Open Source Strategy Research Blog

Updating business strategy for a world embracing open source

Tuesday, June 1, 2010

Open Source Growth: How Open Source Can Support Traditional Growth Strategies, Mekki MacAulay

This is the draft version of an article I wrote for the June, 2010 issue of OSBR (www.osbr.ca)

“The rules of the game are continually changing. It’s no wonder that participants are now particularly receptive to the siren song: ‘Discard the old, leave your historic core business behind and set out for the promised land’. Sometimes this advice leads to the right course, yet usually it does not solve the fundamental problem and can even aggravate the underlying cause of inadequate profitable growth. The key to unlocking hidden sources of growth and profits is not to abandon the core business, but to focus on it with renewed vigor and a new level of creativity.” Chris Zook & James Allen

Carefully selected open source strategies can help support business growth. By focusing on its core competencies, its competitive advantage, and current market successes, a company can use open source strategies to improve its ability to expand its product base, reach new markets, and diversify through vertical integration. This article discusses three traditional business growth strategies and highlights how an open source angle can help improve their effectiveness, without compromising the core business.

Growth from the Core

Companies must grow to survive, and stay relevant to their customers, investors and employees. Most companies that don’t grow cease to innovate, become stagnant and eventually either cease to be relevant, or go out of business. But growth is a painful process, one that is difficult to navigate. There is a long list of once successful companies that tried to grow and failed, destroying the value they had developed in their core business. It can be tempting, especially for young companies, to jump on the latest trends, or blaze trails into new markets, but this strategy, as Zook and Allen remind us, can lead to a quick demise. Open source, with its promise of quick development cycles, accelerated customer adoption, and low cost can be a component of a viable growth strategy, but businesses must resist the siren call to discard their core business.

Every successful business is based around core products and/or services, customers and competencies. This core is the foundation of the business, and its structural pillar of value generation for all of its stakeholders, investors, customers, and employees. A strong core affords a company cash flow to support its growth efforts, which can be time consuming and expensive. It gives the company a staging ground from which to plan its growth. And, most importantly, it defines the company, its profile, goals and values, all of which are important in long term strategic growth. At the most basic level, the core of a business is what it “knows” and “does really well”. It is what creates value, maintains competitive advantage, and motivates the company to grow.

Growth doesn’t come on its own; it must be earned. Companies earn the right to grow by developing their core business to a point where it is self-sustaining, has relevant products/services with an established customer base and notable market share. Companies that haven’t yet reached this point cannot yet afford to spend their precious resources on growth, and should instead first focus on solidifying the core. Once the core is stable, and the company has the leeway to focus its attention on its next stage of evolution, it is ready to grow. There are several strategies that allow companies to grow without extending too far from their core.

Growth Strategies

There are three major growth strategies that were first described by Igor Ansoff in his 1957 Harvard Business Review article (Strategies for Diversification, Harvard Business Review, 35(5), Sep-Oct 1957, pp.113-124). He explained the dimensions of expansion from a core business with successful products/services and an existing client base. Figure 1 (Adapted from Ansoff, 1957) describes the dimensions of growth from a core business.

Figure 1: Growth Strategies from Core Business

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The first strategy is new product/service development: selling new products/services to the same customer base. This strategy leverages the current customer base, target market demographics, and accessible geographies of the core business and focuses on finding new products/services that meet the current and future needs of customers. This is one of the most common growth strategies and has numerous advantages: the primary one being the ability to query the existing customer base for pain points that have not yet been addressed by an existing product or service. Working with existing customers can yield innovative ideas and help chart out the growth path of the company. It spurs innovation in the company, which can lead to discoveries and advances that solidify and build the company’s stakeholder value and long term industry relevance.

The second strategy is market expansion: selling the same products/services to a new customer base. This strategy leverages the product/service expertise that the company has honed through its core business and focuses on bringing the products/services to new customers in new markets that have previously gone unserved by the company. This strategy’s primary advantage is that it allows the company to focus all of its energy on acquiring new sales instead of research and development. It takes successful products/services and reaches out to new customers who were not previously part of the target market. One of the best ways to execute market expansion is to expand the company into new geographies, such as new cities, provinces, or countries. This expansion may lead to minor tweaks and regionalization of the products/services, but does not stray far from the core business.

The third strategy is diversification: expanding into new businesses, most often through vertical integration in the supplier chain. Most companies that are in a position to grow are part of a supplier chain that funnels a raw product/service and progressively refines it until it reaches the client. A vertical integration strategy is effectively a combination of the previous two strategies that still leverages the core business. It proposes expanding into a new customer market where the new customer is the current core business. This approach is advantageous as the needs of the customer are well understood. It proposes new products/services at the same time, where the new products/services are those that are consumed by the core business. This approach has the advantage in that the pain points that the products/services address and use of these products/services are well understood. By acquiring a company upstream in the supplier chain, a successful intermediary can expand its influence and control over the supplier chain while acquiring more of the net value created in the chain.

