The Free Software Solution

Free software is a matter of liberty, not price. To understand the concept, you should think of "free speech", not "free beer." - Richard Stallman (from GNU Website)

Then, in early 1998, we devised a possible solution to the dilemma. The two of us would leave our full-time jobs and devote all of our time to developing the applications to an enterprise level.

However, true to the original ideals of the archive, we decided to form a company based upon the same ideals which had made the site so successful.

Users should continue to enjoy the freedom to download, use, modify and copy the software produced by the "for-profit" company just as they did when it was a public service website.

Fortunately, such a business model was not as absurd as it might sound. Several working and respected business/development models had grown up during the 80s and 90s based on the changes being wrought by the digital economy and which took for granted the idea of "free software." These new models incorporated, evolved or grew up in parallel with the "Free Software" model developed by the Free Software Foundation in the mid-eighties.

Essentially, the new models of software development argue that it is possible to run a profitable company by granting your customers the ability to freely copy, distribute, or even change the software that you provide.

The Free Software Foundation puts it like this:

`Free software' refers to the users' freedom to run, copy, distribute, study, change and improve the software. More precisely, it refers to three levels of freedom:

• The freedom to study how the program works and adapt it to your needs.
• The freedom to redistribute copies so you can share with your neighbor.
• The freedom to improve the program, and release your improvements to the public, so that the whole community benefits.

And "free" doesn't only refer to the "freedoms" granted the users. In many cases, free also refers to the price of the products. In today's economy (not just the software market), it is not unheard of to see companies giving away their technology for free.

In fact, some proponents of the new business/development models argue that this free distribution model, and similar models, will be the most successful models for an information-era economy, in which it is impossible to protect intellectual property in the form of products.

The whole concept might sound a little odd, especially since we have all grown accustomed to the traditional business models, in which you invest capital into developing a product that you can later sell for a profit. Without selling a product, how can you make any money? And what's more, how can you afford to invest in product research and development in the first place?

Indeed, the free software models are fairly avant-garde and sometimes counter intuitive business models. However, examples of successful implementations of the models as well as successful variations of the models abound.

That is to say, these were not simply academic business models. Over the years, real-world implementations forced the models to take shape. By the late nineties there were a host of companies which represented a complex ecosystem of free software model "species."

We decided that the new company would follow in the footsteps of these other successful free software and quasi-free software companies that had already taken advantage of new business models.

So we began researching business models oriented around free software.

Let's consider some of the important ones...

The Red Hat Software Approach - Leveraging the Product Halo

"The ancillary market is the market. The software is free, but the manual is $10,000. That's no joke. Cygnus Solutions rakes in $20 million per year in revenues selling support for free UNIX-like software. Apache is free but you can buy support and upgrades..." - Kevin Kelly New Rules for the New Economy

Consider the case of Red Hat Software which produces Red Hat LINUX - a multi-million dollar company which adopted a fairly pristine implementation of the free software model. Red Hat makes the bulk of its profits not from subsidiary products to its free ones, but from the vast service sector (the "Product Halo") that develops "around" its free product.

If you go to the Red Hat website, you will see that Red Hat LINUX and many development tools are freely downloadable. If you read the intellectual property notice, you will see that they may also freely be resold. Finally, you will see that Red Hat will sell you the code as well as printed documentation on a CD-ROM.

So why would people buy from Red Hat at all if they could get the code themselves for free?

The reason is because there is something to be said for the "convenience" of a book and a CD-ROM. In fact, many clients prefer a book in their hands to online documentation and ftp access to source code. Even though people could get the code for free, many choose to buy it from Red Hat because it is simply convenient to do so.

Further, developers often complain that, though they are very happy with open source code, their managers will only accept something "in a box." Managers sometimes fall prey to the fallacy that open source code cannot be good code (We will discuss why this is a fallacy later on in this document). Instead, they feel better with something in their hands that they have paid for.

Nonetheless, although Red Hat's "convenience products" are profitable, they do not necessarily represent the majority of Red Hat's profit. Red Hat makes most of its money in another type of service, one based upon its reputation and experience.

