Economics in FOSS: Is paying for free and open-source software, an investment, or an expense?

Uri Adonay Herrera
Jan 2 · 17 min read

Probably your immediate reaction is, “pay for FOSS; why should I do that? I thought it was free”. Free and open-source software is all around us. You use it every day; on your computer or your phone; on your car or your house, etc.

To this day, many people new to the free and open-source movements see giving money to a FOSS project as a contrariety.

In this article, we’ll explore why that might be the case and how financing a FOSS project is a good thing™.

What is FOSS?

The first question is, well, what is FOSS?.

Free and open-source software (FOSS) is software that can be classified as both free software and open-source software. That is, anyone is freely licensed to use, copy, study, and change the software in any way, and the source code is openly shared so that people are encouraged to voluntarily improve the design of the software.

The term is used to describe software that falls in both categories, free and open-source, so let’s see what each of these mean.

The Free Software Foundation defined the term free software in 1986, “Free software” means software that respects users’ freedom and community.

On their website, the GNU Project (a project of the FSF) defines free software as […] “free software” is a matter of liberty, not price. To understand the concept, you should think of “free” as in “free speech,” not as in “free beer.” We sometimes call it “libre software” […] to show we do not mean the software is gratis.

The term “open source” was formally adopted in 1999 when Eric S. Raymond created the Open Source Initiative.

The OSI defines it as a type of software in which source code is available under a license that grants users to study, modify, and distribute to anyone and for any purpose.

Therefore we can convey that open-source is more about licensing, while free software is about philosophy or ideals. Both terms are used together most of the time since many software falls into these definitions.

But, if the F in FOSS stands for Free, why do developers ask money for it?

This confusion over the word “free” is due entirely to an unfortunate ambiguity in the English language. On first hearing the term “free software,” many people mistakenly think it means just “zero-cost software.”

It may be true that all free software is zero-cost, but not all zero-cost software is free as in “freedom” — that is, the freedom to share and modify for any purpose. Think freeware, for example, the only thing you could do was download an executable and run it. You couldn’t get the source code, and even if you could, you didn’t have the right to modify or redistribute it.

As a mean of making the difference apparent to the general public, the GNU Project mentions the use of different words to refer to free software, libre, and gratis.

We sometimes call it “libre software,” […] to show we do not mean the software is gratis.

The use of these words serves a direct translation of the original intended meaning of the term free software, libre means freedom, and gratis means zero-cost. The distinction between gratis and libre is immediately evident to speakers of Romance languages such as Spanish and French.

But English’s position as the de facto bridge language of the Internet means that a problem with English is, to some degree, a challenge for everyone.

Understanding this problem allows understanding free and open-source software as a development methodology and business strategy, instead of as a moral crusade.

As a methodology and business strategy, FOSS needs good marketing, where “good” means “viable in the business world.”

Mainstream corporate CEOs and CTOs will never buy “free software.” But if we take the very same tradition, the same people, and the same free-software licenses and change the label to “open source” — that, they’ll buy.

Excerpt from The Open Source Case for Hackers, opensource.org, ca. 2002.

In this instance is where open-source makes a difference; open-source allows the growth and proliferation of free software by utilizing a licensing model that allows for open collaboration and innovation.

It is, therefore, not a contradiction for FOSS developers to ask for money for their projects.

Financing FOSS, why is it not common practice?

I have held for a long time that the free and open-source software ethos means that you should be making money out of what you are doing.

The GNU Project mentions that […] Many people believe that […] you should not charge money for distributing copies of the software, or that you should charge as little as possible — just enough to cover the cost, this is a misunderstanding.

[…] Actually, we encourage people who redistribute free software to charge as much as they wish or can. If a license does not permit users to make copies and sell them, it is a nonfree license.

Meanwhile, the OSI mentions that […] You can sell services based on the code (i.e., sell your time), sell warranties and other assurances, sell customization and maintenance work, license the trademark, etc. The only kind of profit strategy that is incompatible with Open Source is monopoly-based sales, also known as “royalties.”

So if none of the primary institutions that defined these movements prohibit commercial endeavors with free and open-source software, i.e., it’s not illegal, why does it result surprising to some people that developers ask for money?.

Is paying for FOSS the same as paying for proprietary software?

No.

When you buy proprietary software, the license is likely not to allow you to re-distribute. Often, an exclusive software license will further restrict the number of computers where software is in use. Much less will it enable you to study the code, or even access it in the first place.

