How to make money with an open source strategy?

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How to make money with an open source

strategy?

The design of GravityZoo’s open source business model

Wouter Devens Rijksuniversiteit Groningen Faculty of Management & Organization Thesis

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How to make money with an open source

strategy?

The design of GravityZoo’s open source business model

Author Wouter Devens

S1226991

University of Groningen (RuG), Faculty of Management & Organization Study: Financial Value Management

Version: Final Version 21-06-07 Date: 26/06/2007

Supervisors RuG:

Primary Supervisor : Drs. J.H. van Uitert Secondary Supervisor : Dr. Ir. R. de Graaf

Graduation Organisation: NASH Consulting BV

Company Supervisors: Mr. M. Vrijhof (GravityZoo Company) Ir. E. Steffens (NASH Consulting BV)

® The author is responsible for the contents of this thesis; the author remains ownership and rights on the contents of the thesis at all times.

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Preface

In de zomer van 2006 begon ik aan mijn stage bij NASH Raadgevende Ondernemers. NASH is een klein adviesbureau dat voornamelijk adviseert bij fusies en overnames. Mijn eerste idee was om mijn afstudeerscriptie over dit onderwerp te schrijven, daar dit uitermate goed bij mijn afstudeerrichting Financieel Waarde Management aansloot. Geheel onverwacht kwam ik echter in aanraking met de IT wereld. Na enkele onderzoeksvoorstellen over het onderwerp fusie en overname (voornamelijk literatuur gericht), drong zich bij mij het sterke gevoel op om iets met een concrete case te doen. Na een dag nadenken kwam ik tot de conclusie, dat deze kans dichterbij was dan ik dacht. Marc Vrijhof, een van de NASH partners, was bezig met zijn eigen ICT start-up, genaamd de GravityZoo Company. Naar hier met veel goede moed aan te zijn begonnen, bleek toch dat ik een flinke kennis achterstand in te halen had. Dat dit gelukt is en ik uiteindelijk mijn scriptie succesvol heb kunnen afronden, heb ik uiteraard aan een heel aantal mensen te danken.

Allereerst wil ik mijn ouders, Koen, Janneke en Peggy bedanken, voor de afleiding, goede discussies en steun. Ook wil ik mijn afstudeerbegeleiders, dhr. Van Uitert en dhr. De Graaf, bedanken, in de eerste plaats omdat ze het hebben aangedurfd om met een niet-IT student dit traject aan te gaan. Daarnaast vanwege alle goede adviezen en de juiste sturing.

Tenslotte ben ik in het bijzonder veel dank verschuldigd aan het gehele NASH team. Erik, omdat hij mij de kans heeft geboden om bij NASH af te studeren en daarnaast dit naar alle vrijheid in te vullen. Peter, omdat hij ervoor heeft gezorgd dat ondanks mijn uitstapje naar de IT wereld, mijn finance kennis op peil is gebleven en uitgebreid. Joost, voor alle wandelingen en de goede gesprekken. En tenslotte Marc, vanwege de vele tijd die hij aan mij heeft besteed om op al mijn vragen antwoorden te geven, en daarnaast omdat hij mij de kans heeft geboden om aan een echt project mee te werken. Marc, ik weet zeker dat GravityZoo een gigantisch succes gaat worden!

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Management Summary

The development of the internet has challenged many ISV’s (Independent software vendors).

Increased competition and market dynamics forced them to search for new models of growth. This has led to a new model, called software as a service (SaaS). Because of limitations of current

technologies, the SaaS model has not yet reached its full potential. However, the newly founded GravityZoo (GZ) Company states that their framework, especially designed for the enabling of SaaS, can overcome limitations of current technologies. GZ believes that the success of their framework depends for a big part on the development of client toolkits. Their management thinks they can accelerate this development by utilizing the open source developer’s community, because of the large base of available developers. Therefore, GZ decided to go for an open source strategy. The

management, however, lacks the information to execute such a strategy. This research aims to fill this gap and to design a business model for GZ’s open source strategy.

The above has resulted in the following research objective:

‘To design a business model for the GravityZoo Company by means of which they can attain the objectives of their open source strategy.This advice can be used by GZ’s management for deciding on the final design of their open source business model.’

And the derived research question:

‘What is an optimal business model for the GravityZoo Company in order to attain the objectives of their open source strategy?’

GZ decided to release the client toolkits (Most critical is the user interface toolkit) of their technology and utilizes the open source developer’s community for the development of these toolkits. The open source strategy should result in the achievement of the following objectives: the acceleration of the development of client toolkits by utilizing the open source developer’s community, attract end-users, generate more exposure and contract developers.

The aim of this research is to translate GZ’s open source strategy into an optimal business model. In this thesis the following definition of a business model has been used: ‘A business model is a

description of the roles and relationships among a firm and its community that identifies the major flows of products, information, and money, and the major benefits to participants’ (Weill & Vitale, 2001: p.34). An optimal business model has been defined as: ‘a business model that given the research restrictions and the available information complies with the product specifications and unlocks the latent value from the technology.’ GZ’s optimal business model is designed by using the key success

factors of comparable successful business models (i.e. Eclipse and NetBeans) and literature. In combination with GZ’s management requirements, these formed the product specifications, to which an optimal business model has to comply.

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To attract the open source developer’s community GZ has developed a SaaS integrated development platform (IDE) called DaaS. DaaS is comparable to IDE’s like Microsoft Visual Studio (closed source), and open source IDE’s NetBeans and Eclipse. The main difference is that DaaS runs online and other IDE’s need to be downloaded to a local workstation (e.g. pc). The developer can develop various applications in DaaS, for instance a Microsoft Word alike application. As a proof of concept and to attract end-users, GZ has developed the open source p2p application MediaZoo, comparable to LimeWire, Bearshare, and EMule. Both markets were analysed as very attractive and with a lot of potential and the value of both products exceeded comparable products in terms of effort and use. Hence, they are valuable for their target customers.

In order to have a successful business model there are some essential resources and capabilities that GZ needs:

• GZ needs an evangelist and an appealing project story. The evangelist should post on all kind of Blogs, wiki’s etc. This should create a viral effect.

• To create a further viral effect it is great importance that the initial experience of users of the DaaS environment and MediaZoo is very good. Otherwise, the viral marketing will have a negative effect.

• In addition, it is important that GZ supports their users and developers as much as possible; assisting developers to achieve their own goals and providing them feedback.