Open source can play a creative role in each of these strategies to improve their effectiveness and likelihood of success.

Open Source and Growth via New Product/Service Development

New product/service development implicitly implies innovation. Traditionally, innovation occurs through internal research and development, requires time and effort, and very few ideas make it all the way to the customer. Increasingly, companies are moving towards an open source innovation strategy to address some of these issues. In his 2003 book Open Innovation (http://www.openinnovation.net), Henry Chesbrough compares the traditional model of closed, intra-company innovation and open innovation principles. Table 1 compares these principles.

Table 1: Comparing Closed vs Open Innovation Principles

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The advantages of an open source innovation strategy are clear: there are numerous existing product/service ideas, allowing a company to identify new opportunities and capture a portion of the value generated without having to generate the ideas from scratch. This strategy allows the company to focus its resources on the correct execution of the idea that leads to a product/service.

Open innovation principles lead to strategies that complement, and depend on, the core business. The focus shifts away from coming up with innovative products/services to positioning the company to acquire value from existing product/service ideas. Depending on the core business, the best way to acquire value from an existing idea may be through the ability to deliver that idea better than anyone else to an existing market. Such an approach leads to a distribution focus. Another core business might have strengths in development and may take a base idea and improve it threefold, selling a new and improved version to an underserved market. Such an approach leads to a development focus.

In some cases, it is possible to take the open source strategy even farther, right through to collaborative and distributed development. This is possible where the core business has a positioning that can partner with customers, or other industry participants who are not in direct competition, to work collaboratively on product/service development for mutual gain. A common example is partnerships between a company and a government agency. By opening up new product/service development to participation by a government agency, a company can benefit from the free innovation and development work of the agency, while earning revenue through support services, specific feature development, and in-depth product expertise–all the while safe in its knowledge that a government agency is not likely to suddenly go into the product/service business in direct competition.

This approach can also lead to mutually profitable associations in a broader, more distributed context. In such models, the products/services that are collectively designed and developed in the open source community are at one participation layer for the company seeking to grow. The growth takes place at a different layer, typically with revenue-generating services overlaid on the new product/service development. The new product/service development becomes an extension of the core business that improves its revenue generation potential. One example is the Symbian (http://www.symbian.org) cellular phone operating system which Nokia recently acquired and promptly released as open source. The core business of Nokia is selling cell phones. By engaging in new product development and improvement of Symbian, and allowing the community to improve it via distributed development, Nokia increases the value of its cell phone production, bringing more features and services to its customers. Such an approach can lead to company growth just as surely as if they had developed a whole new cell phone from scratch.

Another successful open source strategy for new product/service development hinges on the idea of distributed platform development. This strategy focuses on building and offering new products/services that meet a specific need, such as that of the customers of the core business, by creating a platform that is shared by other developers who target other customer markets. It protects the company’s core business by modularizing and opening a portion of the product/service that is not the core competency of the business and not part of its competitive advantage. This approach allows the company to focus on its value-add (its competitive advantage) while effectively outsourcing the foundation upon which it is built. It also allows the company to develop and leverage a brand surrounding the platform. This brand becomes an asset whose value could exceed traditional products/services. An example of such platform brand value is Sun Microsystem’s (now Oracle) Java platform. The Java brand enjoys high recognition and is associated with a broad range of products and services, from desktop applications, to web services, to cell phone games. Sun’s open source platform development strategy led to the effective creation of a “new product” for the company in the form of a brand, and they captured value through the lucrative licensing of the brand.

Open Source and Growth via Market Expansion

When seeking to expand into new customer markets, one of the biggest challenges is customer adoption. An open source strategy can help improve the adoption of a product (and, in turn, an overarching service) in a new market through viral redistribution. By encouraging end users to redistribute the product, a world of mouth effect quickly leads to exponential increases in awareness, the first step in market penetration. Companies must be careful to pay close attention to the market response immediately after a product release as the needs of this new market may be substantially different from the needs of the market that was previously addressed by the core business. This strategy works particularly well if the core business operates at different layers, where one product, or part of a product, can be open sourced to bring new clients to the company. This way, revenue is still generated by the other parts of the core business, be it support services, network infrastructure, or complementary products. The open source product will bring the new market to the company, and the core business has to deliver something of value to that new market in order to capitalize on the new market. An example of such value is releasing a basic, open version of a product to a new, overserved market, and offering a fully-featured closed version of the product to customers who require additional functionality. This strategy can lead to increased brand recognition and can devalue competing products, both of which can lead to market expansion.

