There is a common misconception among people that there is no money in the development of open source software. It is true that the open source code is free to download, but when it comes to the actual act of making money, you should think of this as an opportunity rather than limitation. In the beginning, the open source software looked like a saintly gift to the commonwealth. Programmers would work hard and then give away the fruits of their labor to anyone who wanted it. Anyone could benefit from this act of pure charity.
Over time, companies realized that they could still make money while continuing to give away their developed software. They could do well by just doing good. This was great news for some of the earlier developed open source code since developers would continue to extend those projects as a byproduct of their business venture. The idea being embraced here was that companies could charge anything they like as long as the user could fiddle around with the code and distribute the results.
Companies that IPO’d
Companies that successfully made it to IPO with open source products include:
- VA Software (now Geeknet, Inc.)
- Red Hat – Major distribution of Linux for server and desktop use.
- MySQL – Popular relational database
- WordPress – Widely used as a blogging platform
- SugarCRM- Business customer relations management
- Magento – E-commerce shopping platform
- Zimbra – E-mail and a messaging server
Ways to Monetize Open Source Platforms
Whether you are the developer or creator of an open source project or an expert in one, here are four methods you can use to make money with open source software.
Selling service for the software
An open source project can provide a way to gain valuable community visibility by selling services for the software. These can include:
- Showcasing your abilities by being able to verify a developer’s work and competence by looking at the open source projects they have been involved in.
- Building reputation by having a high profile reputation in an open source community thus leading to speaking engagements, book writing, and training requests
- Being an expert and a significant player in a technology that companies need as you will be in demand for custom consulting, support and training in that technology.
Offering a dual license option or premium version
Another way to monetize open source software is to offer two licensing options for it. A ‘copyleft’ license, requiring modification to be released back to the developers’ community if the software is distributed, and then a commercial license that allows the use of the software without open-source restrictions.
Using advertising revenue
Advertising cost money. Trade shows are expensive. Marketing budgets are never adequate. Many companies see open source as a cheaper alternative. Releasing part or all of the product as an open source package can equally attract users who will use the product and then discover what it does. The products speak for itself and brings in the users, then the sales force steps in when it’s time to up-sell. In this context, the trick is to make sure that the money making feature are compelling enough to be able to support the rest of the product.
Creating add-on modules for a fee
A company or an individual developer can position themselves as a primary provider that adds value to an existing open-source project(s). There are different examples of companies that provide a service by packaging, layering, combining and extending or adding modules to the existing projects at a fee. This falls into two categories:
- Support – An example is how Red Hat and other Linux distributions have added value by collecting and testing a variety of open source projects and codes, and then providing easy-to-use install and upgrade mechanisms.
- Freemium model – Under this category, an essential version of the software or service is free. Additional (premium) are added at extra cost.
Inside the Red Hat IPO
Red Hat is a fast growing company where people drive constant improvements. Even as a major player in enterprise IT, it has retained its freedom-minded culture and open source values by connecting a global community of enterprises, partners and developers and co-creating technologies that are more innovative than any of the developers could have achieved alone.
On July 20th, 1999, Red Hat sent an e-mail to hundreds of software developers offering a chance to take part in its initial public offering (IPO). This was a gesture of support for the community of free-software hackers without whom the company would not exist. The shares were to be initially sold at $14, but within three days the stock price had reached $72.62 per share.
The latest financial reports from Red Hat tout a fourth-quarter earnings of $36 million or 18 cents a share on revenue of $297 million, up 21% from a year ago. Non-GAAP earnings for Red Hat’s fourth quarter earnings were 29 cents a share, which beat Wall Street’s estimates of fourth-quarter earnings of 27 cents a share on revenue of $291.2 million.
The company released a whopping 6 million shares in their IPO. The stock offering was designed to be able to raise between $60 million and $72 million to finance the Red Hat’s expanding operations. Instead, it raised about $84 million.
Today, Red Hat helps more than 90% of Fortune 500 companies solve their business challenges and align their IT and business strategies in preparation for the future of technology. It is a company that provides secure solutions through an open business model at an affordable, predictable and subscription model.
Inside VA Software IPO
VA Software, now Geeknet, Inc. was started by Stanford graduate students Larry Augustin and James Vera as a core provider of Linux-based solutions, integrating systems, software and services, with a broad-based technical expertise in the field of systems and software design as well as focus on Linux operating systems and other open source solutions.
Geeknet, Inc. formerly SourceForge is an online network for the global geek community that comprises of technology professionals, technology enthusiasts and the general customers of technology-oriented goods, services and media. The company operates through two business segments, Media, and E-Commerce.
On December 10th 1999, shares of LNUX, the NASDAQ symbol for VA Software went on sale to the eagerly awaiting public. You may recall that VA Software was the company that combined Linux, open source software and Intel-based hardware. With just six months prior to VA’s Initial Public Offering (IPO), Red Hat Software had gone public with a very successful IPO. To this date, VA software IPO remains NASDAQ’s most successful in terms of first-day gain.
The total revenue for the first quarter of 2015 for Geeknet, Inc. was $19.1 million, a decrease of 16% from the $22.7 in the first quarter of 2014. However, this is a reflection by the company to reduce the site-wide promotions and productivity SKUs while investing on the exclusive GeekLabs products.