Open Source and Business Model Innovation.
The Funambol case
Alberto Onetti
Department of Economics - Insubria State University
Varese, Italy
aonetti@eco.uninsubria.it
Abstract – A comprehensive theoretical framework about
open source business models is still missing, notwithstanding
a growing number of contributions. This lack of literature is
mainly due to the relative newness of the phenomena. This
paper aims at giving a contribution to the ongoing discussion
about open source business implications. The research
hypothesis is that open source represents a disruptive
innovation for the software industry. The purpose is to
understand, through case study research, how open source
companies can develop successful business models. Funambol
provides an interesting example of an optimized business
model, able to leverage the open source advantage in an
emerging market. The paper is structured in three main
parts: the first one aims at outlining the research hypothesis
and methodology. The second part identifies the unique
competitive factors distinguishing open source business and
the main business implications. The final part focuses on the
analysis of the Funambol business case.
I. INTRODUCTION
There are many business models around open source
software. Generally, these business models are associated
with the different license approaches the companies follow
to regulate open source software distribution. There are a
myriad of licenses available [1,2] but we basically can
group licenses in two main categories [3,4]:
- licenses, such as the GPL (GNU General Public
License), that ensure that all derivative works will
remain as open as the programmer's original software;
- licenses that allow derivative works to become
proprietary. For example, the BSD (Berkeley Software
Distribution) license.
Consequently, according to the adopted license policies,
we can identify three different types of business model:
- GPL/LGPL business model: GPL-style licenses limit
commercial adoption of software. Companies based on
GPL (or LGPL, Lesser GPL) software take on a pure
service model, where revenue comes from professional
services (maintenance, customization, consulting, and
formation). Some examples of companies adopting
GPL business model are 10X Software, which provides
corporate integration consulting for several popular
GPL software, and Red Hat, whose revenue comes
from Linux maintenance and consulting.
- BSD/Apache business model: the BSD-like licenses
allow companies to use the code in proprietary
software, with or without modifications. Code created
under these licenses, or derived form such code, may
go “closed” and be commercialized by anyone (not just
the original developers). For BSD companies, revenue
originates both from license fees on software reselling
and professional services. In most cases, the BSD
license is used just for a core component of the solution
(to favour its diffusion), while revenues usually come
from proprietary extension. Zend, the company behind
the highly successful language PHP, is an example of a
company with a core free open source component (the
Proceedings of the First International Conference on Open Source Systems
Genova, 11th-15th July 2005
Marco Scotto and Giancarlo Succi (Eds.), pp. 224-227
Fabrizio Capobianco
Funambol Inc
Redwood City, CA, USA
info@funambol.com
Zend engine) and multiple commercial tools around it.
- Dual licensing business model: the dual license
approach is not based on one integrated license. It is
rather a business policy that permits a customer to
choose one of two licenses: either the GPL (typically)
or a commercial license. For organizations developing
open source applications, the dual license allows them
to use the software at no charge under the condition
that the complete source code for their application is
available and freely redistributable; organizations that
do not want to release the source code for their
applications as open source software, can buy the
commercial license. Companies adopting the dual
licensing business model, similarly to proprietary
software companies, base their source of revenue
mainly on license fees. MySQL (database servers),
Funambol (mobile application management and
synchronization), SugarCRM (Customer Relationship
Management) and Trolltech (application development
framework and tools) are good examples.
Assuming that revenue in the software industry
originates from two main sources (license fees and
professional services), while the traditional proprietary
software vendors overweight the first one, GPL open
source companies rely more on professional services. BSD
and Dual Licensing companies stand in the middle. Within
the open source arena, the companies adopting the GPL
model seem to be the most innovative ones, while the other
(BSD and Dual Licensing) have a more conservative
business approach, strictly comparable to the proprietary
software vendors.
An analysis of the open source phenomenon in terms of
license policies and sources of revenues fails to understand
the real nature of open source business. The risk is to
define open source business in negative terms, assuming
the commercial proprietary software as the term of
comparison. If we approach open source business models
looking at the differences between open source and
proprietary software, we run the risk to re-create open
source models starting from the traditional commercial
proprietary software business schemes. We could refine
them, in order to make them fit with the open source
different features (source of revenues, license approaches,
etc). However, even with an excellent analysis, we risk to
go nowhere, because we would be missing the point.
Open source business models are intrinsically different
from proprietary software business schemes because open
source software has unique characteristics. To leverage
these unique characteristics, a wholly different approach is
therefore required.
