ANALYSIS OF OPEN SOURCE COMPANIES AND THEIR SUCCESS FACTORS MASTER OF BUSINESS ADMINISTRATION IN INFORMATION TECHNOLOGY W. A. E. S. Amarasiri Department of Computer Science and Engineering University of Moratuwa December 2009 i ANALYSIS OF OPEN SOURCE COMPANIES AND THEIR SUCCESS FACTORS By W. A. E. S. Amarasiri The Dissertation was submitted to the Department of Computer Science & Engineering of the University of Moratuwa in partial fulfillment of the requirement for the Degree of Master of Business Administration in Information Technology. Department of Computer Science & Engineering University of Moratuwa December 2009 ii DECLARATION I hereby certify that this dissertation does not incorporate, without acknowledgment, any material previously submitted for a Degree or Diploma in any University and to the best of my knowledge and belief, it does not contain any material previously published or written by another person or myself except where due reference is made in the text. I also hereby give consent for my dissertation, if accepted, to be made available for photocopying and for interlibrary loans, and for the title and summary to be made available to outside organizations. ------------------------------------------- ----------------------------------- Signature of the Candidate Date To best of my knowledge the above particulars are correct. ------------------------------------------- ----------------------------------- Signature of the Supervisor Date ` iii ABSTRACT Open source software (OSS) is gradually trying to dominate the software world. Lower hardware and software costs, simple license management, reduced dependance on software vendors and ease of customization are some of the main reasons for OSS to be more popular in the software world (Computer Economics 2005). Most of the countries are now promoting OSS since the usage of pirated software is being widely discouraged. Thus, the need for OSS is rapidly increasing in the software market. As a result, a lot of investors are eying up on companies that develop OSS. Investing on a company is known to be a risk. It is a known fact that anyone who is planning to invest on a company would consider many aspects before doing so. OSS companies are mostly funded by venture capitalists and when investing on such companies, one should make sure that they do not end up in a loss. Therefore, before investing on such companies, a background study should be done. The objective of this research study is to find out what factors are dominating the operation of OSS companies and to find out whether there are any relationships between the identified factors and the revenue generated by these companies. The analysis was done with regard to three main factors; business models followed by the companies, revenue models adopted and type of applications developed by these companies. For the analysis, nearly ninety five OSS companies were studied. By analyzing data of these OSS companies, it was evident that some of the factors were having an impact on the revenue generated while some did not. Namely; business models, revenue models and type of licenses followed did not affect the revenue generation of the companies, while multiple applications being developed had an influence on the revenue generated. Then by analyzing the data in different ways, a model was created for investors to base their decisions when planning to invest on OSS companies. This thesis provides the key recommendation that an investor should not consider only on business models, revenue models and applications developed when planning to invest on OSS developing companies but should base investment decisions also on other important influencing factors which were highlighted in this research. iv ACKNOWLEDGMENT This dissertation holds the outcome of the research work which was done for nearly ten months. During this period I have been able to gain support and encouragement from many generous and inspiring people to make this dissertation a success. First and foremost, I would like to express my appreciation and sincere gratitude to my supervisor Mr. Sanjaya Karunasena for his exceptional guidance, patience, caring and providing me with an excellent atmosphere for doing my research study. Without his guidance and persistent help, this dissertation would not have been possible. I would like to express my deepest gratitude to Dr. Sanjiva Weerawarana of WSO2 Lanka (Pvt) Limited, my employer, for his valuable advices and guidance. Without his advise and support, I would not have been able to complete the dissertation this year. Also I would like to thank Mr. Charitha Kankanamage, my manager, for providing me required leave and freedom to work on the research. I further extend my gratitude to Ms. Deepthini Lansakara, who as a good friend was always willing to help and give her best suggestions. I would not have been able to go in the right track and complete the dissertation without her valuable advise. Thank you for the encouraging words, thoughtful criticism and your valuable time. I thank all personnel of open source software companies around the globe who participated and contributed their views and responses for the questionnaire and all my friends at work for their encouraging words. Special thanks to the staff of Computer Science & Engineering of the University of Moratuwa, specially to Ms. Vishaka Nanayakkara for her excellent support extended to me. Last, but not least, my heartiest thanks to my mother, my sister and my husband for their support and encouragement that have been given to me over the years for the completion of the MBA. v TABLE OF CONTENTS DECLARATION ............................................................................................................. ii ABSTRACT .................................................................................................................... iii ACKNOWLEDGMENT ................................................................................................ iv TABLE OF CONTENTS .................................................................................................v LIST OF TABLES ........................................................................................................ ix LIST OF FIGURES ........................................................................................................ xi LIST OF ABBREVIATIONS...................................................................................... xii CHAPTER 1 – INTRODUCTION ..................................................................................1 1.1 Background ..................................................................................................................1 1.2 Problem statement ........................................................................................................3 1.3 Research objectives ......................................................................................................4 1.4 Scope of the research ....................................................................................................5 1.5 Main findings ...............................................................................................................6 1.6 Guide to the report ........................................................................................................7 1.7 Summary ......................................................................................................................8 CHAPTER 2 – LITERATURE REVIEW .......................................................................9 2.1 Overview ......................................................................................................................9 2.2 About Open Source software ........................................................................................9 2.2.1 The Open Source definition .................................................................................. 