Making Money With Open Source, Part 2: Only One Chasm

In this series of articles, we highlight two industry experts who have differing views of what it means to be a commercial open source business and how to be successful. Bernard Golden, CEO of Navica, an open source consultancy, and Michael Grove, CEO of OpenITWorks, which focuses on helping IT organizations collaborate, are both recognized as industry experts and thought leaders.

In point-counterpoint style, Bernard discusses in Part 1 how commercial open source is its own business model and is unique in that it faces two “chasms” (from Geoffrey Moore’s Crossing the Chasm), one involving broad adoption of the free versions of product, and the other involving converting a significant subset of adopters to paying customers.

Businesses should focus their strategic planning on how to cross both chasms, and failure to do this will result in not achieving their full potential, either by not converting enough adopters into paying customers, or not finding enough adopters in the first place. Michael follows by discussing that it is a mistake to think of commercial open source as its own business model. Instead, open source is one of many possible means to an end of making a single software business model successful — that of selling value to customers through software. Businesses should focus their strategic planning on how to best monetize their value propositions, whether it is through open source or something else.

Michael Grove: There Is Only One Chasm, and I Believe in Santa Claus

Bernard Golden is convinced there are two chasms to cross for commercial open source company and I believe there is only one. As I wrote in my recent blog post, “There is no such thing as commercial open source,” the attempt to ride the title wave of open source into a magical business domain called “commercial open source” adds more confusion and dilutes the core value proposition of open source.

Let’s not confuse the success of well managed companies like MySQL, SugarCRM, MuleSource and others with validating the commercial open source model. Each of these companies is winning the old fashion way, listening to customers, creating complete value propositions, and leveraging open source as a competitive advantage, not as a business model or special category. They don’t have two chasm strategies. Their customers are traditional buyers who normally buy proprietary products.

Getting lots of software downloads, open source or not, does not spell commercial success. If the downloads are from commercial buyers who normally try before they buy, then this could be a good marketing tactic — open source or not. However, if your downloads are by developers who rarely if at all buy software or support, then the small amount of revenue from added services to this group is NOT a “cross a chasm” strategy if your real buyer is the IT executive who buys everyday commercial products.

To be a commercial success it is critical to understand and drive towards meeting the needs of your sweet spot, pragmatic customer who is looking for results, a dependable relationship and low risk. Your early adopters are the SAME type of customers except they are willing to take on more support burden and risk than your pragmatist. It is critical that your early adopters have similar demands and the mutual respect of the pragmatist — otherwise you have not crossed THE chasm.

Points of Confusion

There are two points of confusion that I believe have led many so-called commercial open source companies down the slow top line growth path:

1. There is confusion regarding market strategy versus business model. The business model reflects a value exchange and the means upon which a company intends to meet its revenue goals. It starts with the pragmatic customers who write the checks. They write checks based on perceived value versus alternatives — not based on downloads, open source, or price. On the other hand, market strategy is your approach to shaping your pragmatic customer’s perception into believing you are the best choice. SugarCRM leverages its open source developer model to differentiate itself from Salesforce.com as the better choice. SugarCRM prices to what the check writer will pay, not to optimize download conversions.
2. There is confusion on open source as a market or a benefit. Using the Bee model referred to by Bernard, in my opinion (with the exception of developer tools), the open source community of developers are not a market. They don’t like buying stuff. This is not the path to IPO. An open source development and QA model on the other hand can be a competitive differentiator. It’s just better.

My bottom line is that there is no value in a category called commercial open source because commercial buyers simply don’t value the distinction. There are two excellent opportunities for commercial companies leveraging open source:

1. Properly leverage and reinforce an open source commercial “brand.” Part of the lure of commercial open source was to collectively wedge a larger opening for small innovative startups competing in a highly consolidated IT supplier world. Through organizations like the OSA, commercial companies leveraging open source can create a strong brand of innovation, commercial viability and responsiveness that capitalizes on the enormous benefits of open source.
2. Commercial companies leveraging open source can further the brand and enhance there respective business models by publicly pronouncing they represent “second generation” open source. Like the first generation, this group of companies can form a community to collectively foster open source development, interoperability, and quality standards that go beyond and are more effective than traditional go-it-alone proprietary companies.

   The “commercial open source community” can share best practices, validated solutions, and promote standards to their combined community of customers. In my view this kind of community can represent a category recognized by customers and analysts as a great source of both innovation and reliability.

Reaping Rewards

So, what does this have to do with why I believe in Santa Claus? The deal is that if you have been good, Santa will arrive bearing gifts as your reward. In a bigger sense than a commercial Santa Claus putting gifts under the tree, I believe that doing good things for others does come back to you, often indirectly, in a good way. Every day, thousands of developers write and share code, producing value for others and often with little or no recognition. I have been troubled that only a few of these developers get tangibly rewarded.

If a commercial open source community could work with a community of IT organizations to further innovation, best practices, interoperability, and the like, then these communities could also develop tangible reward mechanisms for developers. Such a process would be benefit both the first and second generations of open source, and become the means for having an open source Santa for the unrecognized developers upon whom the open source industry owes so much.

Conclusion, by Dominic Sartorio

One thing is certain. As we move into 2008, more commercial open source companies will succeed, with others falling by the wayside, and it will become clearer who is right. Is open source its own secret to success, a business model “secret sauce” that will ensure the success of any company who gets it right?

Or, is open source a means to an end, another arrow in the quiver of any business trying to sell value to customers? Or, more likely, is there a kernel of truth in each?

Dominic Sartorio, who wrote the introduction and conclusion, is president of the Open Solutions Alliance, an organization dedicated to making enterprise-class open software solutions work together.

Making Money With Open Source, Part 1: Turning Users Into Buyers