Who Says You Can’t Make Money with Open Source?

This week yet another major global IT vendor will launch a product based on Linux – the HP Touchpad, which looks quite promising from early reviews. Even so, it is ironic that I still hear the following comment from a number of investors and business people:

“Open source is great, but you can’t make any money with it.”

While for some reason this sentiment has existed as long as open source software has been in existence, the facts don’t support it; in fact, the facts expose it to be a statement hovering between unbelievable and ridiculous. Red Hat will exceed $1 Billion dollars in revenue this year. Its investors have been richly rewarded over the past decade with more than an 8X return over the S&P 500.

Red Hat’s CEO, Jim Whitehurst, expects the company’s revenue to TRIPLE to three billion dollars in five years. This is a company whose only business is providing service and support for open source software.

IBM, on its 100th year in business, has been richly rewarded for its billion dollar investment in Linux with a market cap today that eclipsed Microsoft’s back in May. I would argue that IBM has created so much shareholder wealth largely because they got open source and they got it early. They built services and products around open source instead of competing with open source.

Can’t make money out of open source? Tell that to the investor who put $100k in Microsoft ten years ago. He would now have $69k. Compare that to the IBM investor who would be sitting on $143k made over the same period.

Even Apple, arguably the greatest corporate turn around in the history of computing, has depended on open source to create value for its share holders. Don’t believe me? Go to the settings of your iPhone click on “general,” then click on “about.” Scroll all the way to the bottom and you will find a “legal” button. Click on that and you will find GPL licenses and names such as the Free Software Foundation, Eric Raymond, and more INSIDE YOUR IPHONE. These are hardly Apple fanboys, yet they are given appropriate credit for helping create the software that powers the iPhone.

So I’ve probably convinced you that open source heavy-weights like Red Hat and IBM make a lot of money with open source. Where the argument gets really interesting is when you widen the net — it is almost impossible to make money WITHOUT open source. With more than 75% of global exchanges relying on Linux for their trading platform, investors can’t even make money off of Microsoft stock without trading it on a Linux platform. (Even though that is largely an academic example. As of today, its stock price is down 28% from a decade ago.)

Also consider how Google has used Linux to create a multi-billion dollar search platform. Linux is the very foundation of Android, which activates 500,000 devices PER DAY. HP is shipping a WebOS phone based on Linux; as I mentioned earlier, its Linux-based TouchPad will hit shelves this Friday. In fact, unless your one of just three companies whose names are Microsoft, Apple or RIM there is nobody out there creating devices platforms without Linux: Amazon’s Kindle, Barnes and Noble’s Nook, all of Sony’s cameras, televisions, and phones, Samsung’s smart TV’s, Tivo’s DVR’s, BMW’s cars, and more. Even further, in addition to Apple, even RIM uses a substantial amount of open source code in its products, leaving Microsoft as the sole company using very little open source. A poorly thought out strategy indeed.

This year’s much hyped social media IPO’s, such as Linkedin and Pandora, all use Linux and open source software to create their businesses. This foundation was essential to their success because not only was the software superior to any alternative, but also because it allowed them to control the delivery of their technology and the costs it takes to deliver that technology. Could Google have really become what they are today if they had chosen to develop their search engine using .NET?

Can’t make money with open source? Just ask a VC who is investing in a cloud or web services start-up whether he wants that company to base their product on Linux or Microsoft. I bet you can predict his or her response.

So, to those of you who question how people can make money off of open source I say, “Get out of the 80s and join the rest of us in today’s new software economy.”

P.S. Please don’t infer that I don’t like the 80’s. I do. In particular the music, the 1980 US Olympic Hockey team, and the Rubik’s cube.