Why are the open source business people not ultra-rich yet?
By Rajesh Setty on Sun 15 Apr 2007, 11:55 PM – 12 Comments
Hugh MacLeod started a discussion about open source and it’s impact by asking question “How well does open source currently meet the needs of shareholders and CEO’s?”
One of the conclusions Hugh was reaching was that Open Source may not have made a big time impact yet. If it did, you would have seen a lot more famous billionaires in the open source world.
Having been one of the founders of an open source solutions company in late 2000 – CIGNEX, I am passionate about open source and hope to provide my viewpoints on most points raised by Hugh in the article sometime soon. In this post though, I want to offer my $.02 about open source business people not getting insanely rich.
The basic premise: For someone to strike it ultra-rich in open source, the open source company they are involved with should make boatloads of money. Here are some reasons why it’s not easy:
First, we all know that the enterprise software and the open source business are very different. Open Source is typically developed by the community members almost forming virtual organizations (there are many exceptions, of course) Most contributors don’t get paid for their contributions. They are in it for the passion. You can make a business out of these contributions but since there is no licensing fee per se, you need to come up with some other reason to charge the customers (there are a number of business models that are becoming mature now)
However, the price points have to be lower than enterprise software so that volumes have to be very high to make serious money.
2. Competition from other open source software
Generally people think that open source software competes with enterprise software. While it is true, the bigger competition for open source software comes from other open source software. Barrier to entry to create new open source software is low unlike creating a new enterprise software company. In fact, one way for the enterprise software company to kill an open source company would be to fund a competing open source company and confuse the marketplace completely 
[Update] Courtesy Matt Dickman, please take a look at this interesting graphic – Linux Distro Timeline. Thanks Matt.
3. Getting the right people to manage an open source company is hard.
Open Source companies have a constant battle to get the top talent to fill the top spots in the company. Think about it – who is the RIGHT person to run an open source company? You can’t hire someone from a VERY successful (of the order of a large enterprise software company) open source company as there is none. If you bring someone from an enterprise software company, the person will have to unlearn a number of things as things are done very differently in the open source world. I am not saying that there are no great leaders in the open source world. For the opportunities available today, there is definitely a lack of talent at the top.
4. It beats logic.
If open source is license free, the costs have to be low to work with open source. If cost is one of the reasons for a customer to embrace open source, he or she will pay less than what they would have paid to a comparable enterprise software to do the same job. An open source company would have to therefore work twice as hard to a comparable enterprise software company to make the same or less amount of money. This means that they have to have a lot more resources than the competing enterprise software company. How can you have a smaller pie but feed a lot more people and still keep everyone happy?
I can go on but the point is – there is still a lot more to happen before people in the open source business can become ultra-rich. More about the same and related topics in the future.
Related Articles:- The curse of the ultra-popular
- Publishing Innovation example – Sourcebeat
- Ways to distinguish yourself – #25 Walk away from “free”
- Ways to distinguish yourself – #18 Be relevant
Posted in the Business Models, Main Page category.
RSS
12 Comments so far, Add Yours
Anonymous on April 17th, 2007
Hello Rajesh,
Thanks for sharing some insights into open source! I think another obvious reason (or at least seemingly so, to me) you don’t see mutli-billionaires in open source is that the motivations are different-I doubt someone starts an open source co to make boatloads of money. I think you probably are more interested in creating new functionality with speed, efficiency, and community participation in mind. It is more user-generated.
I’ve been thinking about the idea of open source lately and curious if you can use the word to refer to things besides software? I’m building a peer group with a close friend where we work on career development ideas, and we want all responsibilities to be shared, everyone is a leader, everyone contributes, and no one really has claim on any of the ideas that come about. Everyone is free to take the ideas and build upon them. What do you think-can you call this an open source approach to learning and teaching?
Anonymous on April 17th, 2007
Thanks Cody.
Open source is a philosophy and can be applied to things other than software of course.
Best,
Raj
Anonymous on April 18th, 2007
Open Source business models seems to be primarily about making money off services, while providing the base ‘product’ free.
In a services model, the money you can make can scale only as the number of employees you have (assuming efficiency of workers is constant). Therefore you can’t really make huge money, the way a product company can.
