OSS Business Models

Open Source Software (OSS) business models have been studied by many academics and authors since the late 90s / early 00s, including JP Smets & Benoît Faucon, Nicolas Jullien or Lerner & Tirole (TODO: add references).

In this note, we present the OSS vendor business models through the prism of several more recent frameworks, like the BMC (2010), the SBMF (2013), the e3-value model (2003), as wel as several other models that each provide insight into this subject.

Through the Business Model Canvas

Business Model Canvas can be used to conceptualize an open source software (OSS) vendor’s business model. Here is a generalized characterization:

1. Customer Segments: The primary customer segments would be businesses, organizations, or individuals looking for open-source software solutions. They could be tech companies, government organizations, educational institutions, non-profits, startups, or individual developers and hobbyists.

2. Value Propositions: The key value propositions would be access to free and customizable software, reduced total cost of ownership, avoidance of vendor lock-in, and the ability to contribute to the product’s development.

3. Channels: Channels might include the company’s website, online communities and forums, social media, open-source repositories like GitHub, and events and conferences.

4. Customer Relationships: Relationships could be community-based and self-service. The company might provide forums for users to support each other, documentation for self-guided help, and possibly paid support for enterprise customers.

5. Revenue Streams: Revenue could come from a variety of sources such as offering premium features or versions (freemium model), guarantees, support and consulting services, training and certification programs, and hosting or cloud services.

6. Key Resources: The OSS codebase, the contributors community, and the company’s staff (including software engineers, community managers, support staff, etc.) would be key resources.

7. Key Activities: Key activities would include software development and maintenance, community management, customer support, and possibly services like consulting or training.

8. Key Partnerships: Partnerships might include other open-source projects, cloud service providers, IT consultancies, other technology companies, and possibly large enterprise users.

9. Cost Structure: Major costs would likely come from staff salaries, infrastructure costs (if providing a hosted service), and costs associated with community engagement and management.

Through the SBMF

An Open source software vendor business model can also be characterized using The Software Business Model Framework (SBMF):

1. Strategy:

   • Value Proposition: May include the freedom to use, study, change, and distribute the software to anyone and for any purpose.
   • Market Differentiation: Could include unique features, community support, or expertise in a particular domain.
   • Growth Strategy: Might involve attracting more contributors, expanding the user base, or offering new products and services derived from the main project.

2. Revenue:

   • Sales Volume: This might depend on the level of adoption of the open source software.
   • Revenue Source: Could include direct user payments for additional services or features, guarantees, advertising, or commissions from third-party services.
   • Pricing Assessment Base: Likely usage-independent, though there could be usage-based aspects for certain services.
   • Payment Flow Structure: May involve upfront payments for additional services or recurring payments for access to specific features or guarantees, or for ongoing support.
   • Revenue Distribution Model: Might involve sharing revenues with the community, especially if the community contributes significantly to development (which may or may not be the case).

3. Upstream:

   • Software Stack Layer: Depends on the type of software being developed.
   • Platform: Could include desktop, server, mobile, or cloud platforms.
   • License Model: Will likely involve an open source license, such as a copyleft or permissive license.
   • Degree of Standardization: Might range from highly standardized to highly specific, depending on the software and its user base.
   • Key Cost Driver: Could be research and development, marketing and sales, or services.

4. Downstream:

   • Localization: Might serve a global or local market, depending on the software.
   • Target Customer: Could include small organizations, large organizations, or private individuals.
   • Target Industry: Could be any industry that finds the software useful.
   • Target User: Might include business users, consumers, or software developers.
   • Channel: Could involve sales agents, online shops, events, or retail stores.

5. Usage:

   • Implementation Effort: Could range from low to high, depending on the complexity of the software.
   • Operating Model: Might be on premise, on demand, or a hybrid combination.
   • Maintenance Model: Could involve daily, weekly, monthly, or less frequent updates.
   • Support Model: Might involve standard support, customer specific support, or a hybrid combination.
   • Replacement Strategy: Might involve one, few, or many releases being available at a time.

Through the e3-value model

The e3-value model emphasizes on the exchange of value between a network of actors. In the context of an open source software vendor, here’s how it might be characterized:

1. Actors: This would include the open source software vendor, the user community, external contributors to the open source project (if any), and possibly commercial partners or customers who pay for additional guarantees, features and services.

2. Value Objects: These are the items of economic value that are exchanged between actors. For an open source software vendor, this could include the open source software itself, contributions to the software from the community (suggestions, code, documentation, bug reports, translations, etc.), and any features, guarantees or services sold by the vendor.

3. Value Exchanges: These are the transactions of value objects between actors. For example, the vendor provides the software to the community, who in turn provide contributions (or various natures, not necessarily in code) back to the vendor. The vendor might also sell features, guarantees or services to customers.