One way to reach new geographies with existing products/services is to localize them by adapting the language, interface, and features to be suitable for a different geographic and linguistic environment. This process can be time and resource consuming and, to be successful, it is important that the company understands the specific linguistic, cultural and functional needs of unfamiliar markets. One way to address these challenges is to open up the product/services for distributed, collaborative localizing, typically by modularizing all the regionally-specific components into a generic framework called a locale. Locales can be developed by participants in underserved markets who would benefit from access to products/services that weren’t initially written for them. Mozilla’s Firefox web browser is one of the most successful examples of such a strategy, with locales available for over 70 different languages and regional needs. It is likely that this localization strategy played a role in its rapid adoption, grabbing a sizable share of new markets where localized versions of Microsoft’s Internet Explorer were not available. Figure 2, from Mozilla’s Q1 2010 Analyst Report on the State of the Internet (http://blog.mozilla.com/metrics/2010/03/31/mozillas-q1-2010-analyst-report-state-of-the-internet), shows the international usage statistics for Mozilla Firefox, highlighting the success of its localization efforts.

Figure 2: Firefox Worldwide Market Share

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Open Source and Growth via Vertical Integration

A supply chain is a set of companies that work to progressively refine a product/service from basic principles, such as raw materials or consulting, until it is ready for consumption by an end user. Each company in the chain adds some value to the product or service and, in turn, extracts some value from the supply chain. This value extraction is not uniform as different companies at different places in the supply chain extra different amounts of value. In typical supply chains, there is one company that extracts the lion’s share of the value. Yet, this position is precarious. If it extracts too much value, there may not be enough resources to support the rest of the supply chain which could collapse. Such a collapse can happen even when there is high demand, especially if a product/service is disrupted. The key to company survival and growth is to gradually move towards the most profitable place in the supply chain, the place where the most value can be extracted. An open source strategy can help with this supply chain positioning by acting as a funnel of resources to the desired value extraction point in the supply chain. This strategy must be carefully executed in order to not destroy the core business.

One approach to shifting the value extraction point in the supply chain is to introduce an open source product/service that is positioned to compete with products offered at that level of the supply chain. This introduction is effectively signaling to the market that, since an open source product is replacing a paid product, the value-added is elsewhere in the supplier chain. This may lead to a devaluation of the other products at that position. The core business must, at the same time, focus on research and innovation to introduce new products/services that refocus and capture customer attention. This diversification strategy leverages the loss leader (http://en.wikipedia.org/wiki/Loss_leader) open source strategy, while positioning the loss leader elsewhere in the supply, outside of the core business, insulating it from devaluation effects. This strategy is being experimented with in the Netbook supply chain. Several Netbook manufacturers have moved to release open source embedded operating systems for their devices that offer basic functionality such as web browsing and media playback. This strategy is testing the ability to weaken Microsoft’s dominant position in the supply chain while funnelling the value to device manufacturers who previously could only extract a small percentage of the total value generated by the supply chain.

Greg Wallace describes (http://linux.sys-con.com/node/173425) a similar effect in the customer relationship management (CRM) system supply chain based on the strategic choices of open source company SugarCRM (http://www.sugarcrm.com). By moving the focus away from hardware and software and towards value added services in the CRM supply chain, SugarCRM positioned itself as the leader in customization services, its core business, extracting the lion’s share of revenue from the supply chain. Figure 3 describes the evolution in the CRM supply chain in terms of value.

Figure 3: Evolution of CRM Supply Chain

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In Closing

Growth is challenging. While open source strategies can give a competitive edge, not all circumstances and companies can leverage these strategies. They are highly dependent on the nature of the core business, the products/services offered by the company, its environment, customers, and supply chain. Every company is different and should devise a strategy that is the right fit for its situation and goals. An open source strategy should be looked at as another tool in the toolbox of strategic growth planning, and not as a one-size-fits-all roadmap.

posted by Mekki at 12:09 pm  

Monday, February 1, 2010

The Business of Open: Common Pitfalls for Open Source Startups

As published in this month’s OSBR:

The Business of Open: Common Pitfalls for Open Source Startups, Mekki MacAulay

“Open Source requires a willingness to acknowledge what others may see as mistakes in strategy. It goes beyond merely engaging with your community, to treating critics as adults rather than as adversaries, and questions as opportunities to provide insight. A willingness to listen and even change your mind in response to criticism is not something we see in many entrepreneurs. Is it an essential part of the open source business toolkit?”

Dana Blankenhorn

Many entrepreneurs look at open source as a panacea of sorts, a golden ticket to success. They assume that the value of the open source approach is apparent to all, undeniable, and the only way. The mistake they often make is carrying this passion into the way they form their startup. They assume that open source startups are somehow different, and that as a result they will carry themselves. I was once such an entrepreneur, with such a vision.

The reality is that an open source startup isn’t really that different from other startups. It still needs to have figured out all of the essential components of a successful business. An open source strategy can certainly yield a competitive advantage, bringing faster time to market, lower development cost, collaboration opportunities, ecosystem positioning, and faster adoption. But, these advantages don’t come along on their own. The open source strategy is just one piece of the larger business model. The other pieces have to be strong, too, or the whole might crumble. This article reviews the essentials for all startups and highlights special considerations and pitfalls for open source startups in particular. It also discusses how startups can use an open source strategy to gain competitive advantage by focusing the passion and energy surrounding participation in open source towards value creation and acquisition.

