In the beginning...open source was pure and unadulterated. Over time, the idea of community-build software that is free and unfettered by sticky licensing terms and fees caught on with IT buyers, and the disruption of the old order began. Now, open source (Linux, Eclipse, Java, etc.) is mainstream, with many companies giving away valuable software for free and looking for ways to gain profits from their largess.
Of course, the business model of free software isn't very attractive, so companies providing distributions began offering support and premium services. Even with support and services fees, open source, compared to traditional, proprietary software, was a bargain.
Hence, a new colony of software companies sprouted up, led by open source leaders such as Red Hat/JBoss, Novell and MySQL; smaller disrupters such as SugarCRM, Greenplum, MuleSource, Scalix, Zimbra, Digium, Alfresco, Socialtext, EnterpriseDB, Ingres, CollabNet, Hyperic, Qlusters, JasperSoft; and now everything under the Sun.
Open source is becoming so attractive that even companies with proprietary technology are taking the open source route. Among the large vendors, Sun has thrown all of its software into the open source pool. Other large vendors don't feel compelled to open source their code, mostly because they don't believe that their proprietary software business model is threatened.
Smaller companies seeking to make inroads against larger competitors are liberating their code and going open source. Wiki maker Socialtext, for example, went from proprietary to open source last year. This week RadView Software will launch its WebLOAD Internet performance testing solution, a product with a ten-year history, as an open source solution. This is a company with 1,600 customers and a product with more than 250 enginneering years of development, but not a great profit story. The company, which is publically traded, just took in $2 million to "restore confidence" in the company's financial position. By offering a less costly solution and tapping into the community for assistance, enabling an ecosystem, lowering marketing cost, RadView hopes to gain more customers and market credibility.
Of course, the secret to success for open source companies is adding additional proprietary management or productivity features in a "commercial" version. In other words, certain versions of open source are not so open. You have the option of free software without support and extra features; free software with support that many include some proprietary code, such as for management or multi-server support; and a commercial edition that includes a significant dose of proprietary code.
At that point, open source software doesn't look that much different in theory from proprietary code--develop some unique intellectual property and charge whatever the market will tolerate. Adding value on top of an open source base is a superior model, because customers only have to pay for what is unique. When a certain feature is no longer unique, it quickly move into the open source pool.
At the same time, open source companies are vulnerable to other companies that pick up the open source code and build their own business around it. But, it turns out that most of the code developed by open source companies is done internally, by staff engineers, which again resembles the way proprietary code shops operate.
It seems that the new software business model is hybrid, open sourcing the basic engine and allow the community to test and contribute to the corpus, but keeping proprietary the code (and the engineers) that makes the engine perform at its best.
But, the reality is that proprietary software vendors still rule. Are they dinosaurs nearing extinction? No, but they will feel increasing pressure to take open source more seriously as part of their business model, just as on demand, browser-based services has inspired new thinking. Salesforce.com, for example, has build nearly a billion dollar in annual revenue business at the expense of Oracle, SAP, Microsoft and others. But, last time I checked, salesforce.com was proprietary software delivered as a service. Even open source CRM vendor SugarCRM keeps a relatively large percentage of its code proprietary in its commercial version.
Economics don't favor pure open source. The future is hybrids--cars, software, people, pets. It's better for the planet...