Nice thoughts. This is an area that we need to discuss on Wednesday.
From: Eric Armstrong <email@example.com>
Subject: Re: [unrev-II] Lifestreams
Date: Mon, Apr 3, 2000, 4:32 PM
Jack Park wrote:
> Once question: how does one build an industry when one is putting out
> the key product as an open source (read: free) product? We're talking
> business models here, I think.
Actually, you are asking two separate questions, both of which are
The first question is: How does one build an industry?
The answer, as Lee Iverson stated so succinctly, is "simple standards
and free software". The HTML standard, coupled with the Mosaic browser,
did indeed create a new industry, defining a new defacto standard upon
which communications have become increasingly based. Yahoo did it, as
The second question: How does one create a self-sustaining *company*?
(In particular, one that operates within that industry.) As you say,
this is fundamentally a question of business models. What business model
makes sense? What it is the value proposition that produces revenue?
I have to confess to being almost totally mystified on this point. I
*still* do not understand the Netscape/Yahoo/RedHat business models.
It's not clear to me how they go about making any money at all, much
less enough to support a large organization. There is manifestly *some*
model that makes sense, though.
I started investigating question at the after-colloquium party. Since VC
folk have a great nose for sniffing out business propositions, I decided
to ask "what open source business models are fundable?" (This may not be
the best way to express the question, since both Yahoo and Netscape
started with college kids giving away their software & services. But I'm
thinking that somebody had to invest something, at some point, before
they were able to form a company. Eugene may have better information,
These are the models I've seen so far:
1) The Education and Services model
The software is the key product. You give it away, and
make your money providing education and services (such
as prioritized development).
That's the Red Hat model. I'm not sure it's a huge
winner, but so far it seems to be at least reasonably
2) The Derivative Service model
The software is something you use to provide a valuable
service. You have some other value-add with respect to
that services that makes it a viable business proposition.
VC loves open source in that model, because you get a
whole world of developers helping you to refine the
software you use to make money. For example, you might
provide payroll services to small companies. The payroll
software would be free, and large companies might decide
to use it. But most small companies will still pay to
outsource the operation, for lack of inhouse manpower to
take over the job, so your fundamental business
proposition is unaffected.
To this, I add one theoretical possibility that I have never seen occur
in practice, but which might be feasible:
3) The Horse Race model
In this model, a bunch of VC types get together to have
a horse race. They each back their own "pony"
(individual company). But they pool their resources to
create the "race track" (base of open source software
they can build on).
The horse race model has interesting parallels in the area of standards.
Companies agree to standards (with a minimal investment -- time on the
part of some employess and possibly a membership fee to the organization
to cover adminstrative cost). The standards that result produce the race
track, and the company products are the ponies.
In the client/server domain, life gets really interesting. The best
situation to be in, by far, is to be producting the server (the
platform) and let lots of other companies compete to build the clients
(applications). That was the ground Microsoft took so successfully. Then
they migrated into applications, as well, which burned a host of
If you can get to that point, that is ideal. Another alternative is to
give away a server (the racetrack) and a minimal client (a seed pony),
and let client producers compete with better and faster ponies.
On the other hand, client software is notoriously a low-margin business.
(The ideal price is free.) So maybe the race is around producing better
servers. You provide a minimal server for a seed pony, as well as a
minimal client. The race is then to provide the best possible server,
where better/faster clients help to increase the winner's prize (i.e.
the market size).
In this model, a open source versions of both server and client software
"builds the racetrack". The risk is that no one comes. But if they do,
the "gate" (winners prize) becomes the market estimate -- what customers
will pay for software that runs on that track. People then place their
bets on different ponies (buy stock). That rewards the folks who have
The folks who built the racetrack, therefore, are only rewarded if they
also have a pony in the race. When pioneering a new
industry, the risks are greater -- you need to develop freely available
versions and hope they catch on at the same time that you need to
develop a proprietary version. So your investment costs are higher. Plus
the risk increases because if *either* project fails, you lose. Finally,
unlike investment in a new potato peeler (which you know people use)
investing in a new industry runs the real risk that it never gets
accepted. (If no one goes to the racetrack, having the best pony in the
race produces no reward.)
The risks are real. If there were some way to create a consortium of VC
folk to build the open source pilot, the risks could be minimized for
any one participant. But there are still two major reasons for investing
in such a project, even if it must be a solo venture:
1) The rewards are huge.
IBM made out like a bandit because it created the
computer industry, and then proceeded to dominate the
hell out of it. When you succeed in such a venture, the
rewards are massive.
2) We can't afford not to.
If our planet and our very survival as a species depends
on solving the critical, complex problems that confront
us, then we cannot afford to ignore technology that
promises to augment our collective intelligence. Win or
lose, it is an attempt we must make.
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