Why Open Source Business Models Are Dead-End Streets

Why Open Source Business Models Are Dead-End Streets And GigaOM (Sebastian Rupley) is Wrong
I was reading GigaOM’s article (linked above) and it espouses the same age-old regurgitated wisdom about viable open-source business models:
Open-Source business model can survive by focusing on service (RedHat) or as a loss-leader (Android by Google) for promoting its more profitable ventures. The article itself is a response to New York Times - Why Open Source Proves Elusive as a Business Model article which discusses the trouble of monetizing most open source businesses like MySQL purchase by Sun etc., with the notable obvious exception of RedHat.

While I like open source software very much and use many of them regularly like Apache HTTPD, Tomcat, Grizzly, Nginx, MODX etc., I think it is time for some myth-busting about open source business models and why they are a difficult proposition for business.

Open source business model: Loss Leader

There is nothing wrong with this business model and can work very well provided you have other profitable closed-source software/ SaaS to promote in the first place. So this is really a model suitable for already successful companies like Google.

Software Service as a open source business model

Service is the most viable business model for open source and yet it is also the toughest. Software support Service requires lot of quality manpower to begin with and can grow only in proportion to your human resource. Contrast this with packaged software like Microsoft Word / Excel which took some effort to produce but requires much less effort to maintain and yet continues to earn revenue by selling millions of copies worldwide. The key point is that the revenue is not directly proportional to the manpower unlike service industry. Google Adwords / Adsense is another good example. The service serves billions of ads everyday and yet is managed only by a handful of people (comparatively). Whether it is software as a service (SaaS) like SalesForce or AdWords or software products like Microsoft Word or Oracle or Microsoft Excel, product companies are much more lucrative simply because of the disjoint between revenue and requirement for human resource.

Service companies are also more affected by economic vagaries like recession simply because of their higher fixed-cost structure. You simply cannot hire-and-fire employees at-will like you can do for data-centers or dedicated servers (hardware).

A closed-source software product company or a SaaS has sellable IP, often patents which makes it harder for a newcomer to compete with them. This protects them from competition during the crucial initial stages and gives them the opportunity to grow. In a service company the only thing going for you is your perceived expertise and reputation which takes time to develop.

I would like to round it off by saying that there still may be small businesses surviving on open source business model, it is much harder to create bigger companies like Oracle, Peoplesoft, SAP, Microsoft with open source business models especially in todays economic climate.

As an entrepreneur myself, my humble advise to fellow entrepreneurs is to avoid open source as business model as look for more lucrative options like software-as-s-service (SaaS) offering or software for platforms which still supports closed-source, paid business models well like mobiles.