• Furthermore, GZ should encourage and facilitate communication via all kind of means (e.g. member meetings, conferences) and tools (e.g. wiki’s, Blogs). Facilitating communication also means maintaining the IT infrastructure.

• It is important that interests of different parties are in balance. This implies that GZ should not exploit the open source developer’s community, but also do something in return. Moreover, as stated above, assist developers in achieving their own goals.

• Last, it is important that GZ is genuine in their intentions to create a ‘real’ community. To convert the technological potential of the GZF, DaaS and MediaZoo into economic value (unlock the latent value) a revenue model has to be designed.

There are three options with regard to GZ’s open source business model:

1. The open source developer develops an application in DaaS and arranges the hosting him self. In addition, he does not make any money with the application.

2. The open source developer develops an application in DaaS and a by GZ contracted ASP hosts the application. Furthermore, the developer does not make any money with the application.

3. The open source developer develops an application in DaaS and commercializes the application, which means that he makes money through subscription or advertising fees.

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The above options have the following consequences on GZ’s revenue model. The first option means that the use of the framework is for free. For GZ it is not necessary to make any revenues, because it does not cost GZ anything.

In the second scenario, a constant revenue stream is needed. After researching alternatives, it was concluded that advertising revenues are the best option for this scenario. Therefore, I would advise the following revenue model:

• The number of end-users of an application drives revenues.

• Total revenues should at least be enough to pay ASP’s (A constant revenue stream is needed in order to pay the ASP for their services).

• If revenues of an open source application are above a certain level, the open source developer should share in these revenues.

• Successful applications (with many users) should finance applications with fewer end-users. This is important, because applications with a little group of end-users hardly generate advertising revenues. To maintain a balance of interests between the relevant parties

(displayed in figure 0.1) it is important that the above rules apply.

The revenue model of GZ is displayed in figure 0.1.

Figure 0.1: GZ’s Open source Revenue Model

The third scenario is the commercial model, which implies that the revenue model is the same as in the case of commercial (closed source) development. Several license models can be implemented to generate revenues. However, due to the nature of the SaaS model, which GZ claims to deliver, the revenue model will be based on an ASP license model, which means the end user has to pay a (recurring) fee to use a commercial application and the GZ framework.

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Chapter 1: Introduction

Since the beginning of the new millennium, the software & services industry has shown a considerable growth. In 2001 total market value of the software & services industry was approximately USD 840, 0 billion. At the end of 2005, this number had already increased to USD 1,230.50 billion (Datamonitor, 2006).

The software & services industry consists of three main segments; the software industry (application1 and system software2), IT services and the internet software and services market (Datamonitor, 2006).

Software industry market segmentation

14,3%

54,2%

31,5% Sof tw are

IT Services Internet Sof tw are & Services

Figure 1.1: Global software industry segmentation by market value of 2005 (Source: Datamonitor, 2006)

Figure 1.1 shows that almost 32 percent of total market value is in internet software and services. In recent years, this segment has shown the strongest growth of all segments; mainly due to the

enormous growth of the number of internet users and the growth of internet bandwidth available to the enterprise and consumer markets (Datamonitor, 2006).

The development of the internet has challenged many Independent Software Vendors (ISV’s). Increased competition and market dynamics have forced them to search for new models of growth. This has led to a new model, called software as a service (NaviSite, 2005).

1.1 Software as a Service (SaaS)

THINK strategies defines SaaS as: ‘a software solution that is hosted and supported by a vendor as a

service, which is accessed by users via the internet, without the need to deploy and maintain an on-premise IT infrastructure (THINKstrategies, 2005: p.3).’

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The Software & Information Industry Association (SIIA) states that SaaS is a major development in the software industry and estimated that the SaaS market will grow from a $2.3 billion market in 2003 to a $7.2 billion market in 2008 (SIIA, 2004). A more recent survey performed by IDC (www.idc.com) confirmed prior research and estimated that the SaaS market will grow even faster at 20% per year, reaching $10.6 million in 2009.3 IDC even states that SaaS is growing at a higher pace than the traditional packaged software market.4

The core value of SaaS, often referred to as the Application Service Provider (ASP) model, lies in the delivery of commercially available applications via the web. Software as a Service is advantageous for both vendors and end-users. The SIIA (2001) identified three major benefits for ISV’s:

1. The cost of code delivery to the customer is reduced substantially. Because service providers host the applications, application modifications can be offered at a higher rate and only have to be implemented once.

2. The customer base of ISV’s increases because of the web-based service model. 3. Revenue bumps are smoothened because of the recurring- revenue charge model

(subscription model).

The most important benefit for end users is the reduction of total cost of ownership (TCO) for

application services (SIIA, 2001). In addition, the model leads to the global availability of products and services, which means a wider range of choice for end users (NaviSite, 2005).

However, until recently the SaaS model is not functioning optimally, because of limitations of current technologies, which are mainly web browser based technologies.

1.2 Current Applications Limitations

The problem of technologies like Citrix and Ajax is that they use web-technologies that are not designed to enable the full potential of SaaS. These technologies lack the user interaction and interfacing which desktop-based applications tend to offer. Web technologies use a client pull

technology. This means that the server can only wait for a request. Presented in steps this goes (more or less) like this:

1. A web page interface is presented

2. User information is collected (via forms, links, etc.)

3. The user submits information (submit forms, activates links, etc.) 4. The server processes submitted information

5. A new web page interface is sent to the user

Another important disadvantage of web technologies is that they cannot act outside the browser; this makes them unsuitable for communication with most peripherals of the common pc (Von Birgelen,

3

http://www.thewhir.com/features/saas-kaplan.cfm

4

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2006). Web-based applications are trying, but fail, to mimic the functionality of desktop-based applications.

Desktop based applications are richer (i.e. the richest type of application) in terms of user interaction, but also have their disadvantages. Stand-alone applications run entirely on the users’ hardware. For the user this means buying expensive hardware (and software), even when the application is only needed for a short period. Furthermore, this means that when users want to access their data on another device, the data always has to be copied to a mobile device in order to transfer the information to the other device.

A company, which is trying to overcome those limitations, is the newly founded GravityZoo Company, presented in the next section. The GravityZoo Company (For a Company Description see Appendix 1) states that their framework, especially designed for the enabling of SaaS, can overcome limitations of current technologies by allowing the net enabling of all applications.