4. Value Interfaces: These represent the business interfaces where value exchanges occur. For an open source software vendor, this could include the project’s website or repository, community forums, and the vendor’s commercial website or sales team.

5. Value Activities: These are the activities performed by an actor to enable value exchanges. For the vendor, this might include developing the software, maintaining the project’s infrastructure, providing support, and selling features, guarantees or services.

6. Value Ports: These are the channels through which value objects are exchanged. For an open source software vendor, this could include the software repository for exchanging code, a bug tracking system for reporting and tracking issues, and a payment system for selling features, guarantees or services.

The e3-value model helps to illustrate the reciprocal nature of the relationship between the open source vendor and its community, as well as the potential for the vendor to generate revenue through additional features, guarantees or services. It also highlights the importance of the community as not just users, but also contributors to the open source project.

Through the Technology Adoption Lifecycle

Geoffrey Moore’s model of the lifecycle of technology adoption can be applied to OSS vendors:

1. Crossing the Chasm: In the context of open source software, the “chasm” can be seen as the gap between early adopters (often the developer community or tech-savvy users) and the early majority (mainstream users or businesses). Open source software often starts with a strong base of early adopters who appreciate the flexibility, transparency, and community aspects of open source. However, crossing the chasm to mainstream users can be a significant challenge, as these users often require more polished products, comprehensive documentation, and professional support.

2. The Tornado: This stage represents a period of hyper-growth when the mass market adopts a new technology. For OSS vendors, achieving this stage often means that their software has become a standard in its category (e.g., Linux in operating systems, or WordPress for content management systems). During this phase, OSS vendors can experience rapid growth in users and customers, and it’s crucial to have the infrastructure and resources ready to support this expansion.

3. Bowling Alley: In this phase, the technology is adopted by different market niches (like bowling pins that fall one after another). For an OSS vendor, this could mean tailoring the software or providing specialized guarantees or services for specific industries or use cases.

4. The Main Street: In this phase, the technology has become mainstream and the growth slows down. For OSS vendors, maintaining their position might involve continued innovation, offering value-added features and services, and ensuring customer satisfaction.

The path through these phases might not be linear or predictable for OSS vendors, given the unique aspects of open source (like the role of the contributors community, or the impact of big tech companies in the open source space).

Other (meta)models

Several other frameworks can provide insights into the business models of open source software vendors. These include:

1. Four-Stage Hybrid Business Model: Introduced by Riehle, this model describes the possible evolution of open-source vendors from single-vendor open source (stage 1), to open-core (stage 2), to product specialists (stage 3), to platform providers (stage 4). This framework can help understand the different ways open source vendors may choose to commercialize their offerings.

2. Value Network Analysis (VNA): This framework can help analyze social and technical resources within a business and how they interact. It can be used to represent the complex network of interactions in an open-source community, including the interplay of developers, users, and vendors.

3. The Resource, Competences, Organization, and Value (RCOV) framework: The RCOV model’s emphasis on resources, competencies, organization, and value propositions can help represent how an open source software companies leverage their unique resources (like a vibrant developer community), competencies (such as expertise in certain technology areas), organization (like the processes and structures it uses to coordinate development activities, manage contributions from the community, or respond to issues and feature requests), and value propositions (like superior customizability, lack of vendor lock-in or lower total cost of ownership) to compete in the market. [TODO: develop this section using the recent litterature].

4. Blue Ocean Strategy: This strategy can be used to identify uncontested market space and create and capture new demand. Open source vendors often operate in such “blue oceans” by offering unique value propositions that differentiate them from traditional software vendors.

5. The Lean Startup Model: This model emphasizes iterative product development and customer feedback as key elements of building successful startups. Open source projects often embody these principles, with a strong focus on user involvement and rapid, iterative releases based on user feedback.

6. Resource-Based View (RBV): This framework focuses on the strategic resources a firm possesses and how they can be used to achieve competitive advantage. For open source software vendors, such resources may include its open source community or communities, the software itself, and the firm’s technical expertise.

7. Porter’s Five Forces: This model helps assess the competitive environment of a business. Open source software vendors operate in a unique environment with different competitive dynamics (e.g., competition from other open-source projects, the bargaining power of contributors and users, etc.), and this framework can provide valuable insights in this regard.

8. The Value Disciplines model: An open source company could choose to focus on on the the following 3 disciplines defined by the model:

   1. Customer Intimacy: the company could leverage its community to provide highly tailored and adaptable solutions to individual customer needs, while also fostering strong, long-term relationships with their users.
   2. Operational Excellence: the vendor could focus on efficiently managing community contributions and maintaining a streamlined process for software development, testing, and deployment to deliver high-quality software at a competitive price.
   3. Product Leadership: an open source vendor could continuously innovate by incorporating cutting-edge technologies into their products, driven by the contributions from a diverse community of contributors, thereby pushing the performance boundaries of their offerings.

Page last modified: 2024-03-08 14:39:17