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The Challenge of the Open-Source Business Model

By Jay Hollander

Jay Hollander, Esq. is the principal of Hollander and Company LLC,, a New York City law firm concentrating its efforts in the protection and development of property interests relating to real property, intellectual property and commercial interests, as well as related litigation.

The content of this article is intended to provide general information relating to its subject matter. Providing it does not establish any attorney-client relationship and does not constitute legal advice. Personal advice in the context of a mutually agreed attorney-client relationship should be sought about your specific circumstances.

Summary: The "open-source" movement -- where computer software source code is freely transferable -- has gained momentum, thanks in large part to the success of the Linux operating system. This article explains the history of the open-source movement and how this new business model is having a significant impact.


Even as the Justice Department battles mightily in its quest to dethrone Microsoft as the ruler of the software operating system and Internet browser industry, a larger battle is playing out in the background with even broader implications for licensors and licensees of software. This is the battle between closed- and open-source software, that is, between software where source code is closely guarded by the licensor, and software where the source code is freely transferable and available for review.

Software, essentially being intellectual property, is not normally sold but, instead, licensed, an agreement conveying usage rights rather than ownership of a program. More to the point, what is usually licensed is the object code version of the software, that is, the executable code that runs the program when selected by the user or licensee. What is not usually licensed and what is typically most closely guarded, is the source code, the human-readable text version of the code, which allows programmers and users to see what instructions actually make the program behave as it does. This is because exclusive access to this source code has been the key to continuing revenue streams by software vendors.This type of licensing arrangement has assured these vendors that, among other things, no one will be easily able to copy what they've done exactly as they've done it. This, in turn, greatly increases the difficulty of a would-be competitor improving on the software without starting from scratch, a barrier to competition that can make or break the success of a software vendor's effort.Witness, for example, the sustained failure of IBM'S OS/2 operating system, which tried valiantly -- and at great expense to IBM -- to dethrone a closed system that had become an industry standard, namely, Microsoft's Windows. Ironically, by contrast, the well-known emerging open-source operating system, Linux, has fared much better despite lack of access to Microsoft source code, precisely because its source code is open, or available to all those who want to use it, modify it, customize it, etc. Linux's source code is essentially free in two senses: You can get it free and the code is free, meaning open. Linux belongs to no one, or, more accurately, to everyone to improve on or modify as they see fit, the only caveat being that they also make their contributions open.If you are a licensor, the time is fast approaching when you will have to decide if you will continue to license traditional closed-source software or migrate to the small but growing numbers of open-source software providers programs.Where did open source come from? And how should you decide which path to go down now, open-source solutions versus closed?

The History of Open Source

Many may think that open-source software is a new phenomenon that is only just now bursting on the scene. But in actuality, open-source has been around for a long time.The Internet traces its routes back to ARPANET, which was started as a research project on networking by the U.S. Department of Defense in the late 1960s, with individuals and universities later joining the project. Source code was shared freely by all in what was then a relatively small community of programmers, all collaborating freely and working to build up a pool of knowledge in this new field.In fact, one could argue that the Internet was built -- and flourishes -- on the back of the open-source model. E-mail largely depends on open -- source Sendmail, the "postal system" of the Internet. Apache, an open-source server, is the No. 1 web server used in the world today, with 55 percent of the market by early 2000, according to a February 2000 Network Web Server Survey.Today, you will find that many substantial organizations and businesses, including NASA, Northern Telecom, Disney, Ernst & Young, Nasdaq, the IRS, Boeing, Amiga and GE are choosing to use open source software as part of their solutions.

A New Business Model

Let's say you are a licensor, making your money the old-fashioned way, through control of source code, and the repetitive licensing of vanilla or customized versions of software products to a variety of customers, together with licenses of periodic update releases with new features. What does the open source movement hold in store for you?In the last year or two, a number of open-source companies have formed, seeing a new business opportunity. Noting the difficulty average users face in installing and using Linux, vendors such as RedHat, Caldera, SuSe, Corel, and VA Linux began making and selling their own collections of Linux bundled with application programs, including user-friendly installation programs, Windows-like graphical interfaces, and Office-type applications. Each distribution, as they are called, is aimed at a different market, RedHat, for example, the market leader, is aimed at corporate users, but each distribution has the Linux kernel and so are largely compatible. They are considerably cheaper than Windows, probably the single largest expense in a computer system next to the hardware.By definition, these open source companies are not really dealing with copyrighted software in the traditional sense. Rather, they use freely available source code and make their primary money off of delivery of versions that are easier to install and use, and which they will support.These distributors eschew large development expense and, instead, sell installation support, reference guides and customer-service packages, so that individuals and businesses can purchase whatever level of support they feel they need, from none to 24/7. Some offer customization. These companies are building their new business model, therefore, not primarily on developing software for license, but on providing available inexpensive software in a convenient package to businesses and to those who can't face the technical challenge of downloading and installing it themselves.By definition, open source programs minimize copyright-related protections since open source is generally subject to the GNU General Public License (GPL), popularly known as "Copyleft." an alternative to traditional copyright protection. Under this system, an original work may be copyrighted provided that distribution terms are added giving everyone the right to use, modify and redistribute the program's code or any program derived from it, so long as the distribution terms are unchanged.Similarly, open source minimizes and largely abandons source code-related trade secret protections.

The Future of Open Source

Will the new business model succeed? Some wonder what will happen when software improvements solve the ease-of-use issue, which will inevitably happen. If the customer no longer needs help installing Linux, for example, what happens to the companies that are depending on installation and support as the foundation of their business?Proponents of open source rely on the fact that most PC users probably never will reach a totally support-free skill level since they certainly haven't with closed source products.Other companies are not leaving it to chance and are creating a hybrid business model, incorporating aspects of the closed and open source models.Corel Corporation, for instance, allows free download of its distribution of Linux, like other open-source vendors. It charges for manuals and support, like other open-source vendors. But, Corel goes further and offers to bundle "enhanced" versions with additional proprietary software that are sold in the traditional fashion. In this way, even if users can get a different Linux distribution elsewhere, to the extent they like Corel's bundled programs, they will come back to Corel for enhancements, upgrades and new features to these proprietary programs.Open source software is typically released "as is", with no warranties. RedHat, for example, expressly states that its software is provided to you "as is" and without warranty of any kind. However, like the shrink-wrap licenses of the closed-source companies, the law isn't quite that simple. The business model of offering free software along with installation and support may be characterized in many ways as essentially as a service contract, which, under most state laws, carries a warranty of workmanlike performance. In this way, licensees may not be totally without protection if buying it, and licensors may not be totally free of liability if they offer it.

So, whichever side you choose in this complex issue, open or closed, choose from a base of accurate knowledge and keep up with developments. The landscape is changing fast. And the stakes are huge.

Copyright © Jay Hollander, 2007. All Rights Reserved.

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