Red Hat has gained a reputation for doing good business and for helping its customers solve their problems. Reputation, like status and experience, is vital. Customers often are willing to pay a little extra to make sure that their problems are solved by the best. In the end, hassles can cost more to an organization than a support fee. Who better to hire than the original developers themselves?

Red Hat, perhaps more than any other company to date, has done an incredible job at leveraging the product halo. In fact, they have been so successful that they can afford to maintain a research and development department of six full time developers working on theoretical tangents.

The GNU Project - Free Software Purists

Consider also The GNU Project that has been providing free software since the 80's.

Long before Red Hat entered the scene, GNU was writing and distributing volumes and volumes of high quality free software. In fact, if you are a UNIX developer, you most certainly use GNU products several times every day.

And like Red Hat, GNU sells the code formally as a convenience product as well as providing consulting services for related application development projects. Essentially, they use the free software side of their business to prove their capabilities and to develop tools that they can use on other projects.

The Netscape Approach - Gaining Market Share

"...Ubiquity drives increasing returns in the network economy. The question becomes, What is the most cost-effective way to achieve ubiquity? And the answer is: give things away. Make them free.

Indeed we see many innovative companies in the new economy following the free. Microsoft gives away its Internet Explorer web browser. Netscape also gives away its browser, as well as its valuable source code. Qualcomm produces Eudora, the popular email program, as freeware in order to sell upgraded versions....And of course Sun passed Java out gratis, sending its stock up and launching a mini-industry of Java application developers." - Kevin Kelly from New Rules for the New Economy

Next, consider the case of Netscape Communications Corp. which in a few short years grew to become the envy of every web-based software company by giving away their Netscape Navigator product, and later the source code for that product, for free (to certain users).

By giving away their software, Netscape gained an incredible market share in a short time. And as Barlow and Dyson both show in their discussions of Intellectual Property in the Information Era, in the digital economy, market share is everything.

Netscape realized that the trick about software was that once a customer has grown accustomed to your software product he or she is less likely to switch to a competitor's product because of the cost of relearning and retooling. "If it ain't broke, then don't fix it," is the unspoken law of most IS departments around the globe. Thus, the first software product to capture a customer will be the software product that the customer will tend to stick with.

In the end, Netscape became synonymous with the World Wide Web and as a result, Netscape was able to sell its server product line (which was not at all free) with great success. Netscape Navigator essentially ran as a loss-leader for the Netscape Server product line and the company cleaned up.

Though this is not even close to a pristine implementation of free software according to the definitions set forward by the Free Software Foundation, it was a very successful version, and one of which we should all take heed. The use and management of free (in terms of price) software are important for free (not just in terms of price) software companies.

Scriptics - Besting the Credibility Hurdle

"In early September 1998, the 500,000-plus software developers who rely on Tool Command Language, or Tcl (pronounced "tickle"), cheered Scriptics' launch of the first official development tools for the ten-year-old programming platform. Founded by Tcl creator John Ousterhout, Scriptics joins a slew of recent commercial ventures built on freeware, or software code available in the public domain. These businesses hope to cash in on the vast installed base of technologies that have been given away for many years. Supplying downloads to almost 50,000 users each month, Scriptics serves a market of programmers starved for Tcl tools, extensions, and support services." - Deborah Claymon, The Red Herring

Scriptics is a great example of a free software group which leveraged the reputation, respect and trust of years in the public service to form a company which brought corporate room credibility to an already awesome product.

TCL is a a cross-platform reusable command scripting language which has been shepherded over the last decade by its creator John Ousterhout. Over the years it has developed a large body of dedicated supporters and clients. However, like many free software products, it suffered from a credibility problem. Large companies worried about investing in a purely free technology with no 1-800-SUPPORT number.

By forming Scriptics, Ousterhout brought the respectability Tcl needed to become a major force in application development. Scriptics also allowed Ousterhout to take advantage of the thousands of existing clients who were happy to "give back" to the people who provided them with the tools they needed to do their daily jobs.

Extropia.com: A Case Study in Open Source Software
Extropia.com: A Case Study in Open Source Software
The Open Source Business Model!