cushion are two key factors for offering a commodity product in a price sensitive, horizontal market. To a lesser de-gree the two aspects are also important for offer-ing an innovative product in a niche market; how-ever the niche market might be less price-sensitive and more looking for new, innovative and reliable products. If the niche market is new, the issue of price differentiation might not be critical, at least not until a direct competitor enters the market.
Software Development
Development of open source software products is typically characterized by the following factors:
• Globally distributed software development and Internet-enabled processes.
• Large software projects with little manage-ment overhead (by some authors referred to as open source Globalization in [24])
• Heavy support from the developer commu-nity.
• Entirely Internet-enabled production system. • Company-employed core developers are
of-ten selected from the open source developer community.
Specifically for companies offering dual licensing one factor is very important:
• Only company-employed core developers contribute source code, thus ensuring the company’s intellectual property rights for the product.
This confirms what has been already observed by Mikko Välimäki [12] that copyright and control of the core product development is held in one hand, the original developer, and that the ability to li-cense the product with other terms than open source requires full ownership of all rights to the product.
There is a risk that the development community might start competing products, based on the same software base (forks). This risk is however mini-mized exactly from the decision to allow source code contributions only from company-employed developers.
Spending
Spending plays a major role for any business model. One of the advantages of open source software in general is to allow the spending mostly in R&D, and not in other (traditionally ex-pensive) activities, such as marketing and sales. This is due to the nature of the Internet and the role and support of the active developers’ com-munity and of the various channels.
GPL can be seen as a powerful, low-cost market-ing vehicle to support the adoption of a product. The above applies to dual licensing as well.
Organization and Management
Companies operating with open source software in general tend to have flat hierarchy structures. This is due to the supportive role of the develop-ers’ community, to the companies’ culture, and to economic factors, since a flat organization mini-mizes costs.
This is not different for companies adopting dual licensing; such companies are often organized as a
virtual organization, with few local offices. As a result, core developers mostly work from home, using the Internet to communicate and share code, and seldom meeting face to face.
Customer Support
Contrary to service companies, open source soft-ware product companies provide limited direct customer support, but rather use the developer communities or third parties for that. The devel-oper community provides a key dynamic support resource and add-ons for all users of the product. One of the value-added benefits of dual licensing is that software developed under the GPL-license enhances the commercial product quality without consuming resources at the company, for example when developers perform testing and write bug reports and documentation.
Sales and Distribution Channels
Usually, companies operating with open source software do not use classical sales and marketing
strategies, instead preferring viral Internet mar-keting as the prime strategy.
Customers’ product evaluation is conducted ex-clusively via free downloads of the open source
software. This enables a “bottom up” sales ap-proach (from the developers’ community to the customer’s management) and reduces the costs for new customer acquisition.
Even though some sales capabilities such as tele-sales and dedicated account resources are still necessary, the low cost of sales and distribution channels makes customer acquisition considerably cheaper than for proprietary software companies. For companies with dual licensing, GPL is used as an effective marketing vehicle, as it helps creating a user base, whereby the non-GPL part of the business allow ISVs (independent software ven-dors) to play the role of business escalators.
Because an open source product is distributed with its source code, ISVs have an important ad-vantage in packaging and debugging their own, final product. Most importantly when ISVs oper-ate as business escalators this directly affect reve-nues.
We therefore have the following relationships:
generation evenue R revenue indirect and Direct ISVs revenue Indirect buyers non Community revenue Direct buyers Community → ⎥ ⎥ ⎦ ⎤ → → →
-Financial Support
The type of financial support for the company has a major implication on the market strategy and product offering of the company.
Companies with commodity, open source soft-ware products with large communities may re-ceive VC money. To achieve the return of invest-ment required by the VC, the company must often have an efficient expansion strategy against the proprietary software competitors in the same mar-ket
Without VC money, companies can operate ini-tially in niche markets, trying later to expand to a horizontal market by using for example an “ag-gressive” horizontal strategy.
Market Strategy
We consider two market strategies with respect to their potential success for a business model for OSS with dual licensing.
Strategy 1: Start Offering a Commodity Product in a Horizontal Market and Expand Market Share
This strategy works under the assumptions that: • The product offered is a commodity product • There is a significantly large number of cus-tomers in the specific market who are dis-satisfied with the product(s) of the market leader (for example due to high prices) and are willing to try the open source alternative product.
• Price differentiation is an important decision factor for the chosen market.
An example is MySQL’s focus on the web-based database applications market, as seen as part of the general database market.
