What is the open source business model?

It is often confusing to people to learn that an open source company may give its products away for free or for a minimal cost.

How do open source companies make money?

While it is true that an open source business may not make money directly from its products, it is untrue that open source companies do not generate stable and scalable revenue streams.

In actuality, in the 21st century web technology market, it is the open source company that has the greatest long-term strategic advantage. This is demonstrated by companies such as LINUX, Apache, and Netscape, a host of web-specific technologies such as Java, Perl, TCL, and a host of web-specific technology companies such as Sendmail.

The open source business model relies on shifting the commercial value away from the actual products and generating revenue from the 'Product Halo,' or ancillary services like systems integration, support, tutorials and documentation.)

This focus on the product halo is rooted in the firm understanding that in the real-world, the value of software lies in the value-added services of the product halo and not in the product or any intellectual property that the product represents.

In actuality, the value of software products approaches zero in the fast-paced, highly-customized, ever-changing world of information technology.

But it is not simply an acknowledgement of the revenue streams generated by the product halo that makes open source a compelling business strategy.

Open source also cuts down on essential research and development costs while at the same time speeding up delivery of new products.

This paradoxical situation arises from the fact that within an open source project, the community members themselves provide free research and development by contributing new solutions, features, and ideas back to the community as a whole. The company that sits at the center of any successful open source project may reap the rewards of the work of thousands of highly-skilled developers without paying them a cent.

A final strength of the open source business model lies in its ability to market itself.

Because open source products are typically released for free, open source companies that can produce quality products and generate a good reputation can almost immediately grab huge shares of any market based on the complex and far-reaching global referral networks generated by users.

In fact, in the web technology space, almost every global standard has been based upon open source technology.

By using the open source technology model, we can create a superior product, which immediately has a competitive advantage, and which generates multiple scalable revenue streams while being freely available throughout the community.