1.3 The Gravity Zoo Framework (GZF)

The GravityZoo Framework is an innovative technology that enables software as a service via the IP-Network with a desktop alike end-user experience to both mobile and fixed devices at anytime and anywhere. A better understanding of the functioning of this framework is needed for a clear conception of this thesis.

The GravityZoo Framework provides the link between traditional desktop-based applications and web-based applications. All applications are ‘outsourced’ to a central, so-called GravityZoo back-end. As a result, the user only has to install a small software stack on his hardware. The client core, which is on the client side, communicates with GZF’s backend via the REP routers (See figure 1.2). On the backend the application processing and user data storage occurs. The control mechanism of the framework is the authentication and licensing (AL) infrastructure, which ensures that users have rights to do certain things.

The core of the GZF is the unique object-sharing infrastructure. This infrastructure allows applications to share selected objects with any client connected to the framework. Shared objects are all handled identically by the GZF. Identical, because the GZF is designed to replicate the state change of all shared objects between the server and client. The Client toolkits (Software Development Kit’s (SDKs)) (See figure 1.2) interpret the ‘shared objects’ (Von Birgelen, 2006). Big advantage of this object-sharing infrastructure is the minimization of network load, by only sending updates of changes in object states between server and client (Von Birgelen, 2006).

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Figure 1.2: General overview of the GravityZoo Framework (Source: Von Birgelen, 2006)

This Client toolkit is platform dependent, which means that the success of the GZF depends for a big part on the development and improvement of this toolkit. The most important client toolkit is the GravityZoo User interface toolkit, which takes care of the clients’ interface (Von Birgelen, 2006).To speed up the development of toolkits the GZC decided to go for an open source strategy. Outside developers are invited to join the GravityZoo developer’s community and to develop as many client toolkits as possible.

The result of the implementation of the GZF should be: applications delivered via the IP-network, while remaining the interactivity of stand-alone applications.

The taxonomy of Flashmap Systems (2004) is a practical tool to position the framework. Flashmap Systems has developed a taxonomy that highlights key portions of the software stack common in most organizations. It consists of the following categories:

§ Platforms à The execution foundation for all systems and application software (e.g. Linux and Windows).

§ Middleware à Connects clients to Servers.

§ Serverware à Software running on servers; multi-programmed computers accessed by multiple clients.

§ Manageware à The products used to administer and oversee operating systems, network devices, serverware products and applications

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When this taxonomy is used, figure 1.2 can be explained as following. The REP routers and REP infrastructure are the middleware connecting clients to the backend. The client core is both a piece of clientware and middleware. The client toolkit is clientware. The authentication and licensing part is manageware that keeps the gate of the GravityZoo framework. The other elements of the backend of the framework are all serverware.

1.4 Problem Identification

GZ’s management thinks they can benefit from the open source developers community, because of the large base of available developers. Utilizing the efforts of open source developers should accelerate the development of client toolkits. Therefore, the GZC decided to go for an open source strategy.

However, GZ’s management is in a situation of uncertainty, because they lack information with regard to open source. There is one problem owner, Mr. Vrijhof, who is going to implement the open source strategy. Questions that arose from preliminary conversations with him were: How does a company with an open source strategy make money? Why should anyone work on a project for free? What is the business model for our open source strategy?

The above problem can be qualified as a reality problem. A reality problem is a problem that is caused by a phenomenon in practice (De Leeuw, 2001). In this case, the problem is caused by a lack of information. Fulfilling this need will solve the problem.

1.5 Sub-Conclusion

The development of the internet has challenged many ISV’s. Increased competition and market dynamics forced them to search for new models of growth. This has led to a new model, called software as a service. Because of limitations of current web technologies, the SaaS model has not yet reached its full potential. The newly founded GravityZoo Company states that their framework,

especially designed for the enabling of SaaS, can overcome limitations of current technologies.

The GravityZoo Company believes that the success of the framework depends for a big part on the development of the client toolkits. GZ’s management thinks they can benefit from the open source developers community, because of the large base of available developers. As a result, the

development of client toolkits should be accelerated. Therefore, the GZC decided to go for an open source strategy. However, GZ lacks the information to execute such a strategy. This research aims to fill this gap.

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Chapter 2: Research Framework

In this chapter, the research framework is presented. First the research context and the problem field are discussed. This results in the identification of the management problem, which provides the input for the problem statement. Section 2.3 explains the conceptual model, which is translated into sub-questions in section 2.4. Section 2.5 presents the definitions that are used throughout this thesis. The final section of this chapter explains the methods applied to this research.

2.1 Project context and problem definition

To enter the ‘booming’ SaaS market, GravityZoo’s management has decided to employ a hybrid strategy. Both a closed source and an open source strategy. The business model for GZ’s closed source strategy is straightforward. GZ executes projects in cooperation with ISV’s, IP-Corporations or Original equipment manufacturers (OEMs) in order to realise the adoption of the GZF (See appendix 1 for market segmentation). These ‘partners’ are paying GZ for project related services. Furthermore, if the GZF is adopted, GZ earns an end-user fee per user/device.

Until recently, GZ’s open source business model has been somewhat of a question mark. Open source is a major trend in the software industry. In the early 1990s, at the age of 21 a Finnish student called Linus Torvalds developed a new operating system, called: Linux. From that moment on the system has developed further on a global scale. It was the ‘commercial’ start of open source

development. Open source is a way of developing software. The development takes place in the open (source community) and the artefacts are available for general use (Goldman & Gabriel, 2005). The heart of open source is the open source developer’s community. For these community members to interact a platform is needed. One of the biggest open source platforms is SourceForge; a website where community members can interact and work on different open source projects. An indication of the increasing importance of open source software is the increase of the number of open source projects executed on SourceForge. This has been displayed in figure 2.1.

Number of open source projects

1362 16249 32739 55883 82719 0 20000 40000 60000 80000 100000 2000 2001 2002 2003 2004 2005 Year P ro je c ts

Figure 2.1: Number of open source projects hosted on SourceForge (Source: http://www.sourceforge.net)

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Another good measure is the increase of the number of users, displayed in figure 2.2. Number of users 7908 125758 339227 560290 864996 0 200000 400000 600000 800000 1000000 2000 2001 2002 2003 2004 2005 Year U s e rs

Figure 2.2: Number of users (source: http://www.sourceforge.net)

Numerous companies have started to develop open source activities in recent years, some of them basing their business entirely on it; for instance Red Hat, VA Software, Open Office and CollabNet (Goldman & Gabriel, 2005). In addition a great number of traditional closed source companies, have developed parallel open source activities e.g. General Electric, Hewlett-Packard, IBM, Oracle and so on.

