how does a software company make money, if all software is free?

quick…
is this one-person-sample relevant, how ?
ever called microsoft to fix anything ?
know anyone who ever did ?
know anyone who did and ever got anything fixed ?
I rest my case.

Eh! You’re learning! Cute.

When I worked for a large insurance company it was explained to me thusly: Who do you sue when something goes horribly wrong?
I appreciate the cynical nature of the question, but that’s how it came down in that company. So much so, in fact, that the preferred arrangement was to have a large consulting company, in addition to Microsoft, to help assume the risk. Did they pay for that? You bet, and handsomely. Why? Because assumption of risk is worth money.
It’s a business model.

Hugh, I know you don’t really care about this techie stuff, but you should really sit down with some open source people sometime.
You are repeating two of the biggest lies about the differences between open source and Microsoft.
Open Source software is not “given away for free” per definition, and you can get the same level of support, ie the same kind of social contract with an open source supplier *if you choose* (and pay for it). It’s a matter of choice, and the only difference is that the choice is up to you, and not up to Microsoft.
You’re right about the bottom line though. It’s all about the social contract. That’s exactly what the entire open source movement has always been about, you should read some of Richard Stallman’s essays about the subject.

For your info vruz… The world is full of enterprises which use MS’s support services. I have personally created two cases for them – and got the issues fixed.
Regarding the “all software is free” idea… I can not see any reason why anyone would give products of their expertise for free. Hairdressers don’t do it, why should coders?
Naturally in the case of large ERP implementation projects, the software can be “free”. But one cannot invest millions into Halo 4 or next Office and then give them for free, no matter how full of ads they would be.
Do keep in mind that Google is not free for advertisers, although the company has several free services.
And congrats for the book deal, Hugh! 🙂

Q: “What has got to happen at MSFT if it wishes to remain a relatively happy, successful, interesting company for the next thirty or so years?”
A: “Thirty or so years is a short period of time for an industry. Think 300 years. Don’t underestimate Microsoft’s ability to release new product on a frequent basis, license it, support it, offer training, purchase competitors, and repeat the cycle. It is a business model that works.”
Best Wishes,
Dave

It’s a really interesting debate, and one that I’m slowly becoming more educated about, as I’m trying to bridge the gap between doing social things around my blogging and pet projects, because it all makes absolute sense to me – and trying to do it on a formal company level with justifications on a ROI level in a formal setting…
I flit between open source and business apps depending on what’s most appropriate at the time – and a mixture seems to work best.

Interesting post, Hugh, and I held these views myself before working on an open source project (I’m not a developer either, by the way). I have since changed my views.
There is so much more to open source than the fact it’s free-as-in-beer. For the comments that follow, you should assume that I’m talking about commoditized software, from the perspective of the Enterprise.
1) Because the code can be inspected and amended, it means it can be tailored. And more often than not, these improvements are returned to the commons. The net result is that open source projects increase in both quality and function over time, in line with the needs of it’s users. So you end up relying on the community a lot less than you’d expect – more often than not, someone else has already dealt with the problem you’re facing and the extra code is freely available, or the job required is relatively small and you can do it yourself (especially if you’re a big enterprise with decent resources). Good luck getting someone like Microsoft to change their product for you. Even if they agree, you often have to wait until the next product release.
2) Don’t underestimate the importance of open standards. Billions of dollars are spent by large companies each year because of vendor lock-in. Vendors will charge whatever they can if they know they’ve got you over a barrel. If you can inspect the code, and integrate systems yourself, huge amounts of time and money can be saved. It also puts you in a stronger position to give your customers what they want. In this day and age, if you can’t adapt quickly, you wither on the vine.
3) One of the biggest mistakes people make is mis-understanding the power of the community behind open source software. There is often no written contract, but there is passion and there is love. Not love for the Enterprise, of course, but love and pure dedication for the software. Even on the modestly sized project I’m working on (TiddlyWiki), the dedication and responsiveness of the community is nothing short of sensational. If you don’t believe me, try posting a question on the discussion forums asking how you can change the product to do what you want. Here’s the link:
http://groups.google.com/group/TiddlyWiki
So, where should Microsoft go next? I expect they know the answer. Open source will nibble at their market share of commoditised products, gradually forcing them to focus on products that aren’t commoditised. Maybe they’ll open source their commoditised products in time, maybe they won’t.
Disclaimer: I work for Osmosoft, which has the creator of TiddlyWiki at it’s helm. We report into JP Rangaswami.