Are Open Source Startups Different?

One of the greatest challenges for entrepreneurs who are passionate about open source is understanding that investors and customers probably don’t care that an open source approach is being used. They care about their needs, and what value a company and its offerings bring to them, at what cost, and at what risk. If you can create value for your customers or investors better or more efficiently using an open source approach, great! But the open source approach is not an end of its own.

This concept is enshrined in the founding of the Open Source Initiative as a separate entity from the Free Software Foundation, and the use of the term “open source” instead of “free software”. Eric S. Raymond describes it succinctly: “[T]he term [free software] makes a lot of corporate types nervous. While this does not intrinsically bother me in the least, we now have a pragmatic interest in converting these people rather than thumbing our noses at them. There’s now a chance we can make serious gains in the mainstream business world without compromising our ideals and commitment to technical excellence — so it’s time to reposition. We need a new and better label”..

A focus on the benefits of open source makes customers and investors nervous. The fact is they have their own businesses and portfolios to deal with, and while they might find the goals of the free and open source movements laudable, these goals are not their concern.

At the recent Lead To Win session, I was fortunate to overhear an exchange between an entrepreneur who was pitching an open source startup and a seasoned industry veteran who was coaching him on how to improve his business strategy. The exchange went something like this:

Industry Veteran: “I would never use the open source product your company pitches in my business because the risk is not worth the few hundred dollars I would pay Microsoft in licensing fees for their industry-leading product.”

Entrepreneur: “But my open source product is better than Microsoft’s product!”

Industry Veteran: “You might think so, but I can’t afford to be an early adopter. It’s safer for me to use industry-leading products that I know have been road-tested.”

Entrepreneur: “The US Military uses the product. There’s no risk!”

Industry Veteran: “Then why doesn’t the product have a higher adoption rate?”

Entrepreneur: “Because Microsoft has done a marketing campaign of disinformation to discredit the product and promote their solution as better.”

At this point, the industry veteran’s eyes glazed over as he realised that his message wasn’t getting through to the passionate entrepreneur. The lesson here is simple: from the perspective of business people, Microsoft is the market leader in many areas of software. Open source startups cannot compete with or reverse what millions of marketing dollars have accomplished. Instead, these startups need to take a more disruptive approach, focusing on niches that have been ignored by the incumbents. Roger Irwin describes the advantage of small companies thus: “In many industries there exists a David and Goliath scenario where large corporations simply do not have the agility to match fresh new startups with new ideas, or small companies who just get lucky with a product that just hit the mark at the right time”.

It is the agility of the startup to come up with new ideas and deliver solutions to niche markets that is its primary competitive advantage against incumbents. Taking them head on is simply not an option.

Essentials of Every Startup

There are some essential items that every startup, including open source startups, has to make sure are rock solid in order to have a chance at success.

The product or service the company will offer must solve an immediate and annoying problem for its customers. The customer must have an “itch” that the startup proposes to “scratch” with an innovative solution. This identified need/solution pair is the primary value proposition to the startup’s customers. Shopify provides an example of a strong value proposition: “Shopify is a hosted application that allows you to set up an online store to sell your goods. It lets you organize your products, customize your storefront, accept credit card payments through payment gateways, track and respond to orders — all without the hassle of running a physical store”.

Free software is an example of a weak value proposition: “Free software is a matter of freedom: people should be free to use software in all the ways that are socially useful. Software differs from material objects—such as chairs, sandwiches, and gasoline—in that it can be copied and changed much more easily. These possibilities make software as useful as it is; we believe software users should be able to make use of them”.

The first proposition speaks directly to customers and explains how the proposed solution will improve their business activities. The second speaks of abstract principles that most customers don’t understand or care about. While the goals of the Free Software Foundation are good, they do not make a good value proposition to customers. They do not address an immediate and pressing need.

The next thing every startup needs is a unique method or novel approach that sets them apart from their competition. This “pixie dust” must be more than a gimmick. It must answer the question “Why would a client pick you over your competition?”. When considering this question, I remember the words of one of my mentors: “There are only two types of business ideas: bad ideas, and ideas that are already being done”. Avoid at all costs the assumption that you have no competition. No matter what the product or service is, you have competition. The competition may just not be obvious because they are approaching the problem from another angle, and their solution looks different than yours. Your pixie dust needs to help you stand apart. Examples of poor approaches are lower cost, free USB key with every purchase, or more features than company X. An example of good pixie dust is Amazon’s “See what other people who liked this bought” feature. It allows customers to shop and discover new products in ways no other competitor who offer the same products can.