Even the two biggest global players in the software industry, Microsoft and SAP, have started to contribute to the open source community, although being very pessimistic initially. Only a few years ago Shai Agassi, president of the product and technology group at SAP, stated: ‘Open source will fail

to deliver innovation and is more likely to break applications.’ 5 But the fact that in the past few months all kind of leaks were discovered in Microsoft’s’ proprietary applications (e.g. Microsoft Word6), and Microsoft’s and SAP’s increased willingness to contribute to the open source community, fortifies the thought that open source, in fact increases quality (More on this matter in chapter 3).

As a result, the software industry is gradually transforming; the development of software products is slowly moving away from the traditional licensing (commercial software) model to an open source model (Industry Surveys, 2004).

Many IT developers are engaged in open source projects in their spare time. Most of these developers have jobs at IT companies and are developing software for fun. There are numerous companies, both closed and open source, which have already benefited from the voluntary efforts of these open source developers.

The GZC also believes they can benefit from the open source developers community. Because of this, the GZC decided to go for an open source strategy. GZ wants to use the developers for a faster

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development and a greater applicability of their framework. However, GZ’s management is lacking the information to execute such a strategy and translate this strategy into a business model. To answer their questions (See paragraph 1.4) a deeper understanding of open source is needed. Open source documentation needs to be analysed and current open source business models are explored.

Therefore, the objective of this study is to fulfil the information need of GZ’s management and support the management in developing a business model for their open source strategy. In the next sections, the research framework will be explained further.

2.2 Problem statement

A problem statement consists of a research objective and a logically derived research question. Together they explain WHAT is searched for and WHY the research is performed (Verschuren, 2001).

2.2.1 Research Objective

A research objective should define, whom the research is carried out for, what the result of the research is and why it is relevant for the customer (De Leeuw, 2001: p.85). The objective of this study is:

‘To design a business model for the GravityZoo Company by means of which they can attain the objectives of their open source strategy.This advice can be used by GZ’s management for deciding on the final design of their open source business model.’

2.2.2 Research Question

From the objective of this study, the following research question is derived:

‘What is an optimal business model for the GravityZoo Company in order to attain the objectives of their open source strategy?’

2.2.3 Restrictions

The restrictions of a research can be split into result and process restrictions (De Leeuw, 2001)

Result restrictions

§ The end result should comply with the product specifications.

§ This research has to obey to the restrictions the faculty of business administration from the RuG has with regard to final graduation projects.

§ The design should be relevant, which means it should be realisable and it should connect to the management problem (De Leeuw, 2001).

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§ The design should be valid; this means that the model should be sound and the

circumstances under which the model performs the specified behaviour have to be indicated (De Leeuw, 2001).

Process restrictions

• The research has to be finished in maximum six months.

• GZ’s management performs the change phase, after the design of the business model is completed.

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2.3 Conceptual Model

In the figure below the conceptual model used for this research is presented. A conceptual model is a personal explanation of phenomena in practice. It limits the research by displaying those concepts that might influence each other. Figure 2.3 displays the connections between the different concepts used throughout this thesis.

Figure 2.3: Conceptual model

In this research, strategy is defined as: ‘The competitive efforts and business approaches that

managers employ to please customers, compete successfully, and achieve organizational objectives’ (Thompson & Strickland, 2001: p. 10). Hence, a strategy explains how a company is going to achieve

its organizational objectives. In the above figure, it can be seen that GZ’s objectives have resulted in the choice of an open source strategy.

Another element of the above definition of strategy is that it defines the approaches managers employ to please customers and compete successfully. In order to please their customers and compete successfully it is important for a company to know what these customers demand, if the industry is

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attractive and what parties are needed to create value for the customer. In figure 2.3, these elements are displayed as the organizational context.

The research objective of this thesis is to design a business model for a given strategy. This implies that GZ’s open source strategy has to be translated into a business model. Osterwalder (2004) defines a business model as: ‘the strategy’s implementation into a conceptual blueprint of the company’s

money making logic.’ (Osterwalder, 2004: p.17.) Chesbrough & Rosenbloom (2002) state that a

business model provides a framework that converts technological potential into economic value. Thus, the product/technology that GZ is offering to their target customers provides important input for the business model.

GZ’s open source strategy and its product offering lead to alternative business models. To assess which alternative is optimal, criteria that define an optimal business model, have to be defined. In more abstract terms, the question that needs to be answered is what external behaviour should the black box GZ’s open source business model perform to be called an optimal business model. The product specifications specify the functional specifications the business model has to comply with. The product specifications are determined by the Key Success Factors (KSF’s) of open source projects, plus requirements of GZ’s management.

The ultimate design task is to figure out what this black box should look like from the inside to perform the specified external behaviour.

2.4 Sub –Questions

The sub-questions are used to structure the answering of the research question, by splitting it into steps (Verschuren, 2001). The questions below are derived from the conceptual model and the problem statement. To structure the research the diagnosis-design-change model of De Leeuw is used (De Leeuw, 2001). The change phase is beyond the scope of this research and is performed by GZ’s management.

Diagnosis

1. What is GZ’s open source strategy and what are the objectives?

The goal of this sub-question is to provide input for the business model and to explain and position GZ’s open source strategy. Goldman and Gabriel (2005) are mainly used to explain what open source exactly is.

a.) What is open source?

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2. What is an optimal business model?

The goal of this question is to create a theoretical framework for the design of the product of this thesis, a business model, and to define what an optimal business model is. Osterwalder’s (2004) business model ontology is used to create a theoretical framework.

a.) How is strategy translated into a business model? b.) What is a business model?

c.) What are the components of a business model?

3. What is the product GZ is offering to their target customer segment and what is the value of it?

The first element of the e-business model ontology of Osterwalder (2004) is Product. This element defines the product and its value a company is proposing to its target customer segment. As already stated the business model has the function to convert technological potential into economic value.

4. What does the organizational context look like?

The organizational context influences strategy. This sub-question has the goal to determine what parties are needed to deliver the value proposition. Furthermore, it is analysed if the customer segments that are chosen are indeed attractive for GZ. Finally, it is important to know what drives open source developers to work on projects for free.

a.) What does GZ’s value network look like?

b.) What motivates open source developer to work voluntary on an open source project? c.) What does the industry structure look like?