10 2.2.2. Why go for Open Source software? ..................................................................... 10 2. 3 Open Source software licensing ................................................................................. 12 2.3.1 Introduction to different Open Source licenses ..................................................... 12 vi 2.3.2 Non-copyleft licenses ........................................................................................... 14 2.3.3 Copyleft licenses .................................................................................................. 14 2.3.4 Project-based licenses........................................................................................... 14 2.4 Open Source business models ..................................................................................... 15 2.4.1 Dual licensing model ............................................................................................ 16 2.4.2 Open Source software together with commercial products .................................... 17 2.4.3 Pure Open Source ................................................................................................. 17 2.4.4 Badgeware ........................................................................................................... 18 2.5 Type of products/applications developed by Open Source companies ......................... 19 2.5.1 Operating system software ................................................................................... 19 2.5.2 Middleware .......................................................................................................... 20 2.5.3 Business/Enterprise applications .......................................................................... 20 2.5.4 Database packages ............................................................................................... 20 2.6 Open Source revenue models ...................................................................................... 21 2.6.1 The subscription model ........................................................................................ 21 2.6.2 Licensing ............................................................................................................. 22 2.6.3 Distribution and services model............................................................................ 22 2.7 Previous researches done on open source business models, revenue models and other success factors .................................................................................................................. 23 2.8 Summary .................................................................................................................... 23 CHAPTER 3 – METHODOLOGY ............................................................................... 24 3.1 Overview .................................................................................................................... 24 3.2 Parameter identification and conceptual framework .................................................... 24 3.3 Hypothesis .................................................................................................................. 27 3.4 Population, sample selection and sample size .............................................................. 29 vii 3.5 Questionnaires prepared.............................................................................................. 31 3.6 Modes of data collection ............................................................................................. 32 3.7 Summary .................................................................................................................... 33 CHAPTER 4 – DATA ANALYSIS ................................................................................ 34 4.1 Overview .................................................................................................................... 34 4.2 Questionnaire response rate analysis ........................................................................... 34 4.3 Variable categorization and frequency distribution ..................................................... 35 4.3.1 Frequency distribution of Open Source business models ...................................... 36 4.3.2 Frequency distribution of Open Source revenue models ....................................... 37 4.3.3 Frequency distribution of Open Source licenses used ........................................... 39 4.3.4 Frequency distribution of Open Source applications used ..................................... 41 4.3.5 Frequency distribution of multiple revenue models being followed ...................... 43 4.3.6 Frequency distribution of the condition whether multiple applications are being developed ..................................................................................................................... 45 4.4 Inferential Statistics .................................................................................................... 46 4.4.1 Testing the relationship between the business model adopted and revenue generated ..................................................................................................................................... 47 4.4.2 Testing the relationship between type of OSS license used and revenue generated 51 4.4.3 Testing the relationship between type of revenue model used and revenue generated ..................................................................................................................................... 54 4.4.4 Testing the relationship between multiple revenue models being followed and revenue generated ......................................................................................................... 57 4.4.5 Testing the relationship between type of application being developed and revenue generated ...................................................................................................................... 60 4.4.6 Testing the relationship between whether multiple applications are being developed and revenue generated ................................................................................................... 62 4.5 Framework for investors ............................................................................................. 65 viii 4.5.1 Selecting best business model to be used depending on the type of application developed and revenue model used ............................................................................... 65 4.5.2 Testing the relationship between type of application and license used with the generated yearly revenue ............................................................................................... 67 4.5.2 Testing the relationship between type of application and business model used with the generated yearly revenue ......................................................................................... 