Is open source good business?

If software companies that work with open source code are to survive in the long term, they must find clients who are not developers in their communities. This is one of the conclusions of Thomas Rosenfall’s thesis in an unusual field of research.

Open source software is available for anyone to download, use and develop, devoid of licence fees. It is also characterised by the presence of a strong community of users who test and develop the software. All of the results are also free for anyone to use.

However can profit be made from software based on open-source code? How do the companies make money? These are questions that Thomas Rosenfall devoted his doctoral studies and his thesis to, at the Industrial Marketing division at Linköping University (LiU).

“Next to nothing has been written about how the commercial aspect works. Previously, it wasn’t seen as entirely legitimate to make money from open source code,” says Rosenfall, who will soon defend his doctoral thesis and who is relatively alone in his field of research.

His thesis aims to explain how the open source companies work, and why some of them are profitable while others are not.
The American firm Red Hat is the major player in the field, which offers software based on the Linux open operating system – has been around for a long time and is very profitable. But although the Swedish firm MySQL, which built database systems with open source code became a major, market-leading company, they never made a profit. (They were also eventually bought by Sun Microsystems and then incorporated into Oracle, which in turn bought out Sun.)

The Swedish firm Cendio develops software for thin clients and is still some ways away from making a profit, while American company CodeWeavers, which develop software that runs Windows programs on Macs, is not making much of a profit but managing to stay in the black on the balance sheet. Rosenfall has closely examined these four companies.
“I studied relatively few cases in-depth, but they are carefully selected,” he explains.

His studies show that one central issue is how the company handles its community, i.e. all of the people who use, test and develop the software, both within and outside the company. The way they handle their community is also reflected in their chosen business model. It is also crucial that the companies can differentiate between their community and their clients.

“Both the companies that are profitable – Red Hat and CodeWeavers – have found ways to separate clients from the community, while MySQL for example never managed that,” he says.

The trick they used is to keep the community happy by outsourcing and financing development projects. Red Hat has its own R&D department, but also has the financial muscle to fund a number of different projects, with some results being used in their own development work. Their clients, who are often major companies, subscribe to program packages with upgrades, support etc.

CodeWeavers sells licences like any software company, but also keeps its community busy with projects that in their case are very strongly connected to the company itself. They are also completely dependent on their community, for better or worse.

“Cendio doesn’t have the same financial resources and has to choose projects carefully, so the fact that they sell licences irritates their community a little,” he says.

Do you have any advice for open source entrepreneurs?

“If I had a newly started company today I would look for a community to become part of, and create close ties to it. But it’s also important to find clients who are not developers in the community. The code must also be released, always. When Red Hat buys companies they always open up the code straight away and this is important for their credibility and their brand. MySQL only released the code of the more basic versions, and their users left.”

Having used open source software since 1991, having worked with it since 1997 and having dedicated his post-doctoral studies to it since 2004, Rosenfall is very familiar with this subject. The difficulties he encountered were more about finding scientific references to confirm what he really knows. And there was hardly any previous research on open source and entrepreneurship to relate to. For these reasons his thesis has an extensive list of references.

The thesis is a monograph titled Open Source, Vendors’ Business Models by Thomas Rosenfall. Department of Management and Engineering, Linköping University 2012. Rosenfall defended his thesis at Linköping University on April 26.

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Related Links

• Thomas Rosenfall 
• Division of Industrial Marketing

Monica Westman Svenselius 2012-04-23