How Does One Monetize Open Source Software?

By Benjamin Humphrey, Published January 16, 2012

IBM at Linux.conf.au

Monetizing open source software can be a tricky challenge for many companies. After all, when you’re giving away your primary product for free, how could you possibly make money off it?

Nicolas Erdody, Paul Gampe, Mark Bathie, and Bob Waldie formed a panel in the Business of Open Source MiniConf at Linux.conf.au 2012 and talked about the various ways companies can hope to monetize Open Source software.

The many models of money making

There are different approaches to make money off free code. We’re surrounded by examples of open source software being used in mainstream applications. These applications could be entirely open source, or sometimes they will simply utilize parts of open source code.

Here are a few models that many companies employ to make some cash off free software.

Value adding to existing community projects

Companies like Red Hat and Canonical take open source software and apply their own additions to form a complete package tailored to suit the needs of enterprise customers the world over. Phone manufacturers like HTC and Samsung add their own skins to Android to create (in their eyes) a differentiating factor for consumers which acts as a selling point on the shop floor.

These value added additions may also include expert support and installation of open source solutions and software, and a lot of companies have made a name by focusing on this industry alone.

Embedding open source software in a product or service

Many home appliances and electronics (smart dishwashers, televisions, set top boxes like Tivo) have some form of open source software in their arsenal, whether it’s simply a couple of libraries or the entire kernel.

Web applications like Facebook and Twitter make extensive use of open source software to build their products. They often develop custom solutions (like Facebook’s haystack) which often end up open source as well.

Open sourcing existing proprietary software

Some companies build software and keep the code in secrecy, but for whatever reason (perhaps licensing was too much trouble) end up open sourcing the code in the end which allows for more contributors, testers, distribution, and more.

Fine tuning or polishing existing software

A prime example would be Ubuntu/Canonical, who have taken open source projects like the kernel and GNOME, polished these up and created a cohesive package which can be installed on OEM devices or delivered to enterprise consumers.

The changing face of open source software

Software Engineers from the 1960s and 1970s said in hindsight they were working on open source – it just wasn’t called that. They just called it “software”.

Eventually companies began developing code in secrecy to maintain a competitive advantage, and only then did the term “open source” eventuate simply as a means of differentiation.

Initially the Linux kernel as we know it today was a volunteer project started by Linus Torvalds in the early 1990s, and most of the contributions came from unpaid volunteers. Nowadays, around 70% of contributions are from paid contributors working for companies which have a vested interest in kernel development.

Open source is moving from a community based system to a vendor-powered system, and this has fast forwarded development and adoption of open source technology. Every year the percentage of software that is open source is increasing, and some suggest that in five years it may even tip 50%.

That is to say, 50% of the world’s software could be open source by 2016.

Open source software is growing in popularity every year, and it’s being driven by vendors who have proven that money can be made off a product which is given away “for free.”

What started out as a community driven project is now powering the most popular websites, products, and appliances around the world, and different methods and models of making profit off open source software are popping up every day.

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  1. #LCA2011 How does one create a sustainable open source business?
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  • http://www.corbindavenport.com/ Corbin Davenport

    A good example of the ‘Fine tuning or polishing existing software’ method is IBM’s Lotus Symphony office suite: http://en.wikipedia.org/wiki/IBM_Lotus_Symphony

    • Anonymous

      Which is now dead project. :)
      Lotus Symphony was merged with OpenOffice.org code into Apache OpenOffice product (no stable release yet).

      • Anonymous

        Any sources?
        I don’t think Symphony is dead, I believe they’re just contributing some of their code. IBM still requires some proprietary extensions for Symphony to integrate with their online offerings.

  • Anonymous
  • http://pulse.yahoo.com/_5KG7JAE7WPBQI2PCQL4HYPAKPI Bassboy Anon

    Having the luxury of being able to call up a support company, filing a bug report and getting a fix or workaround or consulting for you is something many individuals and organizations are willing to pay for. It’s a very viable business model as long as you have motivated developers.

