Although the software business model taxonomy is neither perfect nor universal, most high-tech entrepreneurs recognize the existence of (and difference between) the “proprietary” and the “open source” software business models.[1]
The proprietary or “closed source” software model is one where a software program is distributed solely in object code form (i.e., only computer-readable form where the human-readable code is withheld) and legally protected by copyright, patent, trade secret and/or contract law (in the form of a restrictive license). An enterprise participating in such a business model derives a majority of its revenue from licensing – as opposed to selling – software programs to users in the form of per-user or enterprise-wide fees. This business model has been recognized as creating significant value for a firm because the intellectual property inherent in the programs remain under the control of the originating enterprise.
On the other hand, the open source software model is one where the source code of a software program is liberally licensed such that users have the right to view, change and improve the code’s design. An enterprise participating in such a business model may license its software programs for free or for a nominal fee, but derives a majority of its revenues from selling complimentary goods and services such as servers, complimentary proprietary software programs, consulting and software customization services. This business model has been recognized as promoting innovation due to the potential efforts of a large developer community.
Despite the philosophical clashes between these two models, the closed source and open source business models are not mutually exclusive. That is, a high-tech enterprise need not make a black-or-white choice with respect to a particular program’s or the enterprise-wide’s distribution model. There is a hybrid “mixed source” model where both open source and proprietary software code are combined in a single software program distribution. In this business model, development costs and times may be reduced through the use of certain open source components in the single software program distribution. Thus, an enterprise must decide which components of its product should be closed source versus open source (e.g., using open source for “commodity” components, using closed source for “differentiating” components and deciding on a case-by-case basis for “baseline” components). [See Englefriet, IAM, pp. 37-41 (Aug./Sept. 2006), which discusses in-depth these choices and one commercially successful implementation.] Of course, for such mixed source design to work and generate revenue in a predictable manner, an enterprise must manage the different open source licenses under which the utilized components were obtained, because the open source and closed source components may have complex interactions requiring intellectual property legal consultations at the early software design phase.
Another variety to the mixed source model is when an enterprise releases an open source version of its formerly proprietary program and then sells proprietary complimentary code along with the open source program. This may be in addition to other proprietary products and services the enterprise offers. Some observers point to Oracle’s 2009 acquisition of Sun Microsystems as a good example of an enterprise implementing a mixed source model. Oracle’s proprietary database and middleware products can be sold and otherwise leveraged along with Sun Microsystem’s open source Java programming language and Solaris operating system. [See Casadesus-Masanell et al., HBS Working Paper 10-022 (Sept. 2009), which provides an in-depth analysis of the mixed source business model and a framework for capturing value through its implementation.] In such a mixed source business model, a profit-seeking enterprise needs to consider which of its software products should be open and which should remain proprietary. That is, should the “core” software be open sourced or just the “extensions”?
In sum, the marketplace is filled with examples of profitable firms which have opted to implement one of the two above-described mixed source business models. Such success will come, however, only after careful business planning given the product segment, and the relative levels of innovation and competition in the marketplace. And, the careful business planning must include intellectual property legal consultation as early in the process as possible!
[1] This blog post originally appeared on my www.Innovators-Network.org blog.
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