71 4.6 Summary .................................................................................................................... 75 CHAPTER 5 – CONCLUSION ..................................................................................... 76 5.1 Overview .................................................................................................................... 76 5.2 Explaining the research summary against the research objectives ................................ 76 5.3 Recommendations ...................................................................................................... 83 5.4 Enhancements to future researches.............................................................................. 83 5.5 Summary .................................................................................................................... 84 REFERENCES ............................................................................................................... 85 APPENDICES ................................................................................................................ 90 Appendix A - Initial questionnaire ............................................................................... 90 Appendix B - Final questionnaire ................................................................................. 97 Appendix C - Modeling Open Source success factors ................................................. 101 ix LIST OF TABLES Table 2-1 Types of operating system software .................................................................. 19 Table 3-1 List of parameters ............................................................................................ 25 Table 3-2 List of hypotheses ............................................................................................. 27 Table 4-1 Response rate for the questionnaire ................................................................... 34 Table 4-2 Total companies which information is available ............................................... 35 Table 4-3 Frequency distribution of open source business models .................................... 36 Table 4-4 Frequencies of open source revenue models ..................................................... 38 Table 4-5 Frequencies of open source licenses used .......................................................... 40 Table 4-6 Identified categories of open source applications and their frequencies ............ 42 Table 4-7 Frequencies of whether multiple revenue models are being used ....................... 44 Table 4-8 Frequencies of whether multiple applications are being developed .................... 45 Table 4-9 Chi-square tests of business model followed and the revenue generated ............ 48 Table 4-10 Business model Vs revenue generated cross tabulation ................................... 49 Table 4-11 Chi-square tests of different license types and the revenue generated .............. 51 Table 4-12 Type of licenses used Vs revenue generated cross tabulation .......................... 52 Table 4-13 Chi-square tests of different revenue models and the revenue generated .......... 54 Table 4-14 Revenue model Vs revenue generated cross tabulation.................................... 55 Table 4-15 Chi-square tests of multiple revenue models being followed and the revenue generated .......................................................................................................................... 57 Table 4-16 Multiple revenue models being followed Vs revenue generated cross tabulation ......................................................................................................................................... 58 Table 4-17 Chi-square tests of type of application developed Vs revenue generated ......... 60 Table 4-18 Type of application being developed Vs revenue generated cross tabulation ... 61 x Table 4-19 Chi-square tests of multiple applications being developed Vs revenue generated ......................................................................................................................................... 63 Table 4-20 Multiple applications being developed Vs revenue generated cross tabulation 64 Table 4-21 Observed and predicted frequencies of business models Vs application developed and revenue models ......................................................................................... 65 Table 4-22 Chi-square tests of type of application and license against the revenue generated ......................................................................................................................................... 67 Table 4-23 License Vs application and revenue generated of all ranges cross tabulation ... 68 Table 4-24 License Vs application and revenue generated cross tabulation ....................... 69 Table 4-26 Business model Vs application and revenue generated of all ranges cross tabulation ......................................................................................................................... 72 Table 4-27 Business model Vs application and revenue generated cross tabulation ........... 73 Table 5-1 Results of hypotheses ....................................................................................... 78 Table 5-2 Summary of the research findings ..................................................................... 79 xi LIST OF FIGURES Figure 3-1 High level conceptual framework .................................................................... 25 Figure 3-2 Detailed conceptual framework ....................................................................... 26 Figure 4-1 Graphical representation of the frequency distribution of business models ....... 37 Figure 4-2 Frequency distribution of open source revenue models .................................... 39 Figure 4-3 Frequency distribution of open source license types ........................................ 41 Figure 4-4 Frequency distribution of open source application categories........................... 43 Figure 4-5 Frequency distribution of multiple revenue models being followed.................. 44 Figure 4-6 Frequency distribution of whether multiple applications are being developed. . 46 Figure 4-7 Revenue generation among business models.................................................... 50 Figure 4-8 Revenue generation among different license types ........................................... 53 Figure 4-9 Revenue generation levels of different revenue models.................................... 56 Figure 4-10 Revenue generation levels of whether multiple revenue models being followed ......................................................................................................................................... 59 Figure 4-11 Revenue generation levels when different applications are developed ............ 62 Figure 4-12 Revenue generation levels when multiple applications are developed ............ 64 Figure 5-1 Factors influencing revenue generation of open source companies................... 82 xii LIST OF ABBREVIATIONS AGPL - Affero General Public License BSD - Berkeley Software Distribution FLOSS - Free/libre/open source software FOSS - Free and Open Source Software FSF - Free Software Foundation GPL - General Public License ITSC - Installation/Training/Support/Consulting LGPL - Lesser General Public License MPL - Mozilla Public License OSS - Open Source Software