With the value proposition well defined, the next step is to describe a reachable, growing market. This target market should be well defined and understood. It is important to answer questions such as “Why will the value proposition resonate with this market?”, “What is the best way to reach this market?” and “What does this market care about?”. Spend some time researching the target market and their business needs. Understand what drives them in their industry, what they view as valuable, and the language they use to describe it.

One of the best ways to get the word out to the target market of the startup and its products or services is to engineer a public relations (PR) campaign. At a recent PR Bootcamp presentation, Matt Brezina coined the phrase “No one cares about your stupid little startup” and went on to explain strategies on how to make them care. It is a tough-love lesson that faces the reality that startups are a dime-a-dozen and most of them fail. It is difficult to get the media interested in yet another startup. But, you can help increase your odds of coverage and improve visibility to your target market.

A key component to every successful startup is the team. Picking the right balance of skills is a bigger challenge for most open source startups, as the founders typically come from a technical background. They are usually really good developers and experts in technology, but usually do not have strong backgrounds in business, marketing, sales, and all the other gears that keep the machinery of a successful startup running. The natural urge is to work with friends and fellow developers. The reality is that the team needs a complementary skill set in order to succeed. Working with friends can introduce an extra layer of stress that may hinder progress and could lead to the failure of the business and the friendships. Consider carefully what schools of thought you want on your team. Most open source startups need to focus on innovation. Be careful when selecting people and resist the temptation to focus on candidates with lots of experience. Experience is useful, but can hinder innovative thought by constraining the mind to focus on how things were done in the past, instead of creative ways to do them more efficiently. Sometimes the most innovative people come from a different field entirely and contribute to the innovative success of the startup with a fresh, unbiased perspective.

Finally, once you have put all the pieces together, make sure to focus. One of the hurdles many open source startups face is entrepreneurial ADD. It is fine to have lots of ideas for products and services, but no business can do everything. Pick one that is viable, and see it through. Be careful to avoid feature glut: the drive to add lots of features to a product before releasing it, without validating that customers even want the features.

Customers Determine Open Source Strategy

When planning how to incorporate open source into the startup’s strategy, the answer to the question “Who is the business for?” should be the driving force for business decisions. There are three typical focuses, with various hybrids possible: i) shareholder driven; ii) customer driven; or iii) employee driven. Each of these different approaches has its advantages and disadvantages with some particular things to note for open source startups.

The shareholder driven model is particularly challenging for open source startups as shareholders don’t like, and often don’t understand, open source business models. The reason is simple: these business models don’t match traditional measures for company valuations, making exit strategies more difficult to figure out. Clean, unambiguous intellectual property is quantifiable. The value of the open source strategy proposition is difficult to quantify because we haven’t fully developed the measures that update the traditional business model to conditions of looser intellectual property management. This uncertainty makes shareholders uncomfortable with open source models. Open source entrepreneurs have to be sensitive to this fact and recognize that a shareholder driven model for their company will require a lot of work, and may not be viable for really novel approaches. Investment capital may be limited, so they may have to focus on bootstrap funding to get their business off the ground.

The customer driven model also presents challenges for open source startups because most customers don’t understand open source. There are frequent misunderstandings about such things as what “free” really means and whether a product with open source code is a security risk to their organization. To deal with these challenges, open source startups should not try to fight the battles themselves, and instead focus on adding value to customers. Speak to customers in their language, and leave the open source part out when it doesn’t add value that they understand. The value of open source in a customer driven model will come in the service delivery, where the open source startup can leverage a myriad of tools at their disposal to deliver better, faster, cheaper services to their clients. The clients don’t need to know how their services continue to work, so long as they do. A customer driven model will also help open source startups in their focus as they have continuous customer input on where to put development effort.

The employee driven model is the most common model for open source startups, but can also be the most limiting. By following the passions of its employees, a startup can develop a strong team that is committed to company success, lower employee churn, and create a rewarding work environment. The cost comes in the risk of alienating shareholders and customers with decisions that don’t meet their needs. This conflict sometimes arises if employees are bent on preserving the principles of the open source movement, at any cost. Open source entrepreneurs should tread carefully and make sure that the strategy is well thought out to avoid such conflicts, and keep all their stakeholders happy.

The Attacker’s Advantage

In their 2003 article, Gans and Stern describe a framework that identifies the central drivers for startup commercialization strategy. They examined the commercialization environment that startups face when translating an idea into a value proposition for customers, and describe the forces that affect startup success. They conclude that the optimal strategy for a startup who is entering a market that has one or more dominant incumbents is based on two factors: i) the ability to preclude effective product development by the incumbent; and ii) the fit of the incumbent’s complementary assets to the new value proposition the startup is offering.

The implications of these findings are particularly important for open source startups, as they are not introducing barriers to effective development by incumbents, or other competition. As such, they have two possible strategies they can employ, depending on the incumbents’ complementary assets.