You can however make money in the longer term, by getting more customers and keeping them longer than your competitors do.
Of course proving that the service model works well, and making it work better than anyone else can, is called ‘execution excellence’. And anyone who’s interacted with VC’s knows that ‘execution excellence’ is taken for granted, and not a ’sustainable competitive advantage’.
Someone should show them an Ipod. If that’s not execution excellence winning, I don’t know what is.
Anonymous on April 20th, 2007
I think people need to remember distinguish between open source and free software. There are many companies that sell software but use open source code, IBM and EDS to name just two.
Anonymous on April 24th, 2007
The main reason people have not gotten rich off FOSS is that source code availability is not for the sake of the producers, it is for the consumers. To get insanely rich requires control over the scarcity of a desirable consumable. There is no scarcity in FOSS.
But a legitimate question is whether there is real value to society in allowing conditions that create the super-rich? I am against wealth redistribution, but that goes 2 ways. I believe that a legal environment which allows anyone to create false scarcity, resulting in wealth redistribution to a few privileged elite is harmful to society. This is why there must be laws to limit monopolies.
Unfortunately, monied interests can control the political process to the detriment of society at large. One example of this is the abomination of software patents that the US PTO has foisted on us. The time and money wasted on fighting software patent battles has done nothing to help the economy or improve technology. It is only about grabbing more of the pie.
Anonymous on April 25th, 2007
There are other ways to make money, for example embedded systems and SAS (software as a service). Motorola/Nokia are making millions of dollars off from Linux based phones. Just about everything Dlink/Netgear/etc make is Linux based. Google is the pinnacle of SAS using open source software. Right now the big money isn’t in the desktop.
Anonymous on April 25th, 2007
The dear lord did produce quite a few ignorant fools.
Producing OSS doesn’t make one neccessarely rich. It is using OSS that saves money, there’s where the benefit is. There’s the shareholder’s value: a company using OSS can produce more effeciently.
OSS software is widely used. That is an observation. The Apache web server, for instance, does have a market share of around 65%. Linux is also widely used. The same goes for OpenOffice and Mozilla.
Someone concluding from the lack of OSS billionares that OSS does not have a big impact yet does advertise himself as, sorry to say, an imbeicile: he is blind to reallity and shows himself to not to have the slightest clue on the subject he has a strong opinion on.
BTW, that some producers of software have become rich can be attributed to the exploitation of a quite unique feature to software: the depance on a vendor’s particular file format, protocols etc. (Vendor lock in it’s called).
Anonymous on April 26th, 2007
Starting an open source company has more to do with passion than business. It is extremely difficult to sell and market open source products in an environment that is not aware of the power, stability and reliability of open source. To successfully run an open source company requires financial resources and more importantly employees with passion and the right skill set. I have been running an open source company for last seven years and personally think that it will take another three-five years to mature and have have industry-wide acceptability. And i am referring to the server side only and not the desktop.
Anonymous on April 26th, 2007
Rajesh,
Interesting blog. Though I guess another way of looking at it is the Google perspective. Like the founders of Google, most geeks who are into open source are there to ‘change the world’ For them making money is an afterthought. And like google, a few will emerge ultra-successful.
ghoti on July 30th, 2009
I disagree with the foundation of this argument. In fact of the 400 richest people (forbes) only 2 exclusively use proprietary software as a business model, and they sell that software. The other 398 and the companies they work for all run (primarily) open source solutions. I suppose you are correct in that selling FOSS won’t get you rich, but then again it wouldn’t be FOSS if it did.
Rajesh Setty on July 30th, 2009
Ghoti,
Thank you for the comments but we both are talking about different things. I used to be the CEO of a company for five years that focused on helping implement open source solutions. I understand where you are coming from.
I am talking about companies that generate revenues from open source software and services – not companies that use Open source for their business.
Have a great week ahead.
Best,
Rajesh
Leave a Comment
Anonymous on April 17th, 2007
Rajesh,
http://tinyurl.com/28cq4o
This graphic (which I came across just yesterday) helps illustrate this point very well. Just look at the number of splits in Linux alone. Each slightly different and improving on one another. It’s fascinating to me how quickly these iterations happen to deliver a new product to consumers.