II. RESEARCH HYPOTHESIS AND THEORETICAL
BACKGROUND
The research main hypothesis is that open source
represents a disruptive innovation for the software industry
[5]. Although this perspective is rather different from the
approach taken in much of the literature on open source
business models [6,7], a number of concepts derived from
business innovation literature are useful and apply to our
case.
Hypothesis 1a. We are facing a “breakthrough” [8] in
the software industry. Open source is definitely “rule
breaking” [9,10] since, thanks to its unique characteristics,
it will have a disruptive impact on the market structure.
According to [5], “disruptive innovations create an entirely
new market through the introduction of a new kind of
product or service, one that’s actually worse, initially, as
judged by the performance metrics that mainstream
customers value”. That is what happened with open source.
Initially, open source was judged as a weak alternative to
proprietary software. It was considered inadequate for core
applications and large corporations, because, applying the
traditional performance metrics, it lacked the guarantees
given by vendor’s software ownership. Open source
introduced the concept that software ownership is
structurally unable to guarantee high quality, bug-free
products. An open source product - with thousands of users
and developers reviewing and testing the software code,
and returning feedback and bug fixes back to the project –
has proven to be more reliable then proprietary solutions,
with a lower rate of software defects. For instance, [11]
showed that the code quality of MySQL (measured in
terms of defect density) was six times better than that of
comparable proprietary code. Moreover, source code
visibility and availability provide freedom from the so-
called “vendor lock-in”, allowing enterprises to select from
a broader range of hardware and software solutions and
lowering the software cost of acquisition and ownership.
Hypothesis 1b. Open source requires new and different
business models. Incumbents benefit from large market
shares but could find difficulties to face the open source
wave with their existing business methods. They tend to
suffer from the “comfortable clone syndrome” [12]: the
loyalty to “the way we do things here” [13] reduces the
ability to envision alternative possibilities and go beyond
the established business models. On the contrary, new
entrants can approach the software market with an
“exploration” spirit [14,15] and gain the so called
“attacker's advantage” [16,17]. They are not trapped by the
rigidities of the existing routines [18] and can explore
wholly different business models purposely built to
leverage the open source characteristics. New entrants can
also be small start-up companies. For instance, SugarCRM
and Funambol are start-up born around open source
projects. While proprietary software requires big teams to
internally develop and support the product, what matters in
open source initiatives is the community size, not the
corporate size. A lot of activities (QA and, under particular
circumstances, development) are actually managed by the
community, lowering the cost of producing the software,
considerably increasing its quality: this leads to great
business opportunities to build lean companies, quicker to
improve and adapt, with market share increases.
III. RESEARCH METHOD
The paper is based on a qualitative methodology,
peculiar of business studies researches. Given that the
research question has a fundamentally explorative nature,
case study research is the methodology which allows the
Proceedings of the First International Conference on Open Source Systems
Genova, 11th-15th July 2005
Marco Scotto and Giancarlo Succi (Eds.), pp. 224-227
study of the business in its real context [19,20]. Moreover,
single case study methodology fits with emerging
phenomena [21,22].
The unit of analysis is an open source US multinational
corporation in the middleware software industry, called
Funambol. Accordingly, the research was extended to
consider Sync4j, the open source project developed by
Funambol.
The empirical research was based on interviews with
managers and employees involved in the different
corporate functions (Finance and Operations, Sales and
Marketing, Product Development) and with Sync4j
contributors. Ten open-ended and semi-structured
interviews were conducted at the executive (3 interviews)
and operational (7 interviews) levels. The interviews
covered topics such as the past history and growth of the
firm, its success factors, anecdotes on the firm’s
development, new issues arising from open source field,
innovative business system elements, work and
management beliefs and methodologies, sales and
production techniques. Overall, about 30 hours of
interviews were conducted. Participant observation and
analysis of internal and official documents complemented
the interviews. The results of the research here presented
have also been tested with the subjects involved in the
analysis, so as to increase the external validity of the
analytical construct [20].
The research is ongoing. This paper is focused on
gaining an understanding of Funambol business model.
The model is in continuous evolution. We aim to adopt a
wider approach in future researches, investigating other
open source companies.
IV. OPEN SOURCE AS DISRUPTIVE INNOVATION.
THE BUSINESS IMPLICATIONS
Open source does not revolutionize how software is
manufactured. According to [11], early in the development
cycle, open source and commercial software development
environments have a very similar quality and produce a
similar number of defects.