Where incumbents have strong complementary assets, and are best able to commercialize the results of the open source startup’s innovation, open source startups are in a weak position. They may be able to provide consultative input to the incumbent as specialists in a particular area of innovation. However, they are largely at the mercy of the incumbent and its particular strategy. The startup’s efforts are best spent convincing an incumbent that acquiring them is a sound investment to bolster their complementary assets. More importantly, the startup must be careful to develop a relationship with the incumbent in such a way that it doesn’t become more viable to simply put the startup out of business by investing into comparable innovation or a competing startup. This relationship between the startup and the incumbent is probably the most important factor in predicting success.

The best position for an open source startup is one where the incumbent’s complementary assets don’t add anything to the value proposition from the new technology. This incumbent limitation presents an opportunity for the startup to exploit its innovative leadership to capture a possibly ignored market: the attacker’s advantage. The performance of the startup depends on its ability to stay below the radar and focus on niche markets that the incumbents have ignored. Using this disruptive approach, the open source startup can capture market share from dissatisfied customers, and customers who value different measures than the current path of innovation by incumbents. By consistently undermining the value of the incumbent’s offering through creative destruction, the open source startup can rapidly gain market share. The open source software market has been taking this approach for years, and the success of Firefox, OpenOffice, Linux, and others are key examples. The startup must also make investments in developing its own complementary assets to ensure that its value proposition is compelling and novel, and to enable it to capture as much value as possible. These complementary assets can come in many forms, such as those described in the open source business models in Frank Hecker’s Setting Up Shop.

Success Without Compromising Open Source Principles

Open source entrepreneurs tend to be passionate, and there’s nothing wrong with this passion. In order for an open source startup to succeed, it is not necessary to compromise free and open source principles. Instead, make sure the startup’s strategy is aligned in such a way as to harness the passion of its founders and employees for open source, and direct that passion in a way that adds value to customers and inspires shareholder confidence.

Remember to maintain perspective. The loss of perspective is a common pitfall for startups. It’s easy to get obsessed with things that don’t add value to customers. Listen to your customers and let them help you shape the business as it evolves and grows. Their perspective acts as a sanity check to make sure you haven’t lost yours.

Heed the Linux development motto: “Release early and release often“. This approach jives well with the saying “fail fast”. If your business isn’t going to work out, it is best that you find out early on before you and others are heavily invested. Failure is a reality of startups, and is to be expected. Don’t be afraid of failure. Trying to over-engineer success is like trying to catch lightning in a bottle while spending lots of time and effort on designing the perfect bottle. Instead, accept that there will always be some amount of chance and timing that are out of your control.

Finally, remember that one of the most common open source business models revolves around reputation. By building an open source startup and getting people involved, you are contributing to the open source community in a positive way. If you do this well, and consistently, people will begin to notice. Most open source startup founders come and go from “day jobs” framing their ventures. Even if the startup ultimately doesn’t succeed, the positive reputation for the open source entrepreneur will persist, and it may be an asset the next time around.

posted by Mekki at 11:36 am  

Wednesday, January 6, 2010

What’s the Value of an Eyeball – Passive Participation in Open Source Ecosystems

As published in the January, 2010 issue of OSBR

What’s the Value of an Eyeball? Passive Participation in Open Source Ecosystems, by Mekki MacAulay

I reject the notion that any user is a freeloader or a leech. At the very least, they are vectors for your software, getting it out there in real-world environments to show to other potential users.

Brian Proffitt, Community Manager of Linux Foundation

Passive Participants in Open Source Projects

In her recent keynote speech at OSCON 2009, Kirrily Robert talked about the participation of women in open source projects. She interviewed female participants in two open source projects: Dreamwidth and AO3. She reports: “So, what can we learn from this? Well, one thing I’ve learnt is that if anyone says, “Women just aren’t interested in technology” or “Women aren’t interested in open source,” it’s just not true. Women are interested, willing, able, and competent. They’re just not contributing to existing, dare I say “mainstream”, open source projects.”

What about passive participants? Is contribution to the code base the only way to measure participation in a software project? Gender equity issues aside, is it fair to assume that someone who doesn’t contribute to the code of an open source project is not interested in technology or not interested in open source? Are contributors the only stakeholders in an open source ecosystem? Do they generate all of the value?

Franck Scipion of 55 Thinking talks about numerous other roles for participants in an open source ecosystem. He describes roles that include new user support, collaboration facilitator, know-how sharer, evangelist, trainer, event organizer, donor, and users. From the perspective of code commits, these participants are all passive and these contributions to the open source ecosystem are not measured by the traditional scales. Yet they are clearly doing something important to contribute to the health of the ecosystem. Why are these roles marginalized?