5. What alternative business models exist for GZ’s open source strategy and what factors determine the success of projects comparable to GZ’s opens source strategy?

The goal of this question is to generate alternative business models. This question explains what these alternatives are for GZ. Furthermore, it specifies what the key success factors are of comparable open source projects. The KSF’s provide input for the product specifications.

a.) What alternative approaches exist to initiate an open source project? b.) What revenue alternatives exist for GZ’s open source strategy?

c.) What are the key success factors of a comparable open source project?

Design

6. What business model complies with the product specifications?

The alternative business models are tested against the product specifications and result restrictions. The goal of this sub-question is to design an optimal business model.

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2.5 Definitions

The following definitions are used throughout this thesis:

§ Strategy

Strategy is defined as: ‘The competitive efforts and business approaches that managers employ to

please customers, compete successfully, and achieve organizational objectives’ (Thompson & Strickland, 2001: p. 10).

§ Business model

In this study, a slightly adjusted definition of Weill & Vitale (2001) is used:

‘A business model is a description of the roles and relationships among a firm and its community that identifies the major flows of products, information, and money, and the major benefits to participants’ (Weill & Vitale, 2001: p.34).

§ Open source

Statements of Goldman and Gabriel (2005) and CSC’s LEF (2004) were combined, to create an all-inclusive definition of open source. This has led to the following definition: ‘Open source is an

approach to developing software, where the development take place in the open (source community) and the artefacts are available for general use. The former means that the software is ‘free’ in the sense that anyone can use it, modify it, create derived works from it, and redistribute it’

§ Community

A community is defined as: ‘A group of people with a shared interest, purpose, or goal, who get to

know each other better over time’ (Goldman & Gabriel, 2005: p. 52).

§ Design

‘A model of a prospective (realisable) system that in the prospective environment exhibits the desired behaviour’ (De Leeuw, 2001: p. 192)

• Hybrids

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2.6 Methodology

According to Arbnor & Bjerke (1997) methods applied to a research must be both consistent (fit the problem and the ultimate presumptions of the creator of knowledge) and constructive (fit each other) (Arbnor & Bjerke, 1997: p.9).

2.6.1 Research Type

De Leeuw distinguishes three main types of research, problem-solving research, management supporting research and scientific research (De Leeuw, 2001: p.77). This research can be qualified as management supporting. It aims to bring up concrete knowledge that can be used in a specific

situation. The customer can be identified and is GravityZoo’s management. This research can also be qualified as design research (De Leeuw, 2001: p.85). De Leeuw (2001) defines a design process as:

‘a systematic and creative process to develop a model of a prospective system, which performs the desired behaviour in the proposed context, taken the restrictions into account.’ (De Leeuw, 2001: p.193) The objective is to design a business model for GZ’s open source strategy.

2.6.2 Data Collection

If the researcher does not know much about a certain subject, Baarda & De Goede (1997) advise to start with unstructured data collection. Therefore, this research started with unstructured

conversations with GZ’s management. These conversations led to the problem identification.

Figure 2.5: Methods per sub-question

The first sub-question was answered by interviewing the CEO of the GZC. If information about a certain subject is not available in documents, the researcher has to observe or interview (Baarda & De Goede, 1997). If the question is about acquiring new knowledge, interviews are preferred to

observation (Baarda & De Goede, 1997). To acquire a general knowledge about open source and other open source strategies desk research was used. This is the best method if this information is already available in documents (Baarda & De Goede, 1997). The same reasoning applies to the methods used to answer the other sub-questions. If the information is already available, desk research is the cheapest method. If the information is not available and the researcher wants to gain

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knowledge, interviews are the method to get the information (Baarda & De Goede, 1997). Sub-Question 6 has been answered by using participative research, because I was actively involved in the decision making process.

2.6.3 Methods

As already stated in section 2.6.1 this research can be qualified is design research. According to De Leeuw (2001), three steps have to be taken in the case of design research.

The first step of design research is product specification. This step defines the desired behaviour of the system in the proposed context. De Leeuw (2001) sums up three tools to come to product specifications:

1. Study Users (What are the wishes and requirements of GZ’s management?) 2. Study the context (Value network, Industry structure, Customer demand)

3. What management problem should be solved by the system (See section 1.4) (De Leeuw, 2001: p.197).

All the above methods are applied to this research. Another method to come to product specifications, which is applied, is the identification of the key success factors of open source development. Gasson (1999) states that: ’The success of a design initiative is dependent upon the ‘translation’ of the

interests of influential actors in the global network through the re-presentation of these actors goals.’ (Gasson, 1999: p.320). This implies that if the key success factors of open source development can

be identified and translated into GZ’s open source business model, this will increase the chance of attracting the open source developer’s community. The key success factors are defined by analysing comparable business models and literature. The key success factors result in additional product specifications, which specify the proposed external behaviour of the business model.

The second step of design research is generating alternatives. Alternative revenue models are generated and different approaches to GZ’s open source project are discussed. According to Chesbrough and Rosenbloom, ‘A successful business model creates a heuristic logic that connects

technical potential with the realization of economic value.’ (Chesbrough & Rosenbloom, 2002: p.529)

In other words, a successful business model is able to unlock the latent value from a technology and convert this into economic value (revenues). This implies that an attractive customer segment has to be identified for which excellent value can be created. In addition, a revenue model has to be designed to convert the technological potential into economic value.

The final step of design research is the choice of an alternative. Alternatives are tested against the product specifications and the goals of the relevant parties have to be translated into the business model. The business model should comply with the product specifications.

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Chapter 3: GravityZoo’s Open Source Strategy

In this chapter, GZ’s open source strategy will be explained. Section 3.1 and 3.2 start with describing the characteristics of the open source. After that, the pros and cons of the open source software are dealt with. Next, the available options for a company to execute an open source strategy are

discussed. These are used in the next section to describe GZ’s open source strategy. After this GZ’s open source strategy is assessed, in other words I assess if an open source strategy is an appropriate strategy to achieve GZ’s objectives. Finally, GZ’s open source strategy is positioned using Treacy & Wiersema’s (1995) framework of value disciplines. For a short history of open source, see appendix 2.

3.1 Open source as a product

Open source is software, of which the source code is freely available. This essentially means that anyone can use, anyone can alter it and anyone can distribute it (Goldman and Gabriel, 2005). This suggests that users can adjust it to their personal preferences, fix bugs and delete spy options.

