Wednesday, October 10, 2007

Can you make money from open source?

The question asked below was:  Can open source software be used to create a successful business model and generate real revenue?

And the full answer was:

I am assuming that you are asking the question from the point of view of building a business based on open source software, not just using it within your organization. Given that, I think the answer is a very depends. And I would ask you if it matters in today's world.

For those that have been successful and profitable, look at the obvious ones, MySQL and Red Hat. Both very successful so far.
But, you also need to look at the ones that are not yet profitable that made out well via acquisition. XenSource was bought by Citrix for $500 million on $3 million in revenue. JBoss was purchased by Red Hat for $350 million and they were not yet profitable. Zimbra was just bought by Yahoo for $350 million on about $3 million in revenue.

The money is definitely there for sure. But, there are also a ton of open source start-ups who will never make it and the reasons are almost infinite. The two that seem to jump out at me are:

1. The open source project they are based on is too much of a niche product and has no viable market.

2. The team building the company does not understand the model and fails to execute.   As I said there are a million other reasons, but they are the two that jump out at me right away.

What I can say is that this is not like the internet boom of the late 90s. VCs are not throwing money at open source just because it is open source. They are looking for a solid business plan and a path towards profitability.

Another important question is how do you plan to make money? There are many models here.
1. Simply sell support for an existing open source product: Zmanda
2. Add value by bundling components to the open source project and sell support: Red Hat
3. Build your own open source product and sell it: MySQL
4. Take an open source product, add significant value and close source it: EnterpriseDB, IBM Websphere
5. Use open source components to lower your development costs and bundle it "invisibly" into your product: TiVo

The model matters just as much as anything else.

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