Bill Snyder at InfoWorld writes about “open source leeches”. He describes the debate over the perception that those who don’t contribute back in the form of code contributions are considered “open source vampires”. This perspective only makes sense if you assume that roles are clearly delineated as developer and user. In this model, developers shoulder all the work and manage the projects. They contribute source code, debug problems, debate the merits of new features, and add them as needed. Developers are the key players who chose the direction of a particular project and are the primary actors responsible for its success or failure. Open source projects are by developers, for developers.

Following this model, passive participants merely use the software. The developer community regards users as people who only take what was freely available and make no real contributions back to the project or community. Non-developers are often spoken of in disdain as problematic and opportunistic. Passive participants are thought to have nothing to offer open source projects. They are just freeloaders benefiting from the open licensing terms.

Where does this perceived divide come from? It may be the social barriers that grew in developer communities that made it such that only people who could write code, and who fully understood the internals of the open source project in question, could participate in development discussions. There is still frequent debate about open source elitism that is thought to separate the classes of participants. In this divide, developers rebuke users for simply taking the work of others and giving nothing in return and the users rebuke the developers for not understanding the mainstream’s wants and needs and for keeping development restricted to a small circle of people.

This divisive model misses the complexity of open source ecosystems. While some of its points may have validity, value generation in the ecosystem is not controlled purely by these factors. Passive participants are essential to value generation.

Users Provide Value

The emergence of the participatory Web has changed the nature of engagement in open source projects and is in the process of changing the definition of the roles different participants play. At the same time, open source projects are continually building upon one another, and combining in new and innovative ways to address business needs. Ecosystems have formed around some of the larger open source projects, and users make a significant contribution to the overall health and success of the projects.

In 1998, Netscape paved the way as the first widespread commercial open source success. It redefined the open source game, showing that companies could participate in, and even lead, open source projects and be successful. Netscape turned the traditional software business model on its head. It was in this breeding ground of new potential that the traditional model of participation in open source projects began to erode.

Prior to the open sourcing of its code, Netscape had been giving away its browser for free. The management team quickly realised that in order to compete with Microsoft’s Internet Explorer browser, Netscape needed to put its browser in the hands of every single potential Internet user, and that the best way to do this was to give it away for free. The large number of users, in turn, would help fuel sales of Netscape’s server products to companies who wanted to build an Internet presence and conduct e-commerce. The non-paying users of Netscape’s browser played an integral role in the company’s strategy.

When Netscape released its browser code as open source, many users fell into the traditional open source roles of developers and non-contributing users. But, new user roles began to emerge. The advocate user came into being. These users do not contribute directly to a program’s source code or development. But, after using the program, they spread the word by recommending it to their friends and colleagues. In this manner, they increase awareness of the product and bring in more users who may, in turn, make contributions in code or in another ways.

Advocates are just one class of user that has begun to emerge as an important player in open source projects. They add value to the project not through code contributions or feature testing and implementation, but by spreading the word about the project and adding value to the brand by increasing its awareness. In the case of Netscape, its brand was its most valuable asset. The strength of its brand led directly to its acquisition by AOL in the spring of 1999, in a deal worth over $4 billion dollars.

The popularity of a brand can be directly influenced by the number of people who use the brand’s product. By allowing users to use and freely distribute the product, they become distributed marketing and promotional agents for the company. Companies should encourage and nurture user participation to improve their branding strategy and the reach of their market. Users are particularly useful for viral marketing through word of mouth referrals. This form of marketing greatly hastens the adoption of new products.

More than ten years later, observers of open source participation still see average users as unable to help themselves, let alone contribute anything meaningful. It is assumed that all users of open source software must have a profile that is comparable to a developer’s in order to do anything other than “passively consume”.

Emerging User Roles

The participatory Web has put the Internet into the hands of the user. It enables anyone to readily generate and post content in a broad array of contexts. It has helped thousands of communities to grow and thrive around interactive products and services. For open source projects, it has also created a new class of user: the non-code-contributing user.

Originally, the only contributions a participant in an open source project could make were in the form of code. They could debug a problem or implement a new feature and submit the revised source code to be included in the project’s next release. The technical barrier to entry effectively prevented non-programmers from participation. In recent years, non-programmers can add value to open source projects without ever writing a line of code.

Aside from the value that users generate with word of mouth and other promotion of open source products, projects benefit from the complementary works that non-code-contributing users create. In the Netscape context, this might come in the form of web pages. Every user who creates a web page and puts it on the Internet for other people to access is indirectly adding value to the Netscape browser by increasing the number of pages the product can be used to access. If there were only 10 web pages in the world, the Netscape browser would not be very useful. As the number of web pages grows into more content that any given person might want to access, that growth adds value to the tool they will use to access that content.

