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Ontario Technoblog

Ontario Emperor technology blog.

This blog has been superseded by the mrontemp blog
Location: Ontario, California, United States

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Monday, September 19, 2005

An Insurance Business? Funding Open Source

From InfoWorld:

When it comes to open source vendors and innovation, Bill Gates doesn't waver. In an interview at Microsoft's annual Professional Developers Conference (PDC) last week, Gates told CNet, "I don't think that someone who completely gives up license fees is ever going to have a substantial R&D budget and do the hard things, the things too hard to do in a university environment."...

You can't make money giving away products. You can, however, profit by selling support and services around those products, and that's the way many open source companies, including JBoss, are run. Customers can download the code for nothing, but if they want somebody to call when things start falling apart, they have to pay.

The interesting thing about this model is that when you strip it down to brass tacks it looks an awful lot like an insurance business. Customers pay for a number to call even though they hope to never dial it. The problem is that in practice these support contracts don't work like health insurance; they're more like dental insurance.

With group health insurance, everybody pays but only a few get sick. As long as the majority of group members are young and healthy, the insurance provider still turns a profit, even if a few members file major claims.

Dental plans aren't structured quite the same way, for one main reason: With dental insurance, everybody files. What's the first thing you do when you join a new dental plan? Get your teeth checked. That's why the deductibles are so high and the annual caps so low. Dental plans are structured to let every subscriber get two check-ups per year, in hopes that regular preventative care will ward off bigger problems. Anything extra comes out of the insurer's bottom line....

[U]nless I'm missing something, Gates might be right. Without additional revenue from software licenses, "pure" open source companies have two options: either charge support fees that are substantially higher than those of proprietary software vendors, or else forget about innovation.

Which leads me to my next question: Is that situation so bad?

Let's say this is the shape of the software industry for the next 10 years. A proprietary company comes up with an innovative idea and it's successful. The open source community scrambles to duplicate this idea. Eventually the open source version matures, it catches on, the product category becomes commoditized, and customers gravitate toward the lowest-cost option. Meanwhile, a new innovative idea has come along. Rinse, repeat....


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