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Open-Source Business Models Aren't Dead-End Streets

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This year, open-source platforms and applications have shown how truly disruptive and influential they can be. However, The New York Times is getting lots of attention with a story that says successful open-source business models remain elusive. Are they? The companies that have built successful businesses based on open source have done so by being savvy, and understanding that their models have to be different from firms that simply sell software.

The Times’ story raises some good questions about high-profile, expensive open-source software acquisitions that didn’t bring lucrative results to the acquiring companies. It points out that Sun Microsystems’ (s sunw) $1 billion purchase of MySQL didn’t result in a goldmine, and that MySQL is now the key roadblock in Oracle’s (s orcl) proposed acquisition of Sun. It also points to VMware’s (s vmw) buyout of SpringSource and Citrix’s (s ctxs) acquisition of XenSource — both expensive purchases that won’t necessarily have big payoffs.

While it’s true that growing a successful business out of an acquisition is one way to do well — and a long-standing strategy that’s understood on Wall Street — many businesses that really understand how open source works are winning by exploiting its unique strengths.

On this front, I can’t think of two companies that understand how to build a shrewd business model around open source better than Google (s goog) and Red Hat (s rhat). As we approach the end of the year, Google’s Android OS is clearly one of the hugest software successes of the year, and, just today, the latest winning applications in Google’s second Android Developer Challenge were announced. It’s easy to forget that as this year started, people were wondering if Android had any future at all.

Android is free, and Google does not have a business model that surrounds selling it. Instead, the free and flexible open-source platform is making its way into many handsets, where it will help steer lots of users into Google’s lucrative search-and-ad ecosystem. That’s a smart business model.

As for Red Hat, it has posted quarter after quarter of strong financial results based on a business model that is built on selling support, not software (GigaOM Pro, subscription required). Wall Street is still waking up to how well that has worked for the company, and open source-focused startups such as Acquia and Cloudera are employing the same business model. They provide subscription support for popular, free, open-source platforms.

As ZDNet notes, regarding whether businesses can make money with open-source software:

IBM makes a ton. Google makes a ton, too. Microsoft has figured out the trick. So have thousands of service companies, maybe tens of thousands around the world. It’s not just Red Hat.

Going forward, open source will become central to many more imaginative, successful business models, but imagination is required.

4 Responses to “Open-Source Business Models Aren't Dead-End Streets”

  1. Excellent article. I think you could make an excellent case for WordPress. Their business model is shrewd as well and, not in an evil shrewd kind of way. They give their base product away and build around it with services – everything from comment spam prevention, to hosting and enhanced commenting services.

    While companies like twitter seemed to have peeked or at least their traffic has, WordPress has seen an increase as of late. Certainly not as large as Microsoft or Red Hat but, give them time

  2. Google’s drive with Android always has been to block Windows Mobile. As I wrote, a year ago, in

    All Google wants from the G1 is that Android is seen as better than Windows Mobile. Manufacturers and carriers unable to sell the iPhone need an alternative. If Android looks better, they won’t take up Windows Mobile where Microsoft would serve up the ads. So Google’s main interest in Android is in making sure that Windows Mobile does not succeed. Giving Open Source developers a home, so that they don’t work on a less Google-friendly mobile OS, is an added bonus.

    Will Microsoft now buy their way on to the iPhone to make Bing the default choice?