A more direct example can be seen with the virtual world Second Life. Users purchase land and build on it in a 3D environment. This building is more akin to graphic design or visual arts than it is to programming. Users create objects and share them with other users. They then use the space and their creations to offer services and games, run businesses, trade currency, and generally create all kinds of complementary products and services that make the experience of using Second Life’s virtual world more appealing. Second Life released the code of their viewer as open source. This move promoted the development of hundreds of diverse third party applications and interfaces such as 3D headsets, terminals for the blind and Skype plug-ins. It has spurred the development of complementary assets that add value to their core product and brand. The parent company, Linden Lab, continues to generate significant revenue from network services provided within Second Life, and has attracted tens of thousands of new users through its open source efforts.

Users have played a central role in the Second Life ecosystem. Without the critical mass of users creating interesting spaces and using the project, all of the development work and code contributions that went into the product would go unused. These participants played a role in the coming into existence of all the derivative and complementary products that have and will emerge from the ecosystem. Without the passive participants, these products would have never existed, and the value capture for the companies that created them would not have occurred.

Suggestions for Companies

Since its founding in 1998, the Open Source Initiative has encouraged the software industry to re-evaluate intellectual property strategy. Many companies have been in a similar position to that of Netscape in 1998. They have an existing product, a growing user base with different motivations and skills, and revenue generation mechanisms. By taking a fresh look at the different classes of people who participate in the ecosystem they have built around their product, and broadening the operational definitions used to classify them, they are now in a position to be able to begin to quantify the value of passive users. The industry is full of data that is suitable to case studies of such situations.

Managers of companies considering open source strategies can begin planning and analyzing how to structure their open source projects to get the optimal benefit of all the different classes of users. By better understanding the different user motivations, and how different users add value to their core offering, they can increase their likelihood of success and strengthen their brand. Open source users contribute through code development, marketing and promotion, and complementary product creation. They also act as idea generation factories to help the company innovate better and build products and services that better meet the needs of their customers.

The biggest challenge in leveraging this untapped resource is changing the mentality of developers in the open source communities who have long enjoyed the center stage. Technology author Chris Pirillo describes the issue succinctly: “What would the world of software be like if the inmates were running the asylum? I’d argue a lot more useful, and a lot more beautiful. But users are usually in the back seat when it comes to the evolution of a utility – from beginning to end. Let me put it to you this way: software is useless if there isn’t anybody using it. The world of software is getting larger by the day, and more people are finding new and different ways to improve lives with digital code. Programmers suffer from a miscalculation of a user’s wants, needs, and desires. As a power user, I expect better, I expect faster, I expect smarter, I expect more. When I see a new piece of software that holds promise, I call out its shortcomings in the hopes it will be closer to perfection with the next revision.”

It is this culture gap that must be overcome to get the most out of the user base of an open source project. Dedicated community managers are one option as they can help focus the energy of the community towards achieving shared goals. They can also help increase inter-group communication, and help the community grow.

Further, the distinction between passive and active participants may be blurry. It is unclear how to best separate classes of participants, as their roles might be circumstance based. Is a code contributor both a developer and a user? Does it matter how much code they contribute? Further research into understanding roles would help quantify the dimensions of contribution.

Traditional consumer marketing metrics can also be used to learn about one’s user base. By better understanding the users, companies can create more useful products that better meet user needs. Different types of users behave differently, and it may be possible to encourage them to participate in ways that relate to their interests. For example, innovative users tend to adopt technology more readily, don’t mind bugs and crashes as much, and are willing to put in the time to help report errors and suggest improvements. Users who are highly involved with the product are more likely to be able to identify novel uses for the product as they have integrated it more in their life. Loyal users may not be technically savvy, but will gladly wave the banner of the company, promoting the product far and wide and bringing in new users. There are many other passive participants such as event promoters, designers of complementary products, documentation creators, and financial donors.

By carefully partitioning the participants of an open source community using standardized measures, a keystone company could assign its community management and marketing resources more effectively. It could better leverage the inherent value in the user community, and potentially improve the value creation in the ecosystem.

The Challenge of Assessing Value of Passive Participation

Passive participants add value to an open source ecosystem. The challenge is in assessing that value. What is the dollar amount, on average, that each participant adds to the ecosystem? How does that amount vary based on the type of participation? Is it easier to extract value from an open source ecosystem that has more passive participants? The answer to these and many other related questions is of great interest to companies as it defines their positioning strategy and community management practices. If it were possible to better quantify the value of passive contributions, the model of value creation in open source ecosystems would be strengthened, and would improve the ability of keystone companies to strategically position themselves in the ecosystem.

Summary

Companies that make the mistake of discounting the passive participants in their open source community miss out on a valuable resource. It is time to reshape the classical definitions of roles in open source ecosystems. Passive participants should not be viewed as leeches. They contribute to the ecosystem in many ways other than code. As our understanding of how open source ecosystems work improves, the next challenge is to better quantify the value of passive contributions. By better understanding the value of every eyeball in the open source ecosystem, keystone companies can make better strategic positioning decisions, and create more value in the ecosystem.

posted by Mekki at 12:33 pm  
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