Tuesday, May 20, 2008

The For-Profit Business Model for Open Source Development

I know most of you guys are techies, but for the pie-in-the-sky theorists out there, this one's for you. When I discussed the nonprofit model and the long tail of consumers, I promised you one more piece of the puzzle, or at least my thoughts on it. The nagging question:

How can we, as a community, develop a profitable business model around open source?

Everything that’s already been done with open source software suggests releasing software into the open source world as a way to gain market share and win recognition as a platform on the basis of being free, constantly improving, and extremely customizable. Then companies generate revenue by providing support, consulting and other services off of the open source software. Open source software has had a fundamental issue in generating revenue intrinsically, as the product itself is free. But that doesn’t mean it’s not possible. And open source hardware, as it is deals with a tangible product, is another creature entirely.

Fundamentally, we are dealing with three “moving parts”. They are somewhat interdependent, too, so the choices made in one category may affect the options available in the second category.

1) The range of open source or closed source: do we want to be entirely open source, entirely closed source, or a mix of both?
2) Where is the income coming from? Donations, publication/book/speaking engagements, low/high margins on manufactured components, or low/high margins on a finished product (like an assembled combo kit with a case), closed source software, etc.
3) What is the income going towards? Back to the community to facilitate/subsidize prototyping costs, paying dividends on investors’ equity, etc.

The final piece of the puzzle that isn’t “moving” is, as I’ve mentioned, the fact that there is a tangible product involved. What this means is that there is some cost involved in production and distribution—and in turn, a justifiable market price. Benkler poses the argument based on the efficiencies of free access to information, and he has a great point. But the argument can be made with information because the costs of dissemination are marginal.

Where many see it as a hurdle in open source hardware development, the tangible property of the product may in fact be the opportunity that “saves” the paradigm from relying purely on donations and volunteer work of developers. How about answering the three questions above as follows?

1) Open source with designs and software, but manufacturing is “closed”. Manufacturing, distribution and retail are done independently as the revenue generating component of the process. However, these hardware manufacturers must pay 5% royalties on each sale, to be distributed in an incentive structure based on a community developer’s contribution to the project. Should this work, the incentive structure would need to be very well thought out. Pricing of the manufactured product should be at a moderate margin—high enough to fund the community and incentivize production, but low enough to be a cost-effective, customized option for consumers.
2) The income would come from the sales of hardware devices to end users, as well as the purchase of prototyping components by developers within the community. Donations are also accepted.
3) A fraction of the income will go to the community site for maintenance purposes and to pay the “centralized” people whose full time job it is to make sure open source hardware design can happen. This income will also fund community matter such as grants, pro-bono projects, competitions, and in-person workshops.

Craigslist asked its community members to help decide on a “business model” to sustain them, so I thought I’d turn to you as well. What do you think?

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