What developers can do with the source code is determined by the choice of a license. In other words, the license describes certain boundary conditions (Goldman & Gabriel, 2005). There are a large number of open source licenses, ranging from relatively liberal licenses to very stringent ones (See figure 3.1). The most widely used open source software license is the GPL license designed by Richard Stallman. If a piece of software is released under the GPL, and someone uses this piece in his or her own software, that piece also has to be released under a GPL. Generally, a distinction is made between GPL’s and non-GPL’s. Non-GPL’s are more commercial friendly.

Figure 3.1: Open source licenses (CSC’s LEF, 2004)

3.2 Open source as a development process

Open source software is developed in an open source project. This implies that a group of developers is developing software. Open source development is a collaborative effort. If someone does not know

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how to fix a certain bug, he asks the developer’s community for help. To interact the developers need a platform. Currently, SourceForge is one of the biggest open source platforms.

Using open source as a development process means utilizing the efforts made by the open source developer’s community. This is possible by providing access to the software’s source code, another piece of code (e.g. API’s) or do not provide this access. In the software industry, numerous companies are using open source developers for the development of their own software. Some companies just search the ‘area’ for usable code, which is re-used in their own products. This reduces the costs of production substantially. Because open source code most of the time is of a very high quality, open source development can mean increasing a products’ quality at a very low cost (more on this topic in section 3.4).

3.3 Community

A community can be defined as: ‘A group of people with a shared interest, purpose, or goal, who get

to know each other better over time’ (Goldman & Gabriel, 2005: p. 52). The general structure of an

open source community is shown in figure 4.2.

Figure 3.2: General structure of an open source community (Nakakoji e.a., 2001)

An open source community is most of the time initiated by the creator of piece software, i.e. the creator of the initial code. This creator is very often also the project leader. A few core members help the project leader. The active developers are those developers that are trusted by the project leader and which add their own code to the system. Furthermore, they play an intermediary role. The Peripheral developers and the bug fixers are improving the original source code and are in contact with the active developers, who check these codes and improve them further. Bug reporters study the source code to detect bugs and the readers study the source code very thoroughly to create similar systems in other languages. Finally, the passive users are those that use the system, but are not able

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Because companies more and more are using open source communities for their commercial interests it is useful to introduce Jansen’s (2003) division into community roles. Jansen e.a. (2003) presents a description of the roles of a common community:

1. A facilitator; this is the party which initiates the community and provides the technical infrastructure.

2. The commercial participants; an organization that joins the community to gain revenues. 3. The non-commercial participants; the participants who are only participating out of interest.

In many of these open source communities, commercial participants have infiltrated. For those communities it is important to create a win-win situation for all parties, otherwise, the community will not last very long (Jansen e.a., 2003).

3.4 Pros and cons of open source

Why are companies using open source? What are the advantages of open source compared to commercial software and vice versa? The list of pros and cons of open source software, compared to the commercial software model presented here is not extensive. It is a list of most frequently heard (interviews) and read7 arguments for and against open source software.

Pros:

1. Costs

One of the most frequently heard advantages of open source software, is that it is much cheaper than the traditional commercial software model. Of course, this is true when we look at the license costs. However, for the costs of implementation, maintenance and management of the software this is a point of discussion. Interviews with members of Limburg’s open source platform

(Appendix 2) led to the conclusion that the cost advantage is only for people/companies who are actively involved in (open source) software development. Otherwise, the total costs of proprietary and open source are (somewhat) equal.

2. Quality

There is a lot of discussion about the quality of open source software. It has taken a long time before companies like for instance SAP and Microsoft were convinced about the improvement of quality of their products, when using open source. As already stated in chapter two of this thesis, one of SAP’s presidents said only a few years ago that open source would lower quality. The advocators of open source mention the number of developers as an argument, which would improve quality. Particularly the identification and fixing of safety leaks and bugs are mentioned as major advantages of open source development. Recently there has been proof that open source software is indeed more reliable than commercial software (See figure 3.38) (Wheeler, 2005).

7

Sources: Goldman & Gabriel, 2005 and CSC’s LEF, 2004

8

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Figure 3.3: Failure rates as measured by Fuzz Tests (Wheeler, 2005)

The paper ‘Fuzz Revisited’ measured the reliability of programs by feeding them random characters, determining which one crashed, and freezed (Wheeler, 2005).

3. Independence

Because of the number of developers, there is no dependability anymore on a single software vendor. When customers do not like how a vendor is serving them, they are able to choose another one, without very high switching costs. Rather paradoxical is that the business models of pure play companies like RedHat are based on (a monopoly of) services. RedHat positioned itself as the main provider. This model is only viable if customers return to and pay RedHat for their services. This also means that users are still depending on a specific vendor. Of course, the advocators of open source state that independence is a big advantage of open source and that the switching costs are low. However this is not entirely true, customers will remain dependent on software vendors as long as companies like RedHat can base their business model on it.

4. Time to market

Because of the large base of available developers, the development process is much faster and the time to market is lower. In addition, the availability of source code, which can be re-used in other projects, speeds up getting to the market.

5. Customization

Users are included in the development process. This not only, when done right, leads to a better relationship between customer and company, it also leads to more customer specific products. A few years ago, the mantra was, listening carefully to what the customer wants and create products that meet these demands or exceed them (Thomke & Von Hippel, 2002). The mantra of open source is, using your customers as innovators. The challenge for companies is to develop

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Cons:

1. Uniformity

One of the biggest disadvantages of open source development is the number of versions that are on the market. This is one of the pitfalls of the public license (GPL) used by Linux. There are so many versions of Linux on the market, that it is hard to find the best version. Nevertheless, for many people the hardest part is finding a version at all. They do not know where to find it and if they find it, they do not know what to do with it.

2. Responsibility

Because there are so many developers, it is very hard for the client to find the person who is responsible for the performance of the product. In addition, it is nearly impossible (because of the licenses) to hold someone responsible for the performance of a product.

3.5 Open source as a Business Strategy

In chapter 2, strategy was defined as: ‘The competitive efforts and business approaches that

managers employ to please customers, compete successfully, and achieve organizational objectives.’

(Thompson & Strickland, 2001: p.10). This means that an open source strategy has to contribute towards achieving organizational objectives. Open source is not a goal on its own. The above definition has been chosen, because it is precise and relevant. Relevant means that it applies to the problem of GZ’s management. Furthermore, it is also consistent with the problem statement of this thesis.