    That said I don’t see how companies like RedHat or Attachmate are willing to pay their developers for working on web browsers, fancy DEs and music players.

    • Satchit Bhogle

      That’s where the community comes in. It’s remarkable that the three things you mentioned are exactly the things we are now seeing a surfeit of: DEs, music players and browsers.

      • Anonymous

        Your missing the point.
        He is saying He can’t see people monetizing open source web browsers DE’s and music players.

        • Satchit Bhogle

          You monetise the entire experience. You are only relieved from developing these applications which are already community developed.

  • Martin Owens

    Yikes, that’s a bit of a history rewrite in the middle there. It’s like you went in with the deliberate aim of taking Free Software out of the history books. The point is no matter how crazy the FSF and Stallman is today, you can’t just rewrite history like that; those ideas and the passion to drive them forwards with legal and ethical frameworks came from the FSF and Free Software, not from Open Source which is basically a coat tales operation.

    You’ve actually missed three economic models. Public funding, pre-paid group sponsorship and insurance policies. Weak research and poor history.

    • http://twitter.com/humphreybc Benjamin Humphrey

      Wasn’t meant to be a history lesson or in-depth economics lesson, just an overview of some of the stuff that was said in this session.

  • http://twitter.com/dewbot1991 Nihar Sawant

    reminds me of a real good movie on Linux ‘Revolution OS’ http://www.imdb.com/title/tt0308808/ 

    • Satchit Bhogle

      Revolution OS is  a good movie but quite dated. Linux and the world of computing in general has changed too dramatically in the last ten years for that movie to be of too much relevance.

    • Fatriff

      LOL I see the movie Grossed $3,500 at the box office! And this was in 2001. See, there is money in Open Source! They should make a new  movie now and see how much the takings will increase by.

    • http://twitter.com/phiphi_g Philipp Gassmann

       It’s full-length on youtube: http://www.youtube.com/watch?v=CjaC8Pq9-V0

  • Anonymous

    Nothing was mentioned on how to actually monetize open source projects. The examples mentioned were already large and established projects being actively developed my vendors (Linux kernel), and companies packaging software from upstream to distribute (Red Hat, Canonical).

    I didn’t learn how to monetize my own startup project. Kind of misleading title there.

    • Anonymous

      Not sure about startup projects, but  I’ve made money on open source software as a “contractor” of sorts:

      1. Applied for and completed a Google Summer of Code project (first real free software work I did)

      2. Was contacted by someone at a university for a free software project similar to the GsoC one (GsoC does give you lots of chances to get contacts in your field)

      3. Applied to and got a contract on a publicly funded free software project

      I really like this kind of contract work, where the project boundaries are sort of set, but you get a lot of freedom of implementation.

      These contracts can also help secure you financially while you build whatever startup project you’re working on, give you more legs to stand on, as well as build up your network of contacts.

      • Anonymous

        There are also lots of companies giving support on free software, e.g. setting up servers, web sites but also with regards to more specialised stuff. If you have a lot of knowledge about a certain type of software (born and raised on a 3D rendering farm? Perhaps you can start a consulting firm taking projects for movie and PR companies)

      • Anonymous

        And then you’ve got companies like http://status.net or WordPress that develop open source software and charge for deployment or support or rent out servers with pre-installed software. By creating a great product, they get users, and by having lots of users, they increase the absolute value of the share that wants the pay-for part of the product, all without needing any of the code to be proprietary.

      • Anonymous

        Or you can just make an Android app, release it under the GPL, and charge money for it. Of course, anyone else can compile the source and charge money for it too, but your will be the “official” source …

        • Anonymous

          And non official sources can’t distribute your trademark and artwork.

    • Anonymous

      If a program is to be made available “universally”, you just can’t monetize your code, so you better close it and sell it. Even asking 1 dollar per license can get you some -or a lot of- money (check the mobile app stores…), while giving the software away for free, well, just won’t.