I think Microsoft has no easier answer to that question than (a) big ad agencies, and (b) big record companies.

Rafi, that’s apples to oranges, you do not HAVE to pay for redhat. Why you are doing so is beyond me.
I work for an oil and gas industry company as a software engineer. We’re an all Microsoft shop, however I do 99% of my day to day work on Linux.
I find the assertion that you have to go all one side or all the other to be a bit curious at the outset. We use Microsoft servers, but we use MySQL database servers. Why? Because oil and gas companies are the biggest penny pinchers in the universe, and the fees for SQL server weren’t justifiable for what we had to accomplish.
I personally use Linux as my daily OS because it doesn’t annoy me as much. Every day, the antivirus on my windows machine updates, and _every_ time, it has to tell me about it. I don’t care, but it tells me anyway.
Working in windows for me is like being in the company of a 3 year old with ADHD in a toy store. “LOOK AT ME LOOK AT ME” ad infinitum. I don’t want to look at the sodding little prick, I want to sit down, and get work done.
That type of “feature” or whatever you want to call it, would be short lived in a linux users world, because developers like myself go nuts over those types of irritating tactics, and patch code like that out of the software.
Long ago, MS decided that they needed to take a very corporate stance with their OS. Rather than focusing on the customers who use it, they focussed on making vendors happy, oems happy, etc, much like they make their share holders happy with a certain disregard to their actual users.
You can look no further than windows Vista to see this at it’s worst. DRM to the core made the entire computer slow and obnoxious. The user experience suffers so the MPAA/RIAA can clutch to a flawed and archaic business model.
To see how it was done nearly right, look at apple. iTunes is the largest music retailer in the USA now.

Quote… “If something goes wrong with Microsoft, I can phone Microsoft up and have it fixed. With Open Source, I have to rely on the community.” … unquote.
What that boils down to is that he’s a lazy bastard that seems to think that whining fixes his problem.
You don’t /have/ to rely on the community. Just go fix yourself. Oooh, you’re unable to? Well then, put some energy into it and join the community. Maybe that is the price you need to pay for that particular piece of software.

ruurd has summed up one of the most appealing and appalling things about FOSS. Whichever it happens to be definitely depends on the user, their level of skill, etceteras.
Me, I’d rather fill out the paperwork and spend a grand or so of my work software budget on 3d Studio Max every couple of years and receive a turnkey product that Just Works (most of the time, anyway) with all of my existing data than attempt to join and interact with the various FOSS products developing 3d apps.
For programmers it’s easier to join the mlist and file bug reports. For everyone else it’s easier to pay the money and dial the phone. “Free” and “Open” aren’t selling points when you have to spend months of social engineering to get a bug fixed or a feature added when you can not have to deal with that bug – or have that feature – QA’d out the ass off the shelf.
FOSS vs. pay soft is ultimately a question of hassle, and what individuals consider to be hassle.

When it comes down to it BigCo’s *like* paying for stuff. They might bitch and whine about the price but *free* freaks the shit out of them. So they’d prefer to spend a fortune on Enterprise Support (whatever the fuck that is) than download Fedora Core 8 and build some competency internally.
This is why Sun and MySQL will continue to make money from OpenSource offerings.
Whats changed is the Quantum of cost. You can no longer charge astronomical amounts for owning the IP, you have to actually deliver a service so this actually plays to Microsoft and IBM’s strengths.
Unfortunately they have brainwashed wall st. into the ideal of uninterrupted capital appreciation of stock value based on accumulated IP value.
Unfortunately he industry is moving to a service revenue model which is people and infrastructure intensive in cost terms. Hence the race to dividends and flat price of MS stock and the horrendous performance of Sun stock in recent years.
How do you make money from software in this new world? Well the world of SaaS and most particularily Salesforce seemed to have cracked it and Google and Yahoo aren’t doing a bad job either.

MSFT should make Windows open source. Not free, but open source. The amount of innovation that will lead to will be incredible. It will open up new markets and whole new businesses.
If there’s one thing I can think of that will ‘change the world’, it’s that.

