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Module 1.2 FOSS Business Globally



Delivery method

For instructional purpose, it is advised that trainers/lectures use lectures, punctuated with short debates as a major means of delivering this module. In addition presentations and exercises are also suitable method of delivery for this module.


The global recession that started in 2008 has provided an opportunity for people to be more careful about their ICT strategies. FOSS is key component in the development of these strategies. It provides an opportunity for organisations, for instance, to shield themselves from risks related to dependence on companies that may be on the verge of collapse. These challenges are more urgent for developing countries. FOSS presents an opportunity to address the challenges with greater speed and agility. The response to the 2004 Tsunami in Asia through the creation of the Sahana Free and Open Source Disaster Management System is an example of the type of agility referred to above.

Apart from the global recession, developing countries also have a number of priorities where FOSS has already contributed positively. These include the promotion of access to knowledge, aligning societal freedom with various 'digital' freedoms, increasing ICT uptake for both genders, ICT curricular expansions and relevance, etc.

FOSS, by its nature, helps reduce restrictions to innovation freedom. However, in light of the economic challenges, it is important to address the opportunities around costs. Having developed, basic understanding of concepts, this module looks at the global economic impact of FOSS by looking at the status of the software industry, how FOSS has prompted the emergence of 'new' business models and what effect such new models will have on total cost of ownership and return of investments. How this global trend has been applied in emerging markets in BRIC countries is also addressed.

The software industry and FOSS

Many misconceptions about the nature of the software industry exist. It is common to think that most of the software written is paid for through sale of the package. However the real picture is quite different. Most software is written in-house, under contract, and is never commercialized and sold. On the other hand, most companies that do sell packaged software also obtain a proportion of their revenue from service provision.

FOSS-based businesses present, in this respect, a competitive advantage, being able to offer service provision at lower costs, due to the elimination of license fees. This has lead major players like Sun and IBM to embrace FOSS business strategies, but more importantly, it opens the doors for the creation of small FOSS enterprises.

The lowering of costs, together with the possibilities of open access to knowledge and skills that come with FOSS are key aspects of the creation of small enterprises, which can harness the full power of technology thanks to the availability of the tools, and the possibility to develop the needed skills. In this respect, the value that comes from FOSS can derive from several different areas:

  • Selection/Integration: choosing from the myriad of possible FOSS applications and integrating them into a functional platform.
  • Basic substitution/migration: the use of FOSS in the IT infrastructure, frequently in substitution of proprietary software.
  • New deployment: the introduction of FOSS for a new project internal to the company (adoption).
  • Selling services based on a FOSS Project. Service here can start from support, customization, localization or training.
  • Selling products that contain FOSS as a significant component

But let's take a closer look at how companies are using these revenue-generating opportunities to create and fine tune specific business models. Although the provision of services is part of almost every FOSS-based business model, we can first distinguish amongst two great categories of enterprises according to what services are being offered: horizontal services firms, and vertical specialists.

Horizontal services firms:

Software services firms will often offer services over a wide range of software packages or applications, sometimes specializing on a particular kind of service (such as training, for example). In this respect, they implement a horizontal specialization strategy as shown in the table below.

Service type Package 1 Package 2 Package 3 Package n
Installation X X X X
Integration X X X X
Maintenance and Support X X X X

Small corporate clients will often look for this kind of service provider, to take care of their whole IT infrastructure. These kinds of models don't usually contribute with large amounts of code to FOSS projects, although they may get involved in other mundane activities such as bug report and fixing, documentation development, etc.

The range of business models in this category is huge, with the possibility of specialization on certain services, particular kinds of application or technology, on selection of target markets and geographic location, etc. But we can name two for their special relevance:

Platform distributors: Well-known enterprises such as Red Hat Inc. or Canonical Ltd. base their business model on the selection and integration of FOSS packages to generate fully functional distributions. Revenue mainly comes from services related to the platforms.

