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How to make money by giving stuff away

What do Playstation 3, JBoss, and Java have in common? They look like they should be losing money, but in the end they will do just the opposite. If you think this the 21st century's version of the perpetual motion machine, maybe you should take a fresh look.

Two news stories caught my eye today. First, it looks like RedHat is planning to split JBoss into free and enterprise offerings as it did with Fedora and RedHat Enterprise Linux (RHEL). The second item is that Sony may be losing over $300 on each PS3 that it sells. Sony hopes to make the money back on game and accessory sales, while economies of scale drive down the cost of the hardware over time.

These are just two examples of companies that are trying to make money by giving stuff away.The key to success is to "convince customers of the value of moving from free to paid" Another, of course, is Sun with its Java and Solaris offerings. For traditional proprietary vendors, this must seem like the height of folly. That's ok, say the RedHats and the MySQLs and the Pentahos of the world. They will be happy for you to keep thinking that way as they continue their slow but inexorable advance into your markets. 

RedHat CFO Charlie Peters said this week that the key to success is to "convince customers of the value of moving from free to paid". Largely because JBoss is a free download, an estimated 11 million people are using it. Now if they can move even a small fraction of those customers into the paying column, that will be a significant source of revenue.

The Playstation 2 (which also sold at a loss when it first came out) is now in over 100 million homes world-wide, and controls over 60% of the market. That kind of penetration gives Sony significant clout with game makers, retailers, and media outlets. Sony is hoping the PS3 will do the same thing while driving its Blu-ray format into the mainstream, and providing them with revenue on hardware royalties and movie distribution. And of course, buying a few of those $50 games won't hurt either.

There is something of a snowball effect here. As you bring more people into your "community", the community becomes more attractive (because of new content, shared knowledge, buzz, etc.), which drives even more people in. Rick Ross of DeveloperZone likes to say, "You have to spend money to make money". His latest project: paying folks to make reference material that he will then give away to his readers. Folly or craftiness? You decide.