Open source software is frequently used to reduce costs and improve time-to-market. These well-known benefits have caused a number of companies to consider whether there are business models that allow the use of open source software for revenue generation rather than cost reduction. These efforts have led to a number of new open source business models. These business models are quite different from traditional proprietary software licensing and pose unique challenges and concerns.

Today, most commercial software is still licensed in binary code form pursuant to proprietary licences. Most commercial software developers license their products in binary code form for a number of reasons. By distributing products in a form that is not human-readable, software developers are better able to protect the competitive technical advantages they may have. In addition, by licensing software rather than selling software, developers can use certain contractual mechanisms to further protect their competitive advantages. When a software developer licenses a copy of a product, the developer does not transfer title to or ownership of that copy. Instead, the developer is granting a user a limited permission to use the product. In return for this permission, the developer can impose contractual obligations beyond those imposed under copyright law alone. In particular, a software developer can impose stronger controls on reverse engineering and subsequent transfers of products. Both of these restrictions can help a software developer maintain competitive advantages.

The use of binary code licensing does not impact most users since most users are unlikely to want to add capabilities or change a product and are generally incapable of debugging or correcting a product. However, certain very sophisticated users find the lack of source code access limiting. These users are able to understand source code, correct defects and modify or add capabilities to software products. The frustration of not being able to receive source code caused Richard Stallman, the founder of the free software movement, to develop the GNU software suite. In addition, Stallman also developed the GNU General Public License (the "GPL"), the most commonly used open source/free software licence. These events are generally viewed as the beginnings of the open source/free software movement. The GPL is a revolutionary licence because it was the first "copyleft" license, meaning copyright was used to make sure any software built on top of GPL-licensed software remained open source under the terms of the GPL. The copyleft provisions of the GPL give effect to one of the overriding principles of the free software movement – that software should always be available in source code form.

Since the beginning of the open source movement, open source software has been developed and licensed under a variety of licences. These licences impose a wide spectrum of terms ranging from very lax, in the case of licences such as the BSD licence and the Apache licence, to more restrictive in the case of licences such as the GPL and Mozilla. However, it was not until the development of the Linux kernel by Linus Torvalds and its subsequent combination with GNU software that open source software started to become more commercially relevant. At first, open source software was used primarily for internal deployments within university and corporate IT departments. These uses demonstrated the quality and usefulness of many software packages developed using the open source methodology. The increasing use and popularity of the Internet further demonstrated the quality and capabilities of open source software and introduced this type of software development methodology to a larger group of users and developers. In particular, GNU/Linux gained a strong reputation because of its heavy use in Internet hosting environments. The result was that open source software became recognized as a readily available, high-quality, low-cost source for various commonly used functions.

As use of GNU/Linux increased, companies started to consider whether there were ways to profit from open source software. Companies like Red Hat, Novell and IBM became active in the open source community and began to offer products and services related to or based on open source software. Red Hat, for example, started providing its own distribution of GNU/Linux under a subscription business model. This business model is based on taking publicly available software (GNU/Linux and other popular open source applications) and packaging and testing them to create up-to-date, high-quality versions of the original open source. Under this business model Red Hat does the complex work of compiling and building a binary executable version of the modules that make up GNU/Linux. This binary version of GNU/Linux is tested by Red Hat to confirm it has been built properly and functions as expected. The resulting version of GNU/Linux (along with the accompanying source code) is called a Red Hat distribution and it is the software component of Red Hat's commercial open source offering.

In addition to the Red Hat distribution, a Red Hat subscription usually includes an ability to receive software support, access to updates and upgrades, and access to various network-based administration tools. A key aspect of this business model is that Red Hat is not the licensor of the vast majority of the software in a Red Hat distribution. Instead, each of the individual modules is licensed by the applicable open source developer or project under its applicable open source licence. Red Hat is not compensated directly for these software licences, but is instead compensated for ancillary or value-added services such as packaging, support and consulting. In certain respects, this business model is similar to that used in the bottled water industry. In each case the product provider must convince customers to pay for something that is otherwise available at almost no cost. This is done through the provision of value-added services, such as, in the case of bottled water, quality control and certainty of source, and in the case of open source software, through consulting, support and packaging. The perceived value of the product is highly correlated to these services, and accordingly the success of this type of business model depends on an ability to create strong brand and trademark awareness.

Another commercial open source business model is dual licensing. As the name suggests, dual licensing involves the use of two (or possibly more) licences for a software package. Typically, one of these licences is a proprietary commercial licence for a binary version of a particular product and the other licence is a copyleft licence for an open source version of the product. In addition to being able to charge for value-added services, a dual licensing model also allows a company to receive license revenue. This license revenue is derived through licensing under the proprietary license.

A dual license model has two seeming paradoxes. First, how can open source software (and in particular GPL-licensed software) be licensed under two different licenses? Second, how can one convince someone to pay for something that is available for free under an open source license? The first paradox is resolved through ownership of the underlying software. If a company owns the underlying software, then the company can license that software under the GPL and it is not restricted from also licensing that software under other licenses. However, if the company does not own the underlying software and has instead been granted a license to that software pursuant to the GPL, then the company will only be able to re-distribute the GPL-licensed software under the GPL thus precluding a dual license business model. The second paradox is resolved through the use of a copyleft license. By using a copyleft license, a licensor can impose conditions on the use of the open source version of a product that are likely to make the proprietary licence the preferred choice. In most cases the condition that will make the proprietary licence the preferred choice is the copyleft requirement and the threat of having to make any software combined with the open source available under the terms of the GPL. This coercive approach can be particularly successful for software meant to be included in OEM packages and it is no surprise that the most successful example of dual licensing is the MySQL database, which is often included as an OEM component in larger products. The key requirement for implementing any dual licence scheme is that the commercial licensor must own all of the licensed software. This can be quite tricky in cases where improvements and/or bug-fixes are accepted from the open source community and care must be taken to ensure that ownership in these submissions is properly transferred to the commercial licensor.

In summary, while revenue-generating open source business models are becoming more common, these business models are significantly more complicated than traditional licensing. In particular, the open source licences underlying or used in implementing a revenue-generating open source business model need to be examined very carefully to confirm that their various terms and conditions are being met and that any related proprietary software is not being unexpectedly compromised.

Michael Morgan is the head of the LaBarge Weinstein Licensing Group. He practises intellectual property law with an emphasis on complex transactions for the development, acquisition, licensing, use or other exploitation of technology products and services. E-mail him at mmorgan@lwlaw.com or visit www.lwlaw.com.

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