      If you offer your services as a programmer for custom software, you will charge for your services and get money for actual coding. This was the model when I started in the late seventies (and it wasn’t called open source whatsoever). The norm was giving our customers the source code as part of the deal, so they could modify it themselves or hire someone else if they weren’t happy with us (that rarely happened, by the way, but gave customers confidence they weren’t tied to us). Big commodity software like MS Office kill that model a little, but I think there are still many opportunities for developing software for local companies, much in the same way IKEA hasn’t killed interiorists. The good thing today is that there exist hundreds or thousands of libraries you can build your custome software upon. In the seventies we used to do almost everything from scratch. That’s a huge difference. I don’t think OS licenses force you to post the source or binaries on the internet. You make it available to your customer and that’s fine. Of course if someone asks you for the code, you will have to hand it to them, but they’ll have to come to your office to collect it… (not sure about this point. Someone else may clarify.)

      There’s little to no money to be made from open source if your target is the whole world and you’re not a pretty big company willing to monetize your software on services (Canonical, RedHat, etc. you know what I mean).

    • Anonymous

      If a program is to be made available “universally”, you just can’t monetize your code, so you better close it and sell it. Even asking 1 dollar per license can get you some -or a lot of- money (check the mobile app stores…), while giving the software away for free, well, just won’t.

      If you offer your services as a programmer for custom software, you will charge for your services and get money for actual coding. This was the model when I started in the late seventies/early eighties (and it wasn’t called open source whatsoever). The norm was giving our customers the source code as part of the deal, so they could modify it themselves or hire someone else if they weren’t happy with us (that rarely happened, by the way, but gave customers confidence they weren’t tied to us). Big commodity software like MS Office kill that model a little, but I think there are still many opportunities for developing software for local companies, much in the same way IKEA hasn’t killed interiorists.

      The good thing today is that there exist hundreds or thousands of libraries you can build your custom software upon. Back in the days we used to do almost everything from scratch. That’s a huge difference. I don’t think FLOSS licenses force you to post the source or binaries on the internet. You make it available to your customer and that’s fine. Of course if someone asks you for the code, you will have to hand it to them, but they’ll have to come to your office to collect it… (not sure about this point. Someone else may clarify.)

      There’s little to no money to be made from open source if your target is the whole world and you’re not a pretty big company willing to monetize your software on services (Canonical, RedHat, etc. you know what I mean).

    • Anonymous

      If a program is to be made available “universally”, you just can’t monetize your code, so you better close it and sell it. Even asking 1 dollar per license can get you some -or a lot of- money (check the mobile app stores…), while giving the software away for free, well, just won’t.

      If you offer your services as a programmer for custom software, you will charge for your services and get money for actual coding. This was the model when I started in the late seventies/early eighties (and it wasn’t called open source whatsoever). The norm was giving our customers the source code as part of the deal, so they could modify it themselves or hire someone else if they weren’t happy with us (that rarely happened, by the way, but gave customers confidence they weren’t tied to us). Big commodity software like MS Office kill that model a little, but I think there are still many opportunities for developing software for local companies, much in the same way IKEA hasn’t killed interiorists.

      The good thing today is that there exist hundreds or thousands of libraries you can build your custom software upon. Back in the days we used to do almost everything from scratch. That’s a huge difference. I don’t think FLOSS licenses force you to post the source or binaries on the internet. You make it available to your customer and that’s fine. Of course if someone asks you for the code, you will have to hand it to them, but they’ll have to come to your office to collect it… (not sure about this point. Someone else may clarify.)

      There’s little to no money to be made from open source if your target is the whole world and you’re not a pretty big company willing to monetize your software on services (Canonical, RedHat, etc. you know what I mean).

    • Anonymous

      The thing is it is near impossible monetize open source software on the consumer device end (desktop, mobile, ect). First all of you are going to scream android. No. Android isn’t really open source, it is locked down and plagued with DRM.
      See: http://en.wikipedia.org/wiki/Tivoization
      All commercially successful devices running open source software for the consumer have “Tivoization”.