Strategy 2: Start Offering an Innovative Product in a Niche Market and Expand to a Horizontal Market
This strategy can be used to establish what Geoff Moore (using D-Day and the taking of Omaha Beach as metaphor) calls a beachhead before as-saulting the mainstream [7]. Like the beaches of Normandy, high cost and certain losses can be es-sential to establishing the toehold that stages vic-tory. Also important for Moore is the idea that to reach the mainstream market, vendors must pro-vide the complete solution, including support. Moore claims that lack of service and complete solutions is one big reason technology firms fall into the “chasm” with a technically good, innova-tive product.
The main challenge for companies operating in an entry niche market is to evaluate if the transition to a horizontal broader market is possible and sustainable.
We asked Christof Wittig what makes the innova-tion technology successful for a horizontal market, as opposed to a niche market only? His reply was: “If you can effort to be horizontal, it’s better, be-cause you get economy of scale. The question is whether the market needs or the differentiation
imposed by competitors forces you to specialize on verticals.”
A byproduct of the free downloads approach is that use of the technology/product spreads by it-self across regions, platforms, applications, in-dustries in a totally scattered and to some extent uncontrolled way. This results in a so-called “ag-gressively horizontal” approach as defined by Jerry Fiddler [25].
This means that a company that starts up with a niche as entry market, finds its way outside the niche market due to the combined effects of:
Community Downloads
Free Source
Open → →
In practice this is a low cost strategy to extend market reach, and this has a direct relationship with potential revenue generation.
This approach opens up the company’s entry mar-ket in a somehow uncontrolled way.
Assuming that in the niche market there is no market leader, and that for the targeted horizontal market—where a market leader exists—there are dissatisfied users willing to try open source soft-ware.
The major downside of this is that influence of competitors (direct and indirect) will start to be evident. This might in turn negatively effect profit generation. The challenge for such companies is to prove themselves able to transition from a niche market, with a small community and relatively small revenue, to a horizontal market with a large community, direct and indirect competitors with both open source and proprietary software prod-ucts, and large revenues.
In particular, when implementing this strategy some of the elements that positively characterized a sustainable business model may no longer hold. Therefore:
• The existence of dominant market leader(s) is more likely.
• Need to increase the size of the community • Spending increases
• The choice of a horizontal market, which may imply a geographically distributed market means that the virtual organization and management will have to be revised:
• Another element that may prove not be any more true is the limited direct customer sup-port
VII.
T
WOB
USINESSM
ODELSB
ASEDO
NO
PENS
OURCES
OFTWAREW
ITHD
UALL
ICENSINGBased on our analysis we have identified two classes of business models that in our opinion have potential for success. We call them:
• Open Source Software Commodity Products For Horizontal Markets (CPHM), and
• Open Source Software Innovative Products For Niche Markets (IPNM)
Both business models share the following com-monproperties:
• Software products are open source: The company produces software products (not services) based (often exclusively) on open source software
• Dual licensing: The company offers both GPL and non-GPL licensing.
• Revenue from product licenses: Revenue is generated primarily by selling product li-censes: to companies for product redistribu-tion, and to end users for use and support. • Proprietary open source: The software is
written exclusively by a core of company-employed developers. This is an essential prerequisite for the dual licensing model, because the company owns all intellectual property of the software products. This is in sharp contrast to early open source systems based on GPL-like licensing such as Linux, also referred to as non-proprietary, where software is not owned by a single vendor. • Price Differentiation: The product is
cheaper than direct competitors’ proprietary software products.
• Price cushion: The company may over time increase the product’s price, while still maintaining price differentiation.
• Synergy with other open source products helps adoption of the product and expands the customer base.
• Focus spending on R&D, not on other activities such as marketing and sales.
• Virtual organization and flat hierarchy structure: Core developers work outside company premises, using the Internet to communicate and share code, and with few face-to-face meetings
• Software development as open source glob-alization: With little overhead, companies manage large software projects of globally distributed, individual contributors (also re-ferred to as open source globalization in [24]). The production system is entirely Internet-enabled; open source developer communities provide most core developers and contribute heavily to project support. GPL-licensed software may be enhanced by voluntary developers, without requiring company resources.
• Limited direct customer support: Contrary to service companies, only limited direct customer support is offered; it is left to de-veloper communities or third parties to take care of this. The developer community pro-vides the key support resource for all users. • Internet as marketing, sales and distribution
channel: The Internet is the primary mar-keting channel, and provides the opportunity for customers to freely download software products for evaluation and/or licensing. This enables a “bottom up” sales approach and reduces the cost of attracting new cus-tomers.
