free as a business Model patterns 97 Business models in the enterprise software industry are usually characterized by two traits: First, the high fi xed cost of supporting an army of expert software developers who build the product; Second, a revenue model based on selling multiple per-user licenses and regular upgrades of the software. Red Hat, a U.S. software company, turned this model upside down. Rather than creating software from scratch, it builds its product on top of so-called open source software developed voluntarily by thousands of software engineers around the world. Red Hat understood that companies were interested in robust, licens- ing fee-free open source software, but were reluctant to adopt it due to concerns that no single entity was legally responsible for provid- ing and maintaining it. Red Hat fi lled this gap by offering stable, tested, service-ready versions of freely available open source software, particu- larly Linux. Each Red Hat release is supported for seven years. Customers benefi t from this approach because it allows them to enjoy the cost and stability advantages of open source software, while protecting them from the uncertainties surrounding a product not offi cially “owned” by anyone. Red Hat benefi ts because its software kernel is continuously improved by the open source community free of charge. This substan- tially reduces Red Hat’s development costs. Naturally, Red Hat also has to earn money. So rather than charging clients for each major new release—the traditional software revenue model—it sells subscriptions. For an annual fee, each client enjoys continuous access to the latest Red Hat release, unlimited service support, and the security of interacting with the legal owner of the product. Companies are willing to pay for these benefi ts despite the free availability of many versions of Linux and other open source software. Open Source: Freemium with a Twist (linux) open source development community software support services software versioning & testing free (linux) open source based software continuously upgraded, serviced, & guaranteed software self-service & direct access to engineers self-service users enterprise clients red hat (linux) software redhat.com red hat global branches cost structure contains elements of a service company professional subscription free software Red Hat software professional subscription professional subscription VP CR CH CS KP KA KR R$ C$ clients professional subscription enterprise clients professional subscription professional subscription professional subscription R$ professional subscription professional subscription users free software self-service users free software continuously free software free software free software continuously upgraded, serviced, & guaranteed software free (linux) open source based software bmgen_final.indd 97 6/15/10 5:37 PM