      Only enterprise or service-based companies like Redhat and Novell have been successful in monetizing open source without Tivoization.

      • Anonymous

        The core of Android is open-source and it doesn’t really suffer from tivoization — CyanogenMod has been doing pretty well.

        • Anonymous

          But the core of android and cyanogen mod don’t generate revenue! (Or at least not enough to make profit).

          • Anonymous

            Nor does Android. Google makes money only through mobile ads and the Android marketplace. It doesn’t sell licenses.
            I think maybe Microsoft makes more money on Android than Google, considering it has forced 70 percent of hardware makers to pay them royalties for it.

    • Anonymous

      If a program is to be made available “universally”, you just can’t monetize your code, so you better close it and sell it. Even asking 1 dollar per license can get you some -or a lot of- money (check the mobile app stores…), while giving the software away for free, well, just won’t.

      If you offer your services as a programmer for custom software, you will charge for your services and get money for actual coding. This was the model when I started in the late seventies/early eighties (and it wasn’t called open source whatsoever). The norm was giving our customers the source code as part of the deal, so they could modify it themselves or hire someone else if they weren’t happy with us (that rarely happened, by the way, but gave customers confidence they weren’t tied to us). Big commodity software like MS Office kill that model a little, but I think there are still many opportunities for developing software for local companies, much in the same way IKEA hasn’t killed interiorists.

      The good thing today is that there exist hundreds or thousands of libraries you can build your custom software upon. Back in the days we used to do almost everything from scratch. That’s a huge difference. I don’t think FLOSS licenses force you to post the source or binaries on the internet. You make it available to your customer and that’s fine. Of course if someone asks you for the code, you will have to hand it to them, but they’ll have to come to your office to collect it… (not sure about this point. Someone else may clarify.)

      There’s little to no money to be made from open source if your target is the whole world and you’re not a pretty big company willing to monetize your software on services (Canonical, RedHat, etc. you know what I mean).

  • https://launchpad.net/~esteinma Erik

    Another way is to release the source code as free software but keep copyright on artwork. That could be a viable route for game developers. ID Software did this with the Doom3 and Quake3 engines. Of course they already took in the majority of the revenues when the games were still closed source.

  • Anonymous

    Question : “How does one monetize open source software”
    Answer    :  Simple , just follow Microsoft. ;)

    • Anonymous

      Haha! but, :(

    • Anonymous

      What would that be, patent suing anyone who uses it on their phones?

  • Peter Mendham

    It’s very difficult to monetize open source in niche markets where the volume is very low. In these cases, expecting to be able to pay for product development through services is unlikely to work. After all, what percentage of users of a piece of open-source software pay for support, and what happens when you apply that percentage to a very small number? And yet, niche markets are often the sources of innovation and a great place for a start-up (which is back to Oxwivi’s comment).The uptake in open source/FLOSS is great, and I have benefited from it, but it creates the expectation in the mind of a consumer that all software should be free. The perceived value in software is decreasing. Rarely does a consumer use a piece of software and marvel at the number of hours that must have gone into its making. How can software in niche markets exist if it is always required to be open?Surely this is ‘horses-for-courses’: sometimes open source/FLOSS is the correct way to go, for example when there will be a large strong community and various viable monetization strategies; sometimes open sourcing is not financially viable and the value of a software product must be directly reflected in its price tag. I haven’t yet heard a decent debate on strategies for monetizing open source and this article didn’t help.

    • Anonymous

      If users expect software to be free-of-charge, and the developer wants to charge for the software, then the onus is on the developer (or, PR team) to change the users mind. But it’s really quite simple: if no user wants to pay for that niche software, then it dies out, and the world is no worse for it.