Ethics-based SMEs: Some SMEs adopting FOSS as their main business strategy do so because of FOSS political and ethic implications, and not only for business or technical reasons. This approach often impregnates other areas of their enterprise, such as decision making and labour relations with employees. However, this approach can also have entrepreneurial rewards, serving as key business differentiators, and helping gain clients for whom this approach may be important, such as NGO's or grassroots organizations. A good and consolidated example of this model is the French SME Easter-Eggs. Further information about is available at the company's website [in French]

Vertical or Specialists firms:

These are companies that are actually developing applications (often no more than a couple of related packages), and releasing them under a free license. One of their revenue streams usually comes from offering services related to the package they develop, from installation, integration and support, to training and certification.

Package 1 Package 2 Package 3 Package n
Maintenance and Support

The choice of a free license for a product is a good strategy towards promoting and encouraging its adoption, but it opens the gate for competitors to offer the same kind of service around the application. However, being the developer, and thus possessing the best knowledge on code-base and their product can bring about a competitive advantage through prestige and reliability. Software companies in this category can be further classified as follows:

  • Pure FOSS based on bounties and donations: Many FOSS projects obtain some financing through donations. If the product is good, and users can appreciate the effort behind a particular project, they might be ready to make small donations for its funding. If the project has enough users, these donations can reach considerable amounts. With bounties, the developing company can associate prices to certain functionalities to be developed. Users, or clients, may offer to pay a certain amount for the development of that particular functionality, until the "price" initially set up by the company is reached. In this model, just as FOSS is collaboratively developed, FOSS is also collaboratively paid for.
  • Mixed FOSS/Proprietary without Dual licenses: This model can also be described as free core dressed with proprietary accessories. In this model, although the core of the business application is free, the company sells other versions of the product, with more functionality under proprietary license. To implement this model, the license must be a permissive one (e.g. the Mozilla Public License (MPL), FreeBSD license), in order to allow the creation of derivative closed software. The strategy here tries to combine the benefits of an open source strategy (wider, faster adoption, as well harnessing external collaboration), while still obtaining revenues directly with a proprietary model. However, it runs the risk of forking (discussed in Sub-module 1.1.5), with the community developing the missing functionality. Along the way, the company may also loose the sympathy and subsequent disengagement of other FOSS developers and users from the software or project. Examples of companies following this model are Sendmail, SourceFire and XenSource/Citrix.

More examples of businesses of each category, and a quantitative analysis of FOSS business models can be found in Daffara, C. (2007). Lastly, it is important to note that in a more indirect way, FOSS creates several business opportunities in other areas. From the selling of hardware with FOSS components installed, to editors specializing in FOSS documentation (such as O'Reilly Media), or merchandising companies (such as ThinkGeek).

'New' Business Models

As technology evolves we are seeing new forms of FOSS business models. Some new business opportunity variants include: Software as a Service, commonly known as SaaS, Green IT, FOSS as an enabler of the Business Ecosystem and Open Cloud Computing. It is claimed that FOSS is cheaper to implement, with less constraint from a traditional vendor. Thus, this may help in introducing products in a reduced time to market which will be a strategic point of view when the creation of new markets, adoption of different business models is considered. To be sustainable, a company must adopt a business model that provides a way to turn the FOSS adoption into lower TCO or increased revenues, and must also take into account the fact that at least a part of the participant community may be out of control of the company (as it commonly happens in large scale FOSS projects, most contributors are not working for a single company). The term "Total Cost of Ownership" (TCO) is sometimes used to help us to know the exact cost of any applied solution from all points of view including hidden costs, deployment, training etc. FOSS can be used to reduce TCO. FOSS is one of the best ways of getting ROI as the software core and most of the functionality are already there and implemented mostly you may need some extra features or localization to your market.

