Subject: Re: Revenue and business models
From: Thomas Lord <lord@emf.net>
Date: Thu, 15 Jun 2006 08:31:20 -0700

Stephen J. Turnbull wrote:
> In what form money is transferred is basically irrelevant.  All you
> need is a sophisticated third party (I'll call it the "bank"), 

You spelled "CFO" incorrectly.

But that assumes a seller who has money in the bank...

So more seriously, a third party service, specializing in
small FSBs, providing the kind of financing you describe
while keeping transaction costs low for seller and buyer --
wow!   I think that's about the third really good business
plan seed to fly by in the subtext of FSB in recent days.


> and it
> can be anything you want.  Here's how it works.  You go to the
> customer.  You say "I want $300K up front".  The customer says, "Wait
> a minute."  She goes to the bank and says, "I will sign a contract
> that pays you $0.35 per widget in perpetuity.  Here's my business
> plan.  What will you give me for this?" and the bank says "$280K".
> She comes back to you and says, "How about $280K?"  You grumble a bit,
> but you say "done!", don't you?
>
> This is what is called "intermediation" (the bank's role in turning a
> cash flow that is convenient for the customer into a cash flow that is
> convenient for you) and "securitization" (turning a private contract
> into a commodity marketable to third parties).  Both are very big
> business today.
>
> Where's the free software in the story above?  *There isn't any*; it's
> completely generic.
>
>   

Seller needs to worry about his own transaction costs and
the transaction costs of customer.   When the customer
you just pitched says "Ok, this sounds good.  Please send
us a draft contract," the wrong answer is "Uh, ok, well,
will you please come with me to the bank?"

Greasing the wheels here to make such deals go smoothly
for firms where a CFO isn't playing the role of the bank
is critical.   In that sense, a third party banking-like service
specializing in the peculiarities of free software markets
would help.    But yes -- the financial structure of the deal
*is* completely generic.   It's how proprietary license sellers
work.   It's how lots of industries work.   Yup.


> How do you put the free software in the story?  Any way you like.  You
> aren't constraining the customer.  She still has all her rights with
> respect to the software; she just has this side contract with the bank
> that costs her money if she does certain things that happen to involve
> the software.  But the bank doesn't know, and doesn't need to!  All
> they do is count widgets.  Where is there any infringement of the
> customer's software freedom?
>   

There isn't any.  

Now, it may be better to skip the bank and use your CFO because
then you take bigger risks.   You *want* $300K within 3 years
but you'll *break even* with $75K in 1 year.   A gambling man would
guess that with per-widget fees you're most likely to get somewhere
in the middle but with a high degree of uncertainty.   A traditional
bank ain't gonna do you much better than $75K.

> I believe that this argument is perfectly applicable to the Red Hat
> seat license, too, even though you do have to know about the software
> to verify compliance.[1]
>
>
>
> Footnotes: 
> [1]  Of course you're unlikely to find a bank expert enough to assess
> the value of software in an innovative industry, so what normally
> happens is that one of the parties accepts the others' cash flow
> proposal, usually after bargaining for a better level, of course.  In
> this case, Red Hat is playing the role of the "bank" as well as the
> software vendor, for the convenience of the customer.  What's wrong
> with that?
>
>   

Nothing is wrong with Red Hat's business model from an ethical
perspective.  Nothing at all.   (That I am aware of.)   More
power to them.   I think they have pretty much the right
idea.

(From a business perspective?  I think they face challenges.
That's a separate topic.)

Red Hat's *contracts* on the other hand seem to me to be rather
bogus.    It's silly because they could implement the same business
model with a contract that wouldn't be at all bogus.

-t