The difference emerges after the first releases and
resides in the fact that people can review and enhance the
original software code. We identify two main business
implications.
1) Having a lot of people reviewing the software code
dramatically improves its quality, obtaining the advantages
of software inspection [23]. Commercial software
companies have sophisticated testing tools, but they are
unlikely to achieve the same level of peer review than open
source, which is critical in finding defects [11]. Moreover,
in open source projects, the inspection process is managed
mainly by independent developers and users, providing an
autonomous nature to the review.
2) The open source approach strongly affects software
distribution. People can try the software before buying it,
having access to internal documentation (such as design
documents) and code. In the open source age software is
not really sold, it is bought. Consequently, sales policies
and organizations require to be wholly redefined: an open
source company is required to properly support – mainly
remotely – software users who contact the company during
the evaluation phase, not to seek potential customers. It is
the customer who looks for the product he/she needs and
chooses it after reading technical documentation,
downloading, looking at the code, testing, and so on. Push
sales models do not work with open source: they are
perceived as a sort of “spamming”. Open source business
is “developer/user pull”. Big sales forces are out. Business
models have to be designed accordingly. Funambol with its
Sync4j project provides an interesting example of how an
effective open source business model can be built.
V. AN OPEN SOURCE BUSINESS CASE: SYNC4J BY
FUNAMBOL
With more than 8,000 downloads per month in 2004
(ObjectWeb and SourceForge data), the Sync4j open
source project is becoming the de-facto standard SyncML1,
mobile application management platform, allowing
wireless developers to build applications based on the
“sometimes-connected paradigm” (the application works
off-line; data is are synchronized when the device is back
on-line). Funambol is the company behind Sync4j. How
has Funambol leveraged and exploited Sync4j potential?
The company initially adopted a classical software
vendor business model, directly addressing potential
customers and focussing on large companies and wireless
carriers. The underlying vision was the following:
increasing mobility produces a growing need to
synchronize the data accessed or used between multiple
mobile devices and corporate servers. Large companies are
the first to encounter this challenge because they generally
have to manage a huge number of field workers and a
plethora of differing devices.
What made this push model poorly effective? The
reasons vary:
- a start-up company encounters obstacles to address
large companies, requiring to be intermediated by
system integrators;
- the length of the sales cycle dramatically widens (12/18
months): salespeople spend time (phone calls/email
pinging/visits) to enter in contact with the right person
who, within the customer’s company, is in charge of
the synchronization issues; the contact often happens
when the synchronization need is not yet mature and
consequently there is no budget available;
- directly targeting final customers requires a large sales
team, affordable only by large software companies.
This model did not work because it was designed for
proprietary software products and it is not suitable for open
source companies. Open source requires different business
models able to leverage its potential. While proprietary
solutions vendors’ main task is to address and reach the
customers, open source companies are generally
discovered directly by the customers. Adopting a sales
push approach with open source equals to renounce to
exploit its strengths. This is what Funambol quickly
understood. Accordingly, the strategy was redefined.
Funambol experienced that, when Sync4j downloads
increase, more companies contact Funambol, asking for
pricing, after having thoroughly tested the software.
Among them are top Fortune companies and wireless
carriers. They represent extremely qualified leads, as they
know exactly what they are looking for. The sales cycle
becomes outstandingly short, about three months on an
average. Mostly, it requires a telesales approach with rare
1
SyncML is the Open Mobile Alliance standard for data synchronization
and device management, already preinstalled on a myriad of devices
(Nokia, Sony Ericsson, Motorola, Siemens, and so of
Proceedings on).
the First International Conference on Open Source Systems
Genova, 11th-15th July 2005
Marco Scotto and Giancarlo Succi (Eds.), pp. 224-227
customer visits, keeping the sales team thin and dropping
the customer acquisition cost.
Funambol therefore analysed the sales cycle and
identified the different steps that several customers
followed before buying a commercial license. It is the so-
called “Sync4j value chain”, i.e. a template describing the
Funambol customer acquisition process:
Step 1) The potential user reaches the Sync4j website to
collect product information and technical documentation.
Step 2) The product is downloaded.
Step 3) After downloading the product, the potential
customer often subscribes to the Sync4j mailing list to
receive free initial support and guidance.
Step 4) After intensive use of the software (usually in
R&D projects), the user contacts Funambol asking for
price information and license conditions. Internally, it is
classified as a Prospect Customer.