      Say I spend one work-year on a medical app for helping diagnose some rare blood disorder. Very niche. I charge $100 for it. No one buys it. Has the world lost anything important? Not really. If a hospital really needs such an app and doesn’t want to pay $100 per doctor, they can just hire a contractor (perhaps with a bidding round) to create one, and if the hospital (or a group of hospitals) is paying for development anyway, they might as well require the source license to be open, so that if the contractor goes bankrupt, others can update it.

      • Peter Mendham

        I agree there’s no loss if ‘niche’ means ‘one customer’, but that’s not really what I was talking about. I bet there are a bunch of customers who would benefit from a your medical app. I bet, also, that there are a number of customers, some with more marketing power than you. With it being a niche app, all of the IPR, all of the smarts, and all of the value, is in the software. So open sourcing niche software is a gift to your competitors who may well be in a better position to exploit it than you.So I guess what I’m getting it is not only about niche markets, it’s also about being a startup or a small company in a niche market. I think then you’re doubly screwed and OSS is just not an option. It’s OK for big organisations to go into open source, but what about the small guy? How does s/he make a living selling software products into a niche market where customers expect the price tag of software to be so different from its development cost?

        • Anonymous

          Per-install charges are not the only way to make money off software. The price tag of software can be high, without putting a price tag on each individual copy. In my example above, the small guy can get paid by taking that contract from the hospital.

          I wasn’t talking about a niche where there’s one customer either. If there’s only one customer and no possible way of making her required software after that one startup died, that’s definitely is a huge loss for her. But that’s seldom the case, is it?

          I was talking about a niche market where perhaps 20 doctors on every hospital was a potential customer (I would consider this a fairly typical “niche”, if it isn’t then perhaps my point doesn’t apply). In that case, one startup dying because it put a price tag on copies is no loss to the customers; the hospital(s) can contract some other firm to do the job, with the requirement that the result have a certain licensing (e.g. FOSS).

  • https://profiles.google.com/blargland/ phlum

    id Software has a good idea of how to make money off open source stuff. They release a full product and then a couple of years or so later they release the source code, without any resources or anything. Hence why Freedoom is allowed to exist alongside Doom II.

  • https://launchpad.net/~tim.timwahrendorff rakete

    I don’t like how beeing “open source” and software “for free” is beeing mixed as if open source is always for free or even free.

    open source != free software != software for free

    apparently I saw some App developers poping up, releasing their source with GPL license, sell the binaries for Windows and Apple users and giving Linux binaries away for free. That is an interesting new model.

    • Anonymous

      Too many “free beer” advocates.  Too many who associate not being able to download an iso as a violation of the GPL. 

    • Anonymous

      I’m pretty sure that the idea is that the developer gives you the source, and, if you don’t want to compile it yourself, pay a few bucks and hey, you might have saved a few hours of frustration. But, I’m not sure why they’re (the developer(s) in your example) are giving the Linux binary away for free… Maybe it’s to punish Max and Windows users :P

    • Anonymous

      “apparently
      I saw some App developers poping up, releasing their source with GPL
      license, sell the binaries for Windows and Apple users and giving Linux
      binaries away for free. That is an interesting new model.”
      You mean Flavio Tordini right? http://flavio.tordini.org/

      • https://launchpad.net/~tim.timwahrendorff rakete

        yes, I saw it there… but I have seen it before, I just can’t remember…
        btw. I donated 10€ for minitube to show that Linux users are even more generous than Windows and Mac Users :D

  • Will Moorhead

    Maybe give the software for free, but charge for licensing or drivers? (I believe Android charges for licensing, but forgive me if I am mistaken on that)

    • Anonymous

      That’s exactly the opposite of open source (and free software). With Open Source Software and Free Software, the “licensing” etc. (e.g. reuse in other projects) is free of charge, but anyone can charge for the binary/running program itself.