In section 3.1 and 3.2 two different views on open source were introduced; open source as a product and as a development process. The first option implies that a company is providing access to their software’s source code. If a company uses this strategic option, then a company has to decide on a strategic level what license is used. The license limits what developers can do with the source code, and thus how a company wants to please its customers and how it wants to achieve organizational objectives. Good examples of this strategy are OpenOffice and Linux, both pure play companies who provide access to their software’s source code.

A good example of a closed source company, which provides access to the source code of a range of their applications, is IBM. IBM’s position was gradually deteriorating in the nineties because of the dominance of Microsoft. Although rather having a proprietary industry, all was preferable to an industry dominated by Microsoft (West, 2003). Therefore, IBM approached the open source community. In 1998 IBM made its first open source initiative public, a web server, called WebSphere and build upon Apache’s open source web server (West, 2003). After this IBM started to cooperate with Apache. IBM sponsored and contributed code to Apache projects; in addition IBM hired one of Apache’s main developers to operate as a liaison (West, 2003). Next IBM formed an open source conglomerate that developed common software tools, called Eclipse. To start the conglomerate IBM contributed source code worth $40 million (West, 2003). The code was licensed under Common Public License (CPL),

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which allows, unlike GPL, commercial distribution of derivates. Although IBM contributed to and sponsored the open source community, they also benefited from the efforts of open source

developers. Because the code was licensed under CPL, they could also use the developed codes in their proprietary (commercial) applications.

Other companies are not providing access to their software’s source code, but release other pieces of code, for instance Microsoft and Google have released the Application Programming Interfaces (API’s) of their applications.

However, in section 3.2 it was already stated, that it is not necessary for a company to provide access to their products’ source code or other code, when executing an open source strategy. High quality open source code can be used to increase the quality of own products. This means that a company can pursue an open source strategy, without providing access to their own software’s source code. Another option can be explained by examples of hosted service companies like Google and Amazon. Both use open source software as the cornerstone of their IT platforms. Google is said to run more than 100.000 Linux servers and Amazon also uses Linux (Koenig, 2004). Another well-known option is tying services to an open source product, e.g. RedHat has positioned itself as the main distributor of Linux.

According to Porter (1985, 1998) competitive strategy is about searching for a favourable position in an (attractive) industry. Providing access to the source code does not result in this competitive advantage. To gain a sustainable competitive advantage, a company has to deliver a unique value for their customers. In terms of Porter’s (1985) generic strategies, this unique value can be to differentiate from other companies or to offer products at lower costs than competitors, thus cost leadership. If open source has the aim to create this position, then a company is executing an open source strategy.

Out of the above three main strategic options can be deducted:

1. Provide access to the source code of your software; and utilize the open source developer’s community for further development.

2. Do not provide access to the code of your software; but make use of code produced by the open source developers’ community.

3. Release other pieces of code, e.g. the API’s; and utilize the open source developer’s community for the development.

3.6 GZ’s Open Source Strategy

As already stated the GZC has positioned itself as a SaaS enabler. SaaS is a booming market and the GZC is going to compete in this market. The strategy defines how a company is going to compete

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source code. Instead of releasing their technology’s core, the GZC decided to release the technology’s client toolkits (SDK’s), which interpret the shared objects (See section 1.3 for a technology

description). The client toolkit of critical importance is the GravityZoo user interface toolkit. To attract the open source developers, GZ developed the so-called Development as a Service (DaaS)

environment, where applications are built online. GZ releases the toolkits under a BSD license, which implies that it also possible to have proprietary derivatives.

GZ’s open source strategy has to result in the achievement of the following objectives:

1. Accelerate the development of client toolkits by utilizing the efforts of the large base of available open source developers.

2. Attract End-users

3. Generate more exposure. 4. Contract developers.

End-users are defined as the private consumer, which means users like you and I, who use the internet or make use of applications like Microsoft Word or LimeWire (Used for downloading music, videos etc.). The business segment as an end-user is beyond the scope of this research, because the focus of GravityZoo’s closed source strategy is already on businesses.

All the above objectives relate to network externality phenomena, inherent to the software industry. Network externalities mean that the value of good increases as the number of units sold increases (Economides, 1995). Translated to the GravityZoo framework; the value of the framework increases with the increase of the number of users. The utility of a technology or software increases with current and expected size of the network. Bonnaccorsi (2004) states that an initial advantage of a technology

leads to dominance in the long run. Therefore, the introduction phase of the framework determines for

a large part the success in the long run. To compete successfully the ‘ink spot’ should grow as fast as possible and the open source strategy should cause this effect.

The GZC is acting both as a facilitator and as a commercial member of the community. The open source developers are arranging themselves around open source projects, which results in sub-communities with a structure comparable to the structure of figure 3.2. If the project leader or writer of the initial code wants the application to be hosted, it has to be submitted to the AL of the GZF. In this way, the GZC keeps control over the development of the framework. The developed objects are connected to the framework by the GZ developers. The AL is the gatekeeper of the framework (See section 1.3).

3.7 Assessment of GZ’s open source strategy

Is an open source strategy an appropriate strategy to achieve the above goals? The answer is yes, Jansen e.a. (2003) states that if the company is capable to built and maintain a thriving community, the facilitator can benefit from conversations among community members. Members are exchanging

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information about the quality of products and services. Good news travels fast. This is called ‘viral marketing’, inherent to community. Hence, if GZ is capable of delivering exceptional value to their customers, this news will travel fast and the result will be more exposure.

An open source strategy is also an appropriate strategy to achieve objective four. A community is an excellent means to assess developers’ capabilities (Jansen e.a., 2003). This puts GZ in a position to assess the capabilities of their community members and attract the best in class.

If sufficient developers are attracted (this is key to the achievement of objectives 1, 3, 4), this will result in an acceleration of the development of toolkits. As already stated a lower time to market is one of the main advantages of open source. Therefore, the open source strategy is an appropriate strategy to achieve goal 1, 3 and 4.

In addition, GZ wants to attract more end-users with their open source strategy. In the end, the number of end-users determines if money is made with the open source strategy. Therefore, it is important that value is created for the end-user, hence that applications are build, which are valuable for end-users.

Concluding an open source strategy is an appropriate strategy to achieve the above objectives; however, the success of this strategy is determined by the pull towards both end-users and open source developers.

