Give software away for free, sell services for a fee

The idea of giving software away for free and selling services for a fee was current by the mid-nineties. In a sense, the selling-water business model is one way of realizing this principle.

The main theory behind selling services is very simple. Free software isn't enough for most people, because your average computer user doesn't know how to install the programs, and needs help to get started. In addition to help with installation, many people would also benefit from a few tips on how to use the program. The simplest form of selling services is to provide an easy-to-use and helpful guide along with the software CD. That is, you don't necessarily buy the software CD to get the CD itself, but to get the User's Guide that comes with it.

Put that way, it's easy to see how easily a profitable business can be built around a free program. The above example is just the beginning. The really big business is in selling services to large corporations or communities with extensive computer systems. Installing Free Software on the 14,000 computers belonging to the City of Munich is a big job. Then, all the people who use the programs need to be trained. The transfer to a new system must be planned carefully and implemented as smoothly as possible, so as to cause as little disturbance as possible to the actual work being done. Some programs may need to be adapted - or tailored as it's known in the trade - to work smoothly with whatever internal information system is already in use. The users will need customer support and the computers will need servicing and updating. Antivirus and other protective software must be kept up to date at all times. And so on ...

The City of Munich is in the process of moving its entire IT infrastructure onto Linux-based systems. At the time of bidding, the contract to provide this service to the city was estimated at some EUR 35 million. So it's not really for free!

The services business model isn't really so exotic. Increasingly, all the big IT corporations that used to focus on selling computer hardware and/or software are becoming service consultancies.

Selling services is particularly interesting when it's built around Open Source software, because there is the same threat of monopolization inherent in support services for closed software or closed hardware that there is in the closed programs themselves. If, for instance, you buy an IBM supercomputer and the IBM AIX OS that goes with it, you're very likely indeed to require a bit of help in getting started.1 Realistically, you have to go to IBM to get that help, because not many other people understand these machines very well - at least not as well as those at IBM. And when it comes to tailoring and updates, you definitely have no other options than IBM, because the source code for these programs is not open. Only IBM employees have access to it and can make changes in it.

If you've bought an open system, however, you can get your service wherever you want. If you end up using a computer running Red Hat Linux, for instance, it's likely that you also want to buy the support services from Red Hat, because they are obviously the experts on their own product. But if you don't like their service or you think it's too expensive, you can get the service from any other company you like. There are plenty to choose from - anybody who has studied computer science in the past five years is likely to be able to help you. Tailor-made solutions and updates pose no problems either, because everybody has access to the Linux code.

Such competition is, of course, advantageous to the customer. At the same time, it also seems sensible and somehow natural. It makes sense for you to buy the services you need from wherever you get the best attention. The competition also keeps the companies that sell such services on their toes. The customer or client isn't bound forever to the same service provider just because they once chose to use their system. If the quality of service slackens off, you can always change your provider, which means they have to earn the loyalty of their customers by continuing to provide good service.

Another aspect of selling services also seems sensible and natural. When clients buy a service, they are buying work. That's opposed to buying a Microsoft CD, which you don't even need, and which doesn't cause Microsoft to work any harder. It's simply free money that just flows into Microsoft without them really having to work for it. At least services can be billed in some relation to how much work a commission requires. A closed computer program, on the other hand, can be priced arbitrarily and that's usually a losing game for customers and clients.

But selling services is also good for the business providing them. If sales of services are compared to sales of software on CDs - and this holds true whether it's a closed or open program being sold according to the selling-water principle - the selling of services generates far more long-lasting clients and therefore more lasting cash flow. A computer program is bought just once, whereas the need for support is usually permanent. Service contracts can even be made on the basis of a monthly fee, which gives a steady cash flow into the company providing the service. In return, the company must do a good job to keep the customer or client happy.

Any company whose business is based on one-off sales is always in a strange relationship to its customers or clients, because they should always try to get them the best possible product, but not so good that they won't be interested in buying a new and improved version of it the following year. This conflict occurs in many fields: for example, in maintaining a balance of fragility and strength in pantyhose for women. However, this has not yet posed a problem for Linux businesses. The Linux world has developed so rapidly in the past few years that Red Hat, for instance, has published two new versions of its Linux distribution in the busiest years. The world of Windows, on the other hand, is so much more mature that the updates published by Microsoft - particularly in the Office family - have seemed to be more like artificial ways of making more money. You should get the latest version, but nobody knows why. Realizing the problem, in the past few years Microsoft have tried to move increasingly into being a service-based industry and charging annual fees.

If you compare the business models of selling water and selling services, the latter of which is favoured by Linux companies, it is interesting to note that since the nineties all the major Linux companies have been trying to become service companies, yet, until recent years, most of their revenue was coming from sales of CDs packed in colourful boxes. In 2003, there was a clear change. Big jobs like the City of Munich are seriously opening the doors of the services market. Also, old Unix computers in many a company basement are busily being upgraded to Linux. At the same time, increasing numbers of Internet users are getting fast Internet access and have a CD-ROM burning capability, which makes getting Linux off the Internet and making CDs at home increasingly widespread, and thereby minimizing the importance of CD sales.

Of the big Linux companies, Red Hat suddenly decided in the summer of 2003 to stop making its cheap basic Linux. Since then the company has focused entirely on servicing the needs of its well-paying corporate clients, and based on its good accounts, there are enough of those. Red Hat is now selling its Enterprise Linux products wholly on the basis of an annual fee, that is, they've stopped selling cardboard boxes. In January 2004, SuSE was bought by Novell, an old and experienced software business, which means it now has a considerably wider and more experienced services network to offer its clients than does Red Hat. SuSE has made several successful deals with cities in Germany. Mandrake Linux, popular with many home users, has encouraged its customers not to buy CDs but rather to download their Linux from the Internet, provided they spend a corresponding sum on the Mandrake Club service.

• 1And why wouldn't you? The cheapest IBM supercomputer comes at a reasonable $21,645, though you are more likely to want one of the proper machines that cost around half a million. The deal includes an operating system and a year's worth of updates, so there's also a bit of service thrown in to sweeten the deal.