When you choose to pay for free and open-source software, you are helping a group of developers continue to produce software that respects your freedom and not just the economic interests of a company.

The result is that you contribute towards making software better, and the beneficiaries are not only those who have paid for the product itself, as it would be in proprietary software. Anyone who downloads and uses the software afterward benefits from that point forward.

While it is true that you’re paying to obtain the final product, i.e., the compiled executable binary, the free and open-source model lends to provide you with other liberties that you wouldn’t otherwise enjoy with proprietary software.

The internal structure of proprietary software is strictly closed-access, meaning they lack transparency, which makes it virtually impossible for users to even suggest modifications or optimizations to the software.

Why don’t we see more end-users financially supporting FOSS?

Objections to not support free and open-source developers financially might come from preconceived misconceptions about free and open-source in general or biased campaigns against free and open-source software such as this.

This affirmation is not valid for most free software. If you don’t trust ‘gratis’ support, there exist companies that will provide you with the same type of support you’ll receive for proprietary software — for a fee.

Companies such as Red Hat make a lot of money selling products based on open source projects. But if the underlying software is free, what exactly are you paying for when you subscribe to these products?

  1. Enterprise-grade support
  2. Tested, stable products, rapid bugs fixes, and predictable lifecycles
  3. Input into new features
  4. Extra functionality, etc.

Surveys show that the majority of companies use some form of open-source, 99% of enterprises see open source as necessary, and almost half of the developers are contributing back.

Another research study concluded countries adopting modern open-source practices saw:

“a 0.6%–5.4% yearly increase in companies that use OSS, a 9%–18% yearly increase in the number of IT-related startups, a 6.6%–14% yearly increase in the number of individuals employed in IT related jobs, and a 5%–16% yearly decrease in software-related patents.

By having the source code, you could go ahead and improve critical parts of the software; this will probably give you the edge faster than buying proprietary software with no source code available.

Free and open-source software has the benefit that many individuals can audit the code to improve it, detect bugs, and fix them. Many vulnerabilities found in open-source software are fixed within hours or days, whereas a vulnerability in proprietary software can go on for many years, unnoticed.

Free and open-source software is a real industry, and free software companies with a successful business model pay a competitive salary to its staff.

It’s no surprise if you look at the Who Writes the Linux Kernel report that the top contributors are all employed by companies like ARM, Google, Facebook, Intel, Red Hat, Samsung, and more.

There are never any guarantees that a software product will be maintained forever. However, when this happens with free software, it may not be the end of the road, you can always pay somebody else to support it and maintain it if you need to continue using it since you have the source code.

There are other types of free, too, but none of them refer to free and open-source software by definition.

Ultimately, there’s still a cost associated with producing the software and its changes. As with any product, there’s an inherent cost of manufacturing.

But as we have conveyed, free software isn’t about price but freedom.

Free and open-source software doesn’t put the restrictions to users in the way that other purportedly free models do (they are called nonfree); however, as we have explored, the problem is with the ambiguity of the word “free” in English.

The problem of marketing FOSS projects with “free (gratis)” as a feature

Everyone loves a bargain. People want to feel like they got a good deal — like they got one over on the establishment. We live in an era of “free.” So many free products and services surround us that, in many cases, we resent the idea of paying for something.

It is no wonder that in 2018, over 94 percent of Android apps are available for free; however, as we have explored, not all zero-cost software is free software.

There are other types of free, too, but none of them refer to free and open-source software.

We don’t value the time and money the developers spent — we want it now, and we want it free, this is a behavioral pattern.

While talking about money might still be taboo in some circles, there’s no way to get past the fact that your livelihood depends on charging for the work you do and the products you’ve made.

But “value” is one of those complicated terms that gets thrown around in such a simple way but is incredibly complicated when you get into it.

Are people more likely to spend money found on the sidewalk on something frivolous?

Thanks to a human tendency called anchoring, when it comes to displaying a price, what you see first is what you want in the end. Anchoring is a cognitive bias that says we rely too heavily on the first piece of information offered (the ‘anchor’) when making a decision.

So when people see the word “free” in free software, this bias causes any perception of the cost related to the software to be thrown out of the window, in spite of being thoroughly a mistake.

As an example, once music was available online, although illegally, people stopped buying CDs. They had a way to get the same product for free. The low-quality files and the financial damages caused to the artists were irrelevant.