Tomi: Why would a company give away their product for free? Well, consider this: Why would a company collaborate with other people in developing software? With the product that the company I work for (CodeSourcery, Inc.) develops based on the GNU programming toolchain (GCC, GDB, and so forth), we’ve found it immensely useful to collaborate with the rest of the GCC and GDB community. It enables us to produce a product that is vastly more capable than what we could produce if we didn’t collaborate. And “giving away our software for free” is how that collaboration works; we give them ours, they give us theirs, and we both are far ahead of where we’d be otherwise.
solios: That desire for “a turnkey product that Just Works” is exactly what we’re aiming for with our GNU-based toolchain products. A lot of the value we deliver is that we’ve gone through all the work to select the right configuration options and do all the build steps to get a combination of GCC, GDB, binutils, Eclipse, this, that, and the other to work for the specific configuration you buy it for, and it’s all wrapped up in a single .exe installer and a single coherent IDE. We keep track of all the relevant communities and the patches that get submitted to fix bugs, and integrate them into product updates, so you don’t have to. And, if something goes wrong on your end, you simply go to our website and submit a bug report, and we fix it.
It’s an interesting world.

Believe me I want Microsoft to thrive and succeed, just but not at the high cost of worldwide unhappiness.
By the way, didn’t my constructive, and thoughtful previous post reach you ?
I don’t see it approved, did I say something wrong ?
Were you really looking for thoughtful advice ?
Or is it that it didn’t match the point you seem to be trying to make about the marketing naiveté of open source proponents ?

Ok, that was why OSS exists and persists in the market. Hackers write stuff for themselves and each other, that for them, is damn fine software, but has this grown into such a big thing and what can Microsoft do about it?
Well, the reason it is a big deal is obvious. It is a resource that exists and in a free market, any free resource is going to be utilized. OSS provided many things and depending on your needs and resources, it may be a better investment than the proprietary alternative. Restrictive licenses are more difficult for small companies to deal with than for large ones and may be more of a threat than lack of market testing. Sometimes its the only real alternative for those on a budget, (take Asterisk for instance.)
Ultimately, I think that reason that Linux in particular is so big, is actually because of Microsoft. Microsoft is by far, the most dominant player in the operating system market and as such, it has a lot of say in the IT industry. Companies like IBM, Oracle, HP, et. al. all have to work around Microsoft’s offerings when selling their products. This gives them an incentive to undermine Microsoft’s place in the market. The most obvious solution, promote Linux.
For example, the relational database market (Oracle, SQL Server) is split into two submarkets, the enterprise and the commodity markets. Oracle used to push it’s enterprise software on expensive Unix systems and it’s commodity on Windows. Then Microsoft started offering SQL Server to the commodity Window’s user market and Oracle’s pushing of Window’s backfired. Oracle changed its strategy and began to offer Linux instead.
IBM explicitly gives to OSS to undermine its competition and create a platform on which it will be more free to offer its own products.
In the end, I don’t believe that Microsoft maintain the position that it has in an over OSS dominated market. So much of its income relies on cornering key areas of the market and pressing the advantage that companies will find it easy to continually undermine it by pushing OSS. I find it doubtful that Linux will ever take the coveted title of mainstream desktop, but if it ever does, it will probably be too late to salvage Windows as a product.
That is, to make money out of OSS, you make products that utilize OSS. Microsoft specializes in making products on which other companies build their products. So for Microsoft to utilize OSS to a great deal, they would have to change their business model grandiosely and would ultimately sacrifice a lot of profit. If Linux and OSS continue to grow, Microsoft will probably have to embrace them and incorporate them into their own product stacks. There would probably be a lot of money in this through service fees, and proprietary extensions, (MS Linux would be very popular I think, and a particularly nasty blow to IBM and Oracle,) but I don’t think it would be as profitable as the current model.