• ISVs as business escalators: Because an open source product is distributed with its source code, ISVs have important advan-tages in packaging and debugging their own, final product. Most importantly ISVs oper-ate as business escalators, directly affecting revenues.
The two business models however differentiate as follows:
Open Source Software Commodity-Products for Horizontal Markets
Open Source Software Innovative-Products for
Niche Markets
Large community Smaller community Commodity product Innovative product
Horizontal market Entry niche market May obtain VC financing Privately financed Strategy 1: Expand/consolidate the horizontal market Strategy 2: “Aggressively” expand from niche to horizontal
market when market conditions make this
possible
Interestingly, both business models can be used by the same firm for different product categories. This is the case for example of MySQL AB: the regular MySQL product can be seen as a highly popular commodity, but special versions like MySQL Cluster are technology and innovation leaders [13].
VIII.
CONCLUSIONS
In this paper we have defined a new framework analysis that can be used to evaluate existing and new business models based on dual licensing of open source software products. We also identify market strategies for two advantageous business models, based on dual-licensing of open source software products. At present, both the frame-work and the strategies lack substantial empirical evidence, which is obviously something we will work on establishing in our future research.
E
XHIBITI:
O
PENS
OURCEL
ICENSINGBSD-Style Copyright
This is the copyright used by Apache, and BSD-based operating systems.
The copyright basically allows everybody to use the software provided it was credited. This kind of copyright does not incentive companies to build business based on open source software.
GNU General Public License
As defined From Wikipedia, the free encyclope-dia, the GNU General Public License (GNU GPL, or simply GPL) is a widely used free software li-cense, originally written by Richard Stallman for the GNU project. The latest version of the license, version 2, was released in 1991, but at the moment (early 2007) a lot of work is being put into making version 3 of GPL, GPLv3.
GPL grants the recipients of a computer program the rights of the free software definition and uses copyleft to ensure the freedoms are preserved, even when the work is changed or added to.
The Lesser GNU Public License
This is a modified version of the GPL, intended for software libraries.
Copyleft is a licensing scheme to facilitate open and decentralized software development. Its key feature is that once a program is licensed by the author, the subsequent programs based on the original must also be licensed in a similar manner [26]
A nice overview of various licenses may be found in [27].
E
XHIBITII:
O
PENS
OURCED
ATABASESThe most notable examples of open source DBMS (database management systems) are MySQL, SleepyCat (Berkeley DB), PostgreSQL, MaxDB, Ingres, SQLite, and Firebird. Of these, MySQL is by far the most successful open source database company. MySQL used viral marketing to pene-trate markets, using the waves of interests in Linux and Apache, and developed an effective strategy in promoting itself in the developer com-munity. Also the use of related open source prod-ucts such as Linux, Apache, Perl, and PHP helped adoption of MySQL.
The business model of MySQL was based on a dual licensing scheme: GPL for non-commercial use, and non-GPL for commercial use.
In particular, commercial MySQL software: • could be distributed with non-open source
software
• included a warranty from MySQL AB
• came with development support.
In 2004 MySQL had 4 million active installations and 10 million product downloads.
MySQL software was exclusively written by em-ployees of MySQL. This was an essential element to enable the dual licensing model, since MySQL owned all of the intellectual property of the soft-ware produced.
MySQL’s development cycle heavily used the de-veloper community for testing and debugging, thus lowering development costs considerably if compared with a closed software company.
Much discussion occurred on the pros and cons of an open source testing process vs. the one of a closed software company.
MySQL is a light version of a DBMS, lacking some of the full-fledge functionalities typical of established giants such as Oracle, IBM. MySQL executives, however, do not share this view [13].
PostgreSQL developed from a project started at the University of California, Berkeley in 1986, and has had a strong root in research.
PostgreSQL is distributed under the BSD license by a non-profit OSS community of individuals and companies. This, in our opinion, has limited the commercial potential of PostgreSQL.
Sleepycat’s Berkeley DB offered a pre-relational DBMS mainly used in the embedded market. The company started originally with a BSD free license and then later moved to dual licensing with GPL-derivative for the open source version. The change in licensing combined with the choice of a niche market (embedded systems), boosted the company’s commercial possibilities. Sleepy-cat’s business model is similar to MySQL’s The company was acquired by Oracle in February 2006.
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O
BJECT ORIENTED DATABASES DEFINITION AND SHORT HISTORY 2An object database management system (ODBMS, also referred to as object-oriented data-base management system, or OODBMS), is a
2
tabase management system (DBMS) that supports the modeling and creation of data as objects. This includes some kind of support for classes of ob-jects, and for inheritance of class properties and methods by subclasses and their objects.