Step 5) and 6) After being informed about general sales
terms, the prospect requires a formal commercial offer
(becoming a Lead) and, if it fits with its expectations and
budget, it becomes a Funambol Customer.
Taking a look at the monthly data series, Funambol
learned that there is a remarkably positive correlation
between the top and the bottom figures of the value chain:
statistical analysis proved that, when hits numbers rise, all
the downstream figures (downloads, users, prospects,
leads, deals) proportionally increase. This means that the
focus of attention must be put on the hits. This is the first
pathway at the top of the Sync4j value chain. The first
pathway creates the foundation for the second (downloads
increase), and so on, starting a virtuous business cycle.
Actually, hits and downloads put the commercial
machine in motion. The sales pipeline is nourished by
downloads, because a download increase produces more
prospects (price information requests) and leads
(commercial offers). Every single link needs to be
improved, in order to maximize the conversion rate from
hit to customer.
The business flow is “user pull” and not “sales push”.
Deals do not originate from aggressive sales efforts aimed
to identify and reach potential customers. The prospect
autonomously contacts Funambol: sales goal is not to
search for new customers, but to properly follow the
prospects and the leads, providing them with all the
requested information and support.
Funambol strategy has been coherently redirected on
enhancing product management and marketing: Sync4j
value chain has to be fed: hits and, above all, downloads
are the feed.
Funambol effort is now addressed to increase the
number of product downloads, focussing on the top side of
the Sync4j value chain. How can it be done? Funambol
identified some action items such as:
- Continuously improve the product, acknowledging the
community’s feedbacks and demands. In the open
source business “techies” (users and developers) are the
“king makers” and they base their choices on technical
excellence criteria. There cannot be a successful open
source project with a low quality product. The same
cannot be said for commercial products.
- Make the product easy to download and install. Thanks
to the feedback in the mailing list, Funambol learned
that a lot of people had problems during Sync4j
download and installation. This created a bottleneck in
the value chain because potential customers who
 encounter problems in the installation, unlikely
transform themselves in Sync4j users and prospects.
The customer approach to open source is highly
aggressive: the first test is pivotal. A product
considered “not mature” during the installation is
immediately abandoned by potentially paying users
(not by academic users). Sync4j 2.2 release is user
friendly with a simple learning curve and a professional
installation.
- Evangelize developers about Sync4j. Hit numbers
depend on Sync4j diffusion within the developers’
community. Traditional communication (commercials)
does not make sense for a technical product. Sync4j
diffusion passes through speeches at technical
conferences, participation at developer forums,
evangelization and contribution on mailing lists,
technical articles on specialized IT magazines,
advertisement on Google AdWords, creation of
synergies with other open source products (such as
JBoss and MySQL), partnership with no-profit
organisations promoting open source software (such as
ObjectWeb consortium), and so on.
- Improve product documentation and management.
Some people contacting Sync4j web site did not
download the product because they did not found a
complete technical documentation or a clear product
roadmap. Better documentation improves the
transformation from hits to downloads.
VI. DISCUSSION AND CONCLUSIONS
This paper was explanatory in nature and, as always
with case-based research, it opens up as many new
questions as it answers. Moreover, focussing on only one
case - although in depth - makes it difficult to draw strong
conclusions. Our study certainly enhances our
understanding of the companies playing in the open source
arena, but it remains to be seen how the findings would
replicate over a more comprehensive sample.
Our research hypothesis is that open source represents
a disruptive innovation for the software industry and hence
a wholly different approach is required in defining
business models for open source companies. Business
success in the open source arena depends on the coherency
of strategies adopted with the new and unique competitive
factors distinguishing open source.
The study provides a concrete example on how open
source companies can design a coherent business model.
Funambol has identified in the strong “user traction” the
Sync4j distinctive factor and the design principle of its
business model: this meant widening the community as the
best way to build a sustainable, profitable business.
The paper presented one specific open source business
case. There are a plenty of ways to chart successful open
source business strategies [7]. Managers should identify
their own business unique factors and accordingly
determine which strategies are better for their companies to
adopt in order to exploit them. By doing so, the community
role in any case should not be ignored. This is the feed of
open source success, the key principle on which every
open source should be based. Leverage the community role
and the community will pay you back.
Proceedings of the First International Conference on Open Source Systems
Genova, 11th-15th July 2005
Marco Scotto and Giancarlo Succi (Eds.), pp. 224-227
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