3.8 Positioning GravityZoo’s Open Source Strategy

To position GZ’s open source strategy the value disciplines of Treacy and Wiersema (1995) are used. In figure 3.4, the three main value disciplines are displayed.

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To become a market leader Treacy and Wiersema define four rules:

1. Provide the best offering in the marketplace by excelling in a specific dimension of value. 2. Maintain threshold standards on other dimensions.

3. Dominate your market by improving value year after year.

4. Build a well-tuned operating model dedicated to delivering unmatched value (Treacy & Wiersema, 1995: p.21-25).

The main value discipline of GZ is product leadership. Their newly developed technology delivers unique value compared to competing technologies (See appendix 5). To maintain threshold standards on the other dimensions GZ decided to execute an open source strategy. After all, employing the open source developer’s community is also a cheap way of improving your product. The primary difference between the open source strategies of Microsoft and Google (See section 3.6) and the GZC is that GZ also facilitates the open source developer’s community with their DaaS environment. This means that they are also trying to be customer responsive.

Other closed source companies with an open source strategy are mainly searching for operational excellence by employing the open source developer’s community, for instance Apple. Traditionally Apple was the leader in 8 and 16-bit PC platforms. In the nineties Apple released the 16-bit Macintosh PC. The Macintosh distinguished itself with simplicity of use (West, 2003). However, because of various motives, the system lagged Microsoft’s Windows in acceptance and Windows eliminated Apple’s competitive advantage. The shift in demand resulted in huge losses for Apple.

Eventually, the hunt for a new and modern Operating system (OS) led Apple to the acquisition of Next. The main asset that Apple got out of the purchase was the NextStep OS. Originally, NextStep was based on proprietary code; however, in 1999 Apple replaced this code by FreeBSD. The result was the release of an open source OS called Darwin. Apple’s open source strategy was based on a first mover advantage, by becoming the first major OS provider making its core OS available to the open source community (West, 2003). However, the fact was that Apple used the open source developer’s efforts, for proprietary development (Darwin was the core of Apple’s proprietary Mac OS) and thus it was a very cheap method to improve their products quality.

Another good example is Sun’s strategy with regard to OpenOffice. OpenOffice is software, comparable to Microsoft Office and OpenOffice is open source. Sun Microsystems have acquired OpenOffice in 1999 (West, 2003). After this Open Office remained open source. However, what did Sun do with Open Office? Sun used the source code of Open Office, for a commercial version called StarOffice. StarOffice is based on Open Office, but contains some additional proprietary components. In other words Sun is sponsoring Open Office for own benefits. This means that the (low cost)

developer’s community is used to develop a high quality commercial version, which is able to compete with Microsoft Office (West, 2003).

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Both Apple and Sun are trying to create threshold standards on product leadership and operational excellence by means of their open source strategy. As already stated in chapter 3, open source can be cheaper for companies who are actively involved in (open source) software development and in addition open source improves quality. For these companies open source leads to both differentiation and lower costs.

The example of Apple illustrates the fact that it is important to maintain threshold standards on the other value disciplines. Apple’s open source strategy was not a success, because they were not customer responsive. IBM on the contrary was also doing something in return for the efforts of the open source developers; as a result, IBM’s strategy is still very successful; Eclipse being one of the most popular open source developments.

Concluding, most of the companies are trying to create better products (product leadership) at a lower cost (operational excellence), by utilizing the efforts of the open source developer’s community. However, it is also very important to be customer responsive (do something in return, which is valuable for the developers). GZ is trying to be customer responsive by providing the DaaS environment to the developer’s community.

3.9 Sub-Conclusion

GZ’s releases the client toolkits (the API’s) of their technology and uses the open source developer’s community for the development. This has to result in an acceleration of the development of their framework at a low cost. The developed objects are submitted to the AL. If accepted the developed codes are connected to the technology by the GZC developers. In this way, the author keeps control over the development of the technology. On a generic level, GZ’s open source strategy can be defined as product leadership.

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Chapter 4: An optimal Business model

This chapter will answer the second sub-question of this thesis; what is an optimal business model? First, the link between strategy and a business model is explained. After this, the definition of a business model, which is used throughout this thesis, is presented. Next, the components of a business model will be are described and finally the above question is answered.

4.1 Linking Strategy and Business Models

In the research question of this thesis (See chapter 2) two linked concepts can be identified, a business model and (open source) strategy. The aim is to develop a business model for a specified strategy. So how is strategy translated into a business model?

Osterwalder (2004) defines a business model as: ‘the strategy’s implementation into a conceptual

blueprint of the company’s money making logic.’ (Osterwalder, 2004: p.17.) Jansen (2003) states that

a good business model provides direction to the organization and network and to the way, strategy is filled in. Both Osterwalder and Jansen’s view business models as a concretization of strategy.

A paper of Seddon and Lewis (2003) provides two perspectives on the link between strategy and a business model. The first perspective defines a business models as an abstraction of strategy. This perspective accepts Porter’s (1996, 2001) definition as ‘the’ definition of strategy. Porter advocates that all the elements of an organization have to fit together to create value for its customers. To describe all these elements in detail would be a time consuming activity. Hence, in this view, a business model is used to abstract from all this detail. This abstraction would lead to the possibility to compare business models of different companies (Currie, 2004). The above view is opposite to the views of Osterwalder and Jagers. It is primarily used for evaluative motives and as regarding content, it does not say much. Above all, when business models are viewed as the translation of strategy into a company’s money making logic, the business model concept also provides a useful framework for comparing the moneymaking logic of different companies. Finally, the definition is very vague. So perspective one of Seddon and Lewis is rejected.

Perspective two of Seddon and Lewis does not accept Porter’s definition of strategy as ’the’ definition of strategy. In this perspective, strategy and business models are differentiated by using two

dimensions:

1. The extent to which the author’s definition is more or less firm specific.

2. The extent to which the author’s definition considers competitive positioning. (Currie, 2004: 47).

The second dimension corresponds seamless to what Magretta (2002) and Osterwalder (2004) have written about strategy and business models. Many people use strategy and business models

How to make money with an open source strategy?

How to make money with an open source

strategy?

The design of GravityZoo’s open source business model

How to make money with an open source

strategy?

The design of GravityZoo’s open source business model

Preface

Management Summary

Table of Contents

Chapter 1: Introduction

Chapter 2: Research Framework

Chapter 3: GravityZoo’s Open Source Strategy

Chapter 4: An optimal Business model