In their paper, The Object-Oriented Database System Manifesto [29], Malcolm Atkinson and others define an OODBMS as follows:
An object-oriented database system must satisfy two criteria: it should be a DBMS, and it should be an object-oriented system, i.e., to the extent possible, it should be consistent with the current crop of object-oriented programming languages. The first criterion translates into five features: per-sistence, secondary storage management, concur-rency, recovery, and an ad hoc query facility. The second one translates into eight features: complex objects, object identity, encapsulation, types or classes, inheritance, overriding combined with late binding, extensibility, and computational com-pleteness.
ODBMS were originally thought of to replace RDBMS because of their better fit with object-oriented programming languages. However, high switching cost, the inclusion of object-oriented features in RDBMS, and the emergence of object-relational mappers (ORMs) have made RDBMS successfully defend their dominance in the data center for server-side persistence.
Object databases are now established as a com-plement, not a replacement for relational data-bases.
SHORT HISTORY OF ODBMS
Early 1980s - Orion Research Project at MCC Won Kim at MCC (Microelectronics and Com-puter Technology Corporation) in Austin, Texas, begins a research project on ORION, which will later lead to two ODBMS products: ITASCA (no longer around) and Versant.
Late 1980s - First wave of commercial products Graphael, a Lisp-based system appears from the French nuclear regulatory efforts. Graphael even-tually goes through a re-write and becomes Ma-tisse.
Servo-Logic (later GemStone Systems) begins work on GemStone.
Francois Bancilhon from MCC starts development of O2 at INRIA (France).
Tom Atwood at Ontologic produces Vbase, which supports the proprietary language COP (C Object Processor), eventually eclipsed by C++. Ontologic becomes ONTOS, and the database is rewritten to support C++. Tom leaves Ontologic in the late 1980s and founds Object Design (now part of Progress Software) with ObjectStore (based on C++).
Another product from that time is Objectivity/DB. Drew Wade has been one of the founders of its vendor, Objectivity.
1991 – ODMG
Rick Cattell (SunSoft) initiates ODMG (the Ob-ject Data Management Group) with 5 major OODBMS vendors. The first standard, ODMG 1.0, was released in 1993. Throughout the 1990s, the ODMG works with the X3H2 (SQL) commit-tee on a common query language. Though no spe-cific goal is achieved, the efforts heavily influence the ODMG OQL (object query language) and, to a lesser extent, SQL: 1999.
1995 - The OODBMS Manifesto
Malcolm Atkinson et. al release “The Object-Ori-ented Database System Manifesto” [29].
1990s - First Growth Period
Market for commercial ODBMS products grows to some $100M, peaks in 2000 and shrinks since. 2001 - Final ODMG 3.0 standards released. A final ODMG 3.0 standard is released. Shortly thereafter, the ODMG submits the ODMG Java Binding to the Java Community Process as a basis for the Java Data Objects (JDO) specification. Afterwards, the ODMG disbands.
2004 - Advent of open source
db4objects is released as free, open source ODBMS. In November 2005, db4objects is first to implement Native Queries [30] as an object ori-ented data access API that relies entirely on the programming language (Java/C#) itself.
E
XHIBITIV:
E
MBEDDEDD
ATABASESAn “embedded” database system is a database that is inside another software product. Typically the embedded database is not visible, and it is cus-tomized to fit the requirements of the application, which often does not need all functionalities of a “classical” database management system, for ex-ample reporting.
Embedded database systems must be very robust, since in the environment where they operate there is no database administrator.
According to IDC [31] the embedded database market grew 15% to reach 1.8 billion in 2004. IDC [32] has identified two key elements to char-acterize the potential of the embedded-DBMS market:
• avoid direct competition with large DBMS vendors
• enable rapid growth (by royalty or run time license fees) through the ISV channel with-out requiring a corresponding growth in support or sales staff.
IDC suggests the following key elements for a strategy to enter this market [32]:
• Make the DBMS self-managing, requiring no DBA, with an API to allow the tool or application in which it is embedded to man-age the database.
• Decide what sorts of products to target for embedding the DBMS
• Identify the targeted software product types based on a determination of which markets make the most sense for the DBMS product based on its characteristics and the growth potential for those markets
• Ensure that the size, performance, and reli-ability characteristics make sense for em-bedding in such products
• Price the product so that its royalty or run-time fees do not distort the overall price of the target product.
A
CKNOWLEDGMENTSMarten Mickos, CEO MySQL and Christof Wit-tig, CEO db4objects, provided useful feedback to earlier versions of the paper.
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