Lessons from Google and Red Hat for Facebook and open source

Something hit me the other day. Perhaps it was two years of education at the hands of Larry Lessig finally sinking in. Or perhaps it was my reading of Gene Simmons' commentary on those pesky kids who steal his music. Whatever the impetus, it finally all came together.

Twentieth century software business models focus on scarcity because they're founded upon 20th century conceptions of property (actually, their origin is a few centuries' older than that, but never mind).

Scarcity is the absolute wrong way to build a software business in the 21st century, with the rise of digitization. It is pointless and fruitless to insist that the digital world act like the physical or analog world, and build business models that conform to this false view. To thrive in the new software world, we need to embrace its changes rather than fight them.

Inspired by Glyn Moody, I wrote a few weeks ago that "in a digital world, the money is in analog." But the principle is actually much deeper than this.

To get at the principle, it's useful to look at the successful business models of a few 21st century pioneers, including Google and Red Hat:

• Google's model works because of an abundance of page views (Driven by searches, news, etc.). Google found a way to give away its service to drive abundance, and then monetize that abundance through advertising. (Interestingly, Google has failed to create any viable businesses that stray far from this principle, though it's likely that the company will succeed in doing so eventually--perhaps with its efforts in the mobile arena.)

  Most interestingly with Google, nothing that it does--be it search or advertising--is inherently difficult to copy. The combination and brand associated with the intersection of them, however, makes Google very valuable indeed.

• Red Hat figured out years ago that the more open-source development, the more need for someone to boil down the community to its "binary" essentials. In other words, to Red Hat Enterprise Linux from the Wild West of Fedora. The bits are free or abundant, but the service around them is not. Red Hat therefore wins the more that it and others give software away for free, because this leads to a greater need for its role as a gatekeeper on quality and stability.

The general principle seems to be to drive abundance (whatever the means) and then sell minimization of complexity as a value derived from that abundance. In Google's case, people search randomly for X, but Google points them to advertising that may help the would-be buyer discover X quickly and (hopefully) at a good price. Red Hat creates and fosters an abundance of software and then makes it consumable by stripping away all but the essentials.

How would this principle apply to other 21st century software businesses? Hint: the answer isn't advertising (not always, at least).

• Facebook. Facebook has done well at creating abundance (in terms of social interaction), but advertising has proved to be a poor way to monetize that interaction. It shouldn't be hard to see why: people are searching for and linking with people on the site, not goods.

  Having said that, Facebook has a massive opportunity to monetize the primary thing that networking can engender: trust. As I've written before on this topic, trust is the basis for secure commerce, and it's sorely lacking online. If Facebook can turn its flimsy friendships into true indicators of trust, it will have a multibillion-dollar business on its hands.



• News media. Bloggers like me rely on high-quality information for commentary. Despite the odd post resulting from my experience in the open-source world, most of what I write derives from commentary on other people's work.

  Print media has the opportunity to monetize the quality of its journalism among an abundance of fake journalism. It needs to find some way to monetize the abundance of links or traffic coming into it from bloggers and other aggregator sites, rather than trying to create a captive readership to its publications.

  I'm not sure what this looks like, but the principle behind its business is to produce wheat among chaff, to provide the core upon which the peripheral commentary is built. Perhaps it is enough to advertise against that incoming traffic, but I suspect that there's something better.



• Content management. This is near and dear to my heart, since my company, Alfresco, is in this business.

  Enterprise content management has traditionally concerned itself with managing the content within an organization, but this is rarely the most interesting content (or, rather, the most interesting content is shared between people in different companies rather than within the same company).

  What's the model here? Give the software away (to encourage content aggregation and storage), and charge for the value of providing secure interactions between people of different organizations, with those people identified and trusted through the online profiles or social networks they have, as Forrester recently opined.

You get the picture. The general principle is always the same: focus on maximizing abundance, and then sell value around minimizing the complexity inherent in abundance.

The old model was to assume that the value was in the software itself and to therefore lock it up. It turns out, however, as Tim O'Reilly notes, that data is the real value, not bits and bytes. You don't discover or, rather, uncover, that value until you have abundance.

There will be a few companies that continue to effectively monetize the old world. Oracle, Microsoft, IBM, and SAP, to name the four primary ones. But these outdated models will eventually fall against the rising tide of abundance-based business models, because the new models recognize that digital bits really do want to be free, and that all attempts to artificially lock them are doomed to fail.

[ian.waring]

There are 3 models...

... advertising, (service) subscriptions and (share of) transactions. Well, at least that's what Steve Ballmer is outlining. The interesting thing is that Microsoft are just about toe in the water with all three; their current core business doesn't yet feature in what he perceives as "the future".

Ian W.

[PACSferret]

Google: "nothing that it does--be it search or advertising--is inherently difficult to copy". Hmm not sure I agree. A key part of the google search algorithm is that click-throughs are logged back to base - the more click throughs, the higher the ranking. So the adundance becomes a central part of the product itself. It would be hard to copy that without achieving abundance first. Chicken & egg not unlike getting a blog above the noise of the 'sphere. And indeed, not unlike the dominant position of some OSS.

[Zak70smith]

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