The Internet Business Model

This was solemnly intoned to me the first year I began covering the commercial Internet, in 1995, at CMP's Interactive Age. During the Internet boom it became something of a mantra.

But it symbolizes something very real. The way to success on the Internet is to get something out there, then convince people to try it, free. From Yahoo and Netscape through Google, MySpace and YouTube, the idea that success is defined by users, not buyers, has become an accepted part of business life.

This is possible because on the Internet the nominal cost of serving new users is virtually zero until you scale to a point where profits are possible merely from the size of your audience.

For serve read distribute, and for advertise read sponsor or convert, and you have both the free software and open source business models.

Free and open source software are intimately related. Some open source software isn't free, and some free software isn't open source, but both spring from the same well – nominal distribution costs and scale.

Grisoft is a good example. The company was founded in the Czech Republic in 1991, and now has its base in the U.S. It sells anti-viral software to companies and individuals, but its main marketing expense is to give away a version called AVG Free.

The free software acts as a marketing department for the paid, and the model works, said vice president-communications Larry Bridwell.

“In the U.S. our commercial version has doubled sales each of the last three years. Our conversion rate is quite good.” And the growth comes without growing the marketing department. “I was looking at the hire rates and I was pleased to see they've increased their support and technical staff at the same rate as the marketing staff.”

AVG is closed-source, free software. I asked Bridwell why true open source engines have yet to gain traction. It's because of the community, he said. The security community.

“It's a closed society where researchers can get the samples, where outsiders can't get them. It's based on trust, individual trust, which leads to sharing. That's just now starting to broaden. At Blackhat these last few years there's been a greater expanse of individual researchers – consultants, academics, people in companies – who work together and share exploits. As that grows there's a greater chance for open source software.”

I think Grisoft demonstrates the connection between free and open source business models. Both are born of the Internet. Both are based on community. And both work.

Tomorrow, I'll talk about one by-product of all this, which I call the Collapse of Competition.