      • Will Moorhead

        Just brainstorming ideas – whether they are right or wrong

  • http://www.facebook.com/zeroangel David Bobb

    It’s well proven that people will gladly pay money for things to be made easier or more convenient for them — an example of this is any kind of service-oriented business like computer repair. Why would a guy who is a manager want to spend hundreds of hours to learn about how viruses work, removal techniques, post-cleaning, etc when he can hire a technician to do that for him?

    Likewise you can develop a product that works, and then develop a tool set to make things easier and market the toolset that simplifies things for your product. Ubuntu’s Landscape is an example of this, a product that you (as a system admin or organization) pay money for, to make administrating multiple (Ubuntu) systems easier by running shell commands across all systems, batch update, etc — thus reducing staffing requirements and saving your organization money overall.

    Landscape also works in that it is a ‘service’ being hosted on Canonicals Servers — their services handle things like nat negotiation, keepalives, receiving data from the clients and keeping logs, so that when you log on you have detailed information about any problems that mightve occurred with the computers over time. Sure there are ways to do similar things with open source software running off of a server on the network, but custom solutions take time and resources to implement and may not work as well as a packaged solution if your organization lacks manpower or expertise.

  • brad clawsie

    how to monetise open source? lets see…google, facebook, yahoo, redhat…all built on open source software.

  • Anonymous

    There’s a big section missing from this article – SUPPORT!!!  What do you think separates CentOS from Redhat?  When something [like HTTPD] breaks or you can’t figure out how to use it on Cent, you’re pretty much on your own.  Sure there’s wiki’s and what not, but no one’s going to do the work for you.  That’s what Redhat is for.  You have someone you can call to either sort out the problem, fix your config, or patch the software for you (and make it available upstream).

    If your company relies on an application built six years ago on a platform that’s out of development and full of leaks, who’s going to either rewrite it or provide support for that 2.4 kernel?  Many companies monetize on this, and is a strength of open source.  When something breaks in windos, included in your microsoft tax was a period of technical support – you call them up and say “Hey, my windows xp is broken.  Can you fix it?”.  If it’s out of a support period then you might get lucky, and they’ll patch the bug.  But when they say “you’re out of luck, go buy our new $300 upgrade”, it’s back to the drawing board.  With free and open source software, you can find a third party, like Redhat (and many other independents), who will support a dated product.  This happened on the community level a few years back with Fedora 9.

  • Anonymous

    There’s a big section missing from this article – SUPPORT!!!  What do you think separates CentOS from Redhat?  When something [like HTTPD] breaks or you can’t figure out how to use it on Cent, you’re pretty much on your own.  Sure there’s wiki’s and what not, but no one’s going to do the work for you.  That’s what Redhat is for.  You have someone you can call to either sort out the problem, fix your config, or patch the software for you (and make it available upstream).

    If your company relies on an application built six years ago on a platform that’s out of development and full of leaks, who’s going to either rewrite it or provide support for that 2.4 kernel?  Many companies monetize on this, and is a strength of open source.  When something breaks in windos, included in your microsoft tax was a period of technical support – you call them up and say “Hey, my windows xp is broken.  Can you fix it?”.  If it’s out of a support period then you might get lucky, and they’ll patch the bug.  But when they say “you’re out of luck, go buy our new $300 upgrade”, it’s back to the drawing board.  With free and open source software, you can find a third party, like Redhat (and many other independents), who will support a dated product.  This happened on the community level a few years back with Fedora 9.

  • Anonymous

    You didn’t really discuss ways to make money, though.
    Off the top of my head:
    - selling the app for a fixed amount, but keeping it open-source (most people prefer official versions over derivatives and don’t hesitate to pay; also, some application stores will not allow in free duplicates and keep only the official paid version)
    - pay-as-you-like price
    - support
    - contracts (e.g. Mozilla+Google, or the way Gnome makes money from the Amazon music store)

    Or, with some profit coming from a proprietary solution:
    - setting a goal (a monetary value) after which the software is open-sourced
    - having two distinct versions, one open-source and one closed-source (e.g. OpenOffice.org/StarOffice)

 
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