Furthermore, the attractive nature of FOSS (e.g. low cost, easy access, inexpensive license terms, freedom from vendor lock-in, etc) has prompted many established firms and institutions to consider migrating to FOSS. One very important factor businesses must consider when migrating in part or as a whole to FOSS is that migration must be done gradually and not in a big bang. In that sense, migration can be seen as a qualitative process rather than quantitative one. For example, a company may use the same old proprietary Operating System but utilize FOSS Productivity suite (Word Processor, Presentation tool, SpreadSheet and a Database solution) and give proper training for this new FOSS productivity suite. After this migration step becomes autonomous enough, the company or business can start migrating another block and so on. This model is a kind of best practice for already established customer or business. However, in the case of a just-established or a New Business, the company can deploy any kind of software solution, gauging market response, leveraging other various open source communities and stakeholders along the way.

FOSS Business in developing and BRIC countries

The water and water and water parable:

Some years ago a group of mothers in East Africa were made to believe that it would be better for them to use formula instead of breast feeding their children. Samples of formula were distributed at no cost. Unfortunately, those promoting this practice had not taken into account that many of the mothers had limited access to clean running water. Very soon, a number of mothers were completely dependent on the formula and were unable to produce milk anymore. This and the continued usage of inadequately sterile water and water containers had a tragic result.

The parable above illustrates the importance of understanding the context within the developing world. While breast feeding can be regarded as 'global best practice', its promotion has greater significance within the developing world especially during times of economic hardship. The same can be said of FOSS. This section highlights some of the factors or cases that demonstrate the special significance of FOSS in the developing world.

The Peruvian Case:

In 2002, the Peruvian government started earnestly looking into creating FOSS friendly legislation. There was initial resistance to this initiative from some company that was not ready to provide solutions without putting some of its licensing impediments. In the ensuing debate, the Peruvian government made it clear that it had its constitutional responsibility of ensuring unfettered citizen access to information necessitated this. A lot has happened since, including the 2005 signing of a Bill in which explicitly acknowledgment of the role of FOSS.

The Vietnamese Case:

Interestingly, around the same time (2002) the government of Vietnam had been identified as being among the top 10 countries with high rates of 'illegally obtained' software. To be 'legal' within a proprietary paradigm, Vietnam would have had to spend twice the amount produced by its GDP. This was one of the factors that pushed the Vietnamese government to consider FOSS.

A number of other developing countries have made a move towards FOSS either in the policy space and/or through implementation of various solutions. These include Brazil, South Africa (www.oss.gov.za) and Malaysia on the policy front. In addition to policy moves, a number of developing countries have also seen a lot of actual development of applications and the creation of other flavours of GNU/Linux for instance. These include the following:

  • translate.org which facilitated the rapid translation of a number of FOSS tools into various languages across the developing world.
  • the creation of Chisimba, a development framework at one of the South African Universities, (Chishewa word meaning framework).
  • the development of various distributions Impi, Ubuntu, Kongoni (South Africa); Mandriva (Brazil, based on Mandrake); Red Flag (PR China).

A lot of work has been done by various scholars on this area. It has now begun to find expression in FOSS. Examples include: Yochai Benkler (commons based peer production), Lawrence Lessig (Free Culture), Ngugi Wa Thiongo (Decolonising the mind).

Module 1.2: ASSESSMENT

  • Debate: Participants should form 2 or more groups to debate for and against the motion; “FOSS empowerment of IT Entrepreneurship in global recession”
  • Assignment: List and describe 6 values that come from FOSS. For each, describe a company or FOSS project where these values are being realized.
  • Exercise: List two firms in your country which can be described as (i) Horizontal services firms (ii) Vertical services firms, (iii) Based on the products or services of each firm, guess the FOSS license the company might be using and give reasons
  • Case studies: Write a case study, 250-400 words, describing a case of FOSS adoption in the developing world
  • Legislative Study: Write a letter to your local councilor or parliament arguing for government's adoption or consideration of a FOSS strategy for your country

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