Finding Profit in Partnership

Talk about volatile business models. Over the last two years, the concept of open source has run the gamut, evolving from the idealistic dream of hard-core programmers to the Microsoft-slaying darling of Wall Street to just another washed-up has-been. With investors no longer interested in funding companies that give their products away, the programmers and executives who still work in companies committed to sharing their source code with the world are picking up the pieces and trying to build a coherent business model.

Most remain committed to the idea that sharing source code builds better, more stable systems that do a better job serving the needs of users. But they still have to pay the bills.

One of the first companies to find a way to do that was Red Hat, which pioneered the idea of selling ready-to-use versions of Linux on CD-ROM. People who purchase the shrink-wrapped CDs get manuals and some free support to help them use the product.

While Red Hat continues to make money selling the enhanced versions of Linux, its management is looking for growth in producing customized versions of the software for appliances and embedded applications.

"Theres a high demand for Linux in the enterprise today, and we have big plans. But the top line for desktop machines and the top line for server machines is going to be relatively flat for the next five years," said Michael Tiemann, Red Hats chief technical officer. "I think that the data shows that the biggest growth is going to be in the post-PC market space."

Tiemann joined Red Hat when the company merged with Cygnus Solutions, an open source company that specialized in developing tool kits for embedded applications. In Tiemanns vision, Red Hat will build Linux versions for all of the appliances in the world, essentially forming partnerships with hardware companies.

"People are going to want to buy intelligent connected machines, where handheld device X, wall switch Y and set-top box Z are able to exchange data in a meaningful way," he said. "By having a consistent operating system across all of these platforms, it will be a much richer application development environment for users."

Ghazi Benothman, an analyst at Deutsche Banc Alex. Brown, agrees. "The fact that [Linux] is open means that it is adaptable," Benothman said. "Linux runs on mainframes, it runs on watches, it runs on VCRs. No other operating system really stretches that far. Theres the potential in the future to tie this hardware together."

Other open source software companies are hoping that the flexibility will attract customers.

For example, Digital Creations spearheads the development of the popular Zope content management system for Web sites. The core of the software remains open and free to anyone who wants to use it.

Digital Creations makes its money by providing expert assistance to companies that want to customize it for their needs. Customers that hire Digital Creations get access to the software and the freedom to use it long after their contract is completed.

"The customer has a lot more leverage," said Paul Everitt, co-founder of Digital Creations. "They have control over their business architecture. Everyones pretty aware of how the proprietary software companies lock you in. Its what is taught in MBA schools. Thats great for the vendor, but its pretty bad for the customers."

Not All Secrets Shared

But do the companies have to share the work that they pay for with everyone, including their competitors? Not necessarily.

Digital Creations splits the work in every contract into two parts. Contributions to the core Zope code used by everyone may be shared, but new solutions developed for a customer are kept proprietary.

"Theres the secret sauce in every business, and thats the competitive advantage," Everitt said. Software developed for that purpose is protected. "But theres a whole other part thats not really their competitive advantage. We encourage them to make that part available to everyone, because thats in their best interest," he said.

It makes little sense for a company to insist upon proprietary rights for a basic tool such as a shopping cart, Everitt said. Sharing those tools means that you also benefit from the work done by others.

Giving away the tool kit is also a cheap way to market the company, Everitt said. "What Im most interested in is that [a transaction] increased our gravity. It may not have been a cash transaction, but it stuck to you. You came back talking to me now. That all happened without me spending money to increase my brand to increase my momentum. With proprietary software, you generally have to spend a lot of money to get some momentum going."

Others are skeptical about open sources marketing power.

"Thats the kind of idea I had a few years ago," said Yancy Lind, CEO of Lutris Technologies. "If youre only appealing to the die-hard open source community, youre not going to have a viable business. They dont need hand-holding. They can roll their own."

Lutris is concentrating on developing high-quality support, documentation and training programs that set it apart and help big companies manage enterprise level projects, Lind said.

"A whole bunch of people got excited about open source in a way that wasnt intellectually rigorous. That doesnt mean that there isnt a solid model, but you have to execute very well. You cant go about it with a philosophical perspective. You need to focus on customers and understand what their pain is," she said.

Watching what their customers need is something that has even led some open source companies to work with companies supporting proprietary software.

CollabNet makes tools that help groups that are spread worldwide work together. While the tools are optimized for wide-open sharing with everyone on the Internet, they can also be locked up to help relatively secret teams within big companies collaborate as well.

"I think open source projects have unwittingly developed a methodology about providing a lot of transparency to the end users," said Brian Behlendorf, CTO at CollabNet. "Why did a particular feature get implemented" [The answer] is not just the documentation. Not just the code comments. [You need] the ability to follow the discussion in a discussion list. That kind of formalism has helped everyone work with other developers"

Even companies developing proprietary products can use CollabNets tools to organize their developers and focus their efforts. The tools are used to organize both open source and proprietary projects inside companies, and pave over the bureaucratic, geographic and organizational differences that can block collaboration in companies.

And CollabNet customizes the tools and maintains the servers in a way that makes it easy for everyone with legitimate access to work with the project. "Pay no attention to the man behind the curtain" only works if its ideally implemented," Behlendorf said.

CollabNet, Digital Creations, Lutris and Red Hat are all concentrating on selling the openness and cooperation that sharing source code offers. While they dont sell the software per se, they can sell the services and hand-holding that make it work.

"Its an interesting culture," Lutris Lind said. "Its OK to charge for the knowledge. You can charge for the documentation. You can charge for the consulting services. Its just the way you go about making the charges."

Hard Choices

Hardware manufacturers are also finding ways to make money with open source. Companies such as Compaq Computer, Dell Computer, IBM, Sun Microsystems Sun Cobalt, TheLinuxStore, VA Linux Systems and many other small manufacturers embraced open source operating systems such as FreeBSD, Linux or OpenBSD. Instead of paying Microsoft for a license for every computer, they simply load another free copy of open source software on the machine. Open source turns software into a commodity and hardware vendors benefit.

While the simplicity and the lack of accounting cut costs, open source operating systems are not completely free for the hardware vendors. The companies still need to customize the software for their computers and ensure that they are stable.

Some of the more forward-thinking hardware companies also pour some of their money into developing the next generation of the software by either sponsoring programmers directly or contributing to projects.

VA Linux, for example, runs the Open Source Development Network, which supports open source projects through Web sites such as Freshmeat.net and SourceForge.

The key difference is that the hardware companies that choose open source software dont have to worry about changing business models -- they make money for every box that leaves the shelves, regardless of what the software might be.