Can open source companies innovate?

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."

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JBoss CEO Marc Fleury seems to agree with the idea that building quality software calls for dedicated developers. He calls his company's business model "professional open source," and he prides himself on hiring programmers to work full-time on open source code. But can the classic open source business model really provide the kind of revenue needed to support true innovation?

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.

Pure open source companies are in the preventive maintenance business, too. Providing a Linux distro, for example, means rolling out security patches, providing installation support, running compatibility tests, producing documentation, pressing media. And you bet every customer takes advantage of these things -- if they just wanted the software, they wouldn't have paid.

On top of that, every so often a customer has an unforeseen, serious problem, and that's when the meter starts running. That's when you hope the vendor has calculated its subscription premiums accurately enough to be able to afford to solve every issue that comes up.

Then the vendor has to pay its development costs: putting out new versions, adding most-requested features. With open source you get a bit of a reprieve, because the community pitches in. But Fleury's thesis is that you need a ringleader: a central body that guides the development process and contributes most of the code. That costs money.

Plus, simply adding features isn't innovation. Innovation means taking risks. It means R&D, which might lead to marketable products or it might not. It's a gamble. In short, innovation is expensive. It's the something extra, like those catastrophic costs dental plans hope they never have to pay.

So it seems to me that, unless 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.

Bill Gates told CNet, "The industry will always be a mix of free and commercial software." If he's finally fine with that, is it good enough for us, too?