Subject: Cyclic, Cygnus, and Sendmail: Open Source business models
From: "Michael A. Olson" <mao@sleepycat.com>
Date: Thu, 24 Jun 1999 09:29:43 -0700

I saw John Gilmore's post to the FSB mailing list of Jim Kingdon's
announcement, in which Cyclic discontinued its new support offerings
for CVS.  This prompted some musings on the business models in use
by different Open Source companies.

Cyclic has not been, primarily, a product development company.  Jim
has financed his activities by selling support contracts, with
occasional consulting.  I don't know what his balance sheet says,
but I expect that his recent announcement means that Cyclic hasn't
been making the kind of money he would need to continue operating
the business.

I suspect that there are two reasons for this.

First, CVS does pretty much everything that a software developer
needs a source code repository to do.  There's just not much of a
market for consulting to add features to the system.

Second, CVS is sufficiently reliable that there isn't much demand
for support.  Companies may feel that they can support it internally,
since they have the source, or they may be willing to walk the wire
without a net because the code has demonstrated its stability.

The result is that Cyclic's business model can't sustain the company.
Certainly there wasn't enough money to fund growth -- Jim was the
only full-time employee -- but there wasn't even enough income to
keep the principal interested.

Compare this to Cygnus, which has the identical strategy (support
and consulting on Open Source tools).  Cygnus makes a good living from
its new port consulting practice, because silicon vendors need the
best tools to run on their platforms, and the best tools include gcc

and friends.  There's a continuing market for these services; the
silicon vendors are constantly releasing new chips to compete, and they
don't have the expertise or funding to port Cygnus' offerings themselves.

I don't know what fraction of Cygnus' revenue is from support, as
opposed to consulting, but I suspect that consulting revenues dominate.
That is, Cygnus is, in a sense, selling product, not services.  Companies
pay for the software that runs on their chip sets.

I've worked for lots of companies, and have used the Gnu tools at
all of them.  As far as I know, none of my employers ever had a Cygnus
support contract.

At the other end of the spectrum is a company like Sendmail.  Sendmail
does sell support and services, but it's fundamentally a product
company.  They want you to buy Sendmail Pro from them, because it's
ready to install and easier to administer than the source you download
from sendmail.org.  Sendmail, Inc. is committed to the continued
availability of the MTA from sendmail.org, and pays its employees to
work on the Open Source code, but their business model says that people
will come to them for proprietary software around the Open Source
offering.

The moral of the story, from my point of view, is that even Open
Source companies need to sell software to be successful.  If you're
considering starting a business to support an Open Source project,
you need to think about your goals.  You may make enough money to
feed the cat and pay the mortgage, but will you have a business that
is viable for the long term?  Why will people pay you enough money

to grow?

All the Open Source companies I can think of that are making appreciable
money right now are selling software.  Red Hat does.  Cygnus does, if
you buy my argument that their ports are really software sales.  Sendmail
does.  Certainly our business model at Sleepycat counts on revenue from
Berkeley DB, and not just services.

Working with freely redistributable source code isn't, by itself,
a business plan.  I don't think that Open Source changes the rules
for companies much.  You still need to plan revenues and expenses.
Open Source is a strategy you can adopt for competitive or other
reasons, but it's not the answer to any business questions, by itself.

					mike