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Licensing and Architecture
A Conversation with Luke Hohmann, Part VI
by Bill Venners
April 19, 2004

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Open Source Business Models

Bill Venners: In your book, Beyond Software Architecture, you write, "As of the writing of this book, I know of no provable long-term sustainable business models for open source software."

Luke Hohmann: I think it's too early to see if a purely service-oriented model based on open source is economically stable. I think we have some evidence with companies like SleepyCat software that some open source business models proving sustainable. I'm not convinced that RedHat is sustainable. I hope that they are. It's just that a pure service-model offering is a really tricky business to get big and successful.

Bill Venners: Why?

Luke Hohmann: How many times have you had good service lately in your life? It's hard to give good service. Service models don't tend to scale very well, because they are typically based on people. Maintaining consistency of the delivery of the service via the people as you grow is very hard. Some of the companies who are in the open-source services business are not cash flow positive, and some of the companies who are cash flow positive have not yet burned through their accumulated debt. That's not to say I hope open source models don't succeed. I hope they do. I think the open source movement is great. It's offering choice and providing competition.

Joel on Software has a wonderful piece on the macro and microeconomics of open source. In a nutshell, if you've got $1000 to spend on a computer, and the operating system costs $200, you've got $800 to spend on the hardware. If the cost of the operating system is zero, then the hardware manufacturer can get $1000. So the goal of IBM pushing open source software has nothing to do with IBM being altruistic. If IBM drives the cost of the operating system to zero, they get more money for the hardware.

I want to be clear that I'm neither for nor against open source software. My comments are strictly based on the business implications of open source. And I'm not alone. Michael Cusumano, of MIT's Sloan School of Management, echoes my analysis in his new book The Business of Software. He writes: "Time will tell if for-profit software companies can make a business out of selling services and products that complement free software. So far, the results have not been promising". So, let's see how things turn out, and hope that open source continues to provide us with better software.

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