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Economic Free Software Perspectives
1
Carlo Daffaracdaffara@conecta.it
Introduction
“How do you make money with
Free Software
?”
was a very common question just a few years ago. Today, that question has evolved into
“What aresuccessful business strategies that can be implemented on top of FreeSoftware?”
 2
In order to develop business strategies, it is first necessary to have a clearunderstanding of the different aspects that you seek to address. Unfortunatelythis is not made easier by popular ambiguous use of some terms forfundamentally different concepts and issues, e.g. “Open Source” being usedfor a software model, development model, or business model.These models are orthogonal, like the three axes of the three-dimensionalcoordinate system, their respective differentiators are
control
(softwaremodel),
collaboration
(development model),
revenue
(business model).The
software model
axis is the one that is discussed most often. On the onehand there is proprietary software, for which the vendor retains full controlover the software and the user receives limited usage permission through alicense, which is granted according to certain conditions. On the other handthere is Free Software, which provides the user with unprecedented controlover their software through an ex-ante grant of irrevocable and universalrights to use, study, modify and distribute the software.The
development model
axis describes the barrier to collaboration, rangingfrom projects that are developed by a single person or vendor to projects thatallow extensive global collaboration. This is independent from the softwaremodel. There is proprietary software that allows for far-reachingcollaboration, e.g. SAP with it’s partnership program, and Free Softwareprojects that are developed by a single person or company with little or nooutside input.The
business model
axis describes what kind of revenue model was chosenfor the software. Options on this axis include training, services, integration,custom development, subscription models, “Commercial Off The Shelve”(COTS), “Software as a Service” (SaaS) and more.These three axes open the space in which any software project and any
1Data and text was partially adapted from the results of the EU projects FLOSSMETRICS and OpenTTT (opensource business models and adoption of OSS within companies), COSPA (adoption of OSS by publicadministrations in Europe), CALIBRE and INES (open source in industrial environments). I am indebted withGeorg Greve of FSFE, that wrote the excellent introduction (more details on the submission here:http://blogs.fsfe.org/greve/?p=260 ), and that kindly permitted redistribution. This text is licensed under CC-by-SA(attribution, sharealike 3.0)http://creativecommons.org/licenses/by-sa/3.0/. I would grateful for an email to indicateuse of the text, as a way to keep track of it, at cdaffara@conecta.it. 2Free Software (defined 1985) is defined by the freedoms to use, study, share, improve. Synonyms for Free Softwareinclude Libre Software (c.a. 1991), Open Source (1998), FOSS and FLOSS (both 200X). Following scientifictradition, FSFE prefers the first established term, which is used in this appendix. For purposes of this document, thisusage is synonymous with “Open Source” by the Open Source Initiative (OSI).
 
product of any company can freely position itself. That is not to say all thesecombinations will be successful. A revenue model based on lock-in strategieswith rapid paid upgrade cycles is unlikely to work with Free Software as theunderlying software model. This approach typically occurs on top of aproprietary software model for which the business model mandates acompleted financial transaction as one of the conditions to grant a license.It should be noted that the overlap of possible business models on top of thedifferent software models is much larger than usually understood. The ex-antegrant of the Free Software model makes it generally impossible to attachconditions to the granting of a license, including the condition of financialtransaction. But it is possible to implement very similar revenue streams inthe business model through contractual constructions, trademarks and/orcertification.Each of these axes warrants individual consideration and careful planning forthe goals of the project.If, for instance the goal is to work with competitors on a non-differentiatingcomponent in order to achieve independence from a potential monopolisticsupplier, it would seem appropriate to focus on collaboration and choose asoftware model that includes a strong Copyleft licence. The business modelcould potentially be neglected in this case, as the expected return oninvestment comes in the form of strategic independence benefits, and lowerlicence costs.In another case, a company might choose a very collaborative communitydevelopment model on top of a strong Copyleft licence, with a revenue modelbased on enterprise-ready releases that are audited for maturity, stability andsecurity by the company for its customers.The number of possible combinations is almost endless, and the choices madewill determine the individual character and competitive strengths andweaknesses of each company. Thinking clearly about these parameters is keyto a successful business strategy.
Strategic use of Free Software vs Free Software companies
 According to Gartner, usage of Free Software will
reach 100 percent by November  2009
. That makes usage of Free Software a poor criterion for what makes aFree Software company. Contribution to Free Software projects seems aslightly better choice, but as many Free Software projects have adopted acollaborative development model in which the users themselves drivedevelopment, that label would then also apply to companies that aren’tInformation Technology (IT) companies.IT companies are among the most intensive users of software, and will oftenfind themselves as part of a larger stack or environment of applications. Beingpart of that stack, their use of software not only refers to desktops and serversused by the company’s employees, but also to the platform on top of which thecompany’s software or solution is provided.Maintaining proprietary custom platforms for a solution is inefficient andexpensive, and depending upon other proprietary companies for the platformis dangerous. In response, large proprietary enterprises have begun to phase
 
out their proprietary platforms and are moving towards Free Software inorder to leverage the strategic advantages provided by this software model fortheir own use of software on the platform level. These companies will ofteninteract well with the projects they depend upon, contribute to them, andfoster their growth as a way to develop strategic independence as a user of software.What makes these enterprises proprietary is that for the parts where they arenot primarily users of software, but suppliers to their downstream customers,the software model is proprietary, withholding from its customers the samestrategic benefits of Free Software that the company is using to improve itsown competitiveness.From a customer perspective, that solution itself becomes part of the platformon which the company’s differentiating activities are based. This, as statedbefore, is inefficient, expensive and a dangerous strategy. Assuming a market perspective, it represents an inefficiency that providesbusiness opportunity for other companies to provide customers with a stack that is Free Software entirely, and it is strategically and economically sane forcustomers to prefer those providers over proprietary ones for the very samereasons that their proprietary suppliers have chosen Free Software platformsthemselves.Strategically speaking, any company that includes proprietary software modelcomponents in its revenue model should be aware that its revenue flow largelydepends upon lack of Free Software alternatives, and that growth of themarket, as well as supernatural profits generated through the proprietarymodel both serve to attract other companies that will make proprietarymodels unsustainable. When that moment comes, the company can eithermove its revenue model to a different market, or it has to transform itsrevenue source to work on top of a software model that is entirely FreeSoftware.So usage of and contribution to Free Software are not differentiators for whatmakes a Free Software company. The critical differentiator is provision of FreeSoftware downstream to customers. In other words:
 Free Software companiesare companies that have adopted business models in which the revenuestreams are not tied to proprietary software model licensing conditions.
Economic incentives of Free Software adoption
The broad participation of companies and public authorities in the FreeSoftware market is strictly related to an economic advantage; in most areas,the use of Free Software brings a substantial economic advantage, thanks tothe shared development and maintenance costs, already described byresearchers like Gosh, that estimated an average R&D cost reduction of 36%.The large share of “internal” Free Software deployments explains why some of the economic benefits are not perceived directly in the business servicemarket, as shown by Gartner:
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