First let me say I’m glad you’re getting the gratis/libre distinction. The intentional, malicious, continued misrepresentation of this by the opponents of F/OSS is what I find most infuriating. Steve Ballmer is not an idiot, he knows perfectly well the distinction. Nobody is giving the software away, except Mark Shuttleworth(and he has his own reasons). I’ve purchased many iterations and distributions of Linux and Star/Open Office over the years.
Q: “What has got to happen at MSFT if it wishes to remain a relatively happy, successful, interesting company for the next thirty or so years?”
A: They must come to realize the value of service. As in “customer” service. They’ll have to rethink their whole business model because licensing will not be the cash cow it was two years ago.
I think Vista was a big mistake, from the “customer” service angle. I’m not in development but I’m in a .Net shop and there is zero talk of when they’ll go to Vista. Server 2000 in the server room and XP on the desktop seems to be working fine. Not to mention the re training costs for 30,000 desk jockeys. You not being a tech guy may not see that. Office 2007 is nothing like Office 2000, seriously. So who’s footing the re train bill if this enterprise goes to Vista, not MS. That’s what I mean by “customer” disservice.
And this will have to come from the top. Gates and Ballmer, being ‘boomers’, may very well retire in the next 2 – 5 years and then the fun will begin. I believe, with no insight except hope, that who ever comes up will not be so completely invested in the “old school”. They can look at it from the view of we don’t seem to be making as much money as we were let’s fix that from in here. And I say more power to ’em.

Interchangeable parts, Microsoft Software, and Building Social Contracts On A Common Ground
“Interchangeable parts are components of any device designed to specifications which insure that they will fit within any device of the same type.”
Eli Whitney saw the potential benefit of developing “interchangeable parts” for the firearms of the United States military, and thus, around 1798, he built ten guns, all containing the same exact parts and mechanisms, and disassembled them before the United States Congress. He placed the parts in a large mixed pile and, with help, reassembled all of the weapons in front of Congress. The Congress was immensely impressed and ordered a standard for all United States equipment. With interchangeable parts, the problems that had plagued the era of unique weapons and equipment passed, and if one mechanism in a weapon failed, a new piece could be ordered and the weapon would not have to be discarded.
How can worldwide commerce function without the Interchangeable Parts of Microsoft Office Documents and the server software it runs on? We already know that to fractionate communication leads to failure. It’s sort of like the Intel Chip. Why would you make a different OSH version of the Intel chip so that hardware and software were no longer compatible? It is not about who makes it, how much it costs, or how well it works, but about building social contracts and ecomomic products on a common ground. Build together and thrive…
Best Wishes,
Dave

It looks like the entire Open Source Movement is a large-scale version of the age-old marketing technique known as the Loss Leader.
Marketing methods arise from the unforgiving and immutable laws of economics. Die-hard OS True Believers can ignore these laws only for so long before reality catches up with them.

Change at MSFT? It’s the same for them as it is with any company in the same position. Change the DNA. It’s really that simple.
I could also add: change the Techmeme algorithm so it recognizes there’s more to the world than Google.

@vruz some people are proud to work here and things are changing. people expect this to happen overnight…that’s like saying “i want to lose 20lbs” and expecting it to happen overnight. it doesn’t…it takes work and there will always be setbacks. multiply that by 70k employees or so and it’s quite an interesting challenge.
i think (maybe hope) that people 5 years from now will notice a very different microsoft. one that is more open than you could imagine right now.
time will tell.
@ – spot on as usual

I love this – there’s a lot of goodness on both sides, but I think the real question is “who is going to be installing software in the future?”.
From a consumer point of view, the only software people actively pay for (i.e. not as part of buying a new PC) by and large is game software, or maybe some specialized tools to support their hobbies (music, photography, that kinda thing). Used to be you had to pay extra for an MP3 encoder. Or a mail client. Or a word processor.
Oh, and many of those things are moving online (almost everyone I know uses a webmail client at home, rather than Outlook Express or Thunderbird). Flickr stores more photos than Photoshop Elements.
And guess what – most people don’t care whether their software is Open Source – they want it to be as cheap as possible, that’s all. So, they will use OpenOffice – because it’s free, not because of its philosophy.
As for businesses – I think the “we can sue someone” argument doesn’t hold much water – license agreements make it clear you can’t sue for anything, and sueing a big consulting firm tends to be an exercise in washing dirty linen in public.
The thing businesses tend to care about is risk – which for software purchases are more about long-term costs. Using Microsoft technologies is relatively safe because you can always find people who know the technology to support it. You can buy books on how to configure it. Other companies in your business sector are using it without huge flameouts.
Some Open Source products have reached the “low-risk choice” status – Apache, PHP, Linux on the server. Those products have grown through word of mouth, rather than marketing – marketing to software folk must be very hard.
As for what Microsoft should do – well, if we knew that, we wouldn’t be wasting our time reading blogs, now would we?