According to Dan Ariely, Professor of Psychology and Behavioral Economics, once something is labeled “free” — we cannot find the negative value of it.

Contextually, a proprietary paid program is likely to have extra features than its free (gratis) version — yet the ‘free’ label seems more appealing.

It may be true that many free and open-source users choose to use the software based on principles, or based on personal preferences and needs, but many more do it because it’s free (gratis). And then, trying to convert these new users to paid customers is invariably an uphill battle.

The way to prevent this, we ought to make it clear.

First, we should stop promoting (marketing) free and open-source as free; it is not free; it is libre.

Second, FLOSS (Free/Libre Open Source Software) should replace FOSS in our vocabulary. The different acronym appropriately portrays the correct meaning and nature of the free and open-source software movement, which is about freedom and collaborative and transparent licensing.

Lastly, understand that when it comes to producing a good or service, there is no such thing as “free (gratis).” We always give something in return for a “free” (gratuitous) item or service.

The “pain of paying” for FOSS

Even though with free and open-source software users are not exposed to adware, spyware, malware, or nagware, many people do not have the mindset to pay for free software; after all, they got it for zero-cost.

Using Android apps as an example, sometimes we even have to watch a 15–second ad video before continuing. Yet we don’t pay $0.99 to remove the ads because of the pain of paying.

People feel a more considerable‘ pain of paying’ when they use hard cash than credit or debit cards, contributing to higher spending on cards. Paying advance, on the other hand, causes less pain.

It is, therefore, incredibly difficult to convince users otherwise, unless the price is present upfront. However, at this stage, the question stops being about, “Why should I pay?” and becomes “Why would I pay?.

Many people say that since there are hundreds of free programs available out there, they don’t see a reason to pay for that one, but is it a valid comparison?.

For instance, when Nitrux introduced its payment model, it was met with many resistance. Nitrux provides users with many features, some of them unavailable for other Linux distributions. Nitrux also doesn’t track, collect, store, or sell its user’s information, unlike other operating systems. Nitrux, too, pays its developers and staff and offers a bounty program, etc.

And while it is correct that there are hundreds of “free (gratis),” it is these features (present and future) that are possible only because we decided to ask users to make the payment upfront, which provided us with the monetary funds to fuel their development.

Understanding that “free (gratis)” also has an impact in FOSS

The worst-case scenario of competing on the lowest price is that you win. The second worst is you don’t.

It is a certainty that a lot of the open-source work comes from volunteers.

For example, someone might come across a bug in a project they use and submit a quick fix, or they might enjoy tinkering with an open-source project in their spare time.

And there are many reasons why a person would not want to accept payment for their open-source work either.

But, for organizations like a startup, generating revenue is essential for its growth. Every worker within an organization has to be paid, somehow.

Somebody must bear the costs of the supposedly “free (gratis).” In the end, nothing is truly free cost. And, not a single person would work for free (no payment, compensation, or benefits, or in other words, gratis) full-time.

It is an absurdity to think otherwise.

Free and open-source software is handed out at zero-cost to make it possible to lower the barrier of entrance; to make it as widely available as possible. Knowledge should, indeed, be free (gratis).

Should other peoples time and effort in giving you knowledge be free? That should be up to them to decide.

The knowledge to create free and open-source software should be obtainable by everyone, but that doesn’t mean that the end-result of using that knowledge to create something should also be zero-cost.

Ultimately, a zero-cost policy has both a consequence and a cause. And it’s a matter of the developer to decide whether their software should have a price or not, with no obligation to choose the former either.

Is FOSS an investment or an expense?

To present the last part, we need to understand two concepts, what is an investment and what constitutes an expense.

What Is an Investment?

An investment is an asset or item acquired to generate income or appreciation.

What is an Expense?

An expense is the cost of operations that a company incurs to generate revenue. As the famous saying goes, “it costs money to make money.”

As much as anything else, successful investing requires the ability to identify and overcome one’s psychological weaknesses. The field of behavioral finance attempts to explain why people make financial decisions that are contrary to their interests.

Investment vs. Expense — Understand the difference

Should technology costs be treated as an asset or should they be expenses as costs are incurred?

Investments and assets are those costs that are expected to result in revenues over a future period; this depends on the nature of the company’s business and how critical technology development is for future revenues.

For a software company building software, the company capitalizes on the technology. Sales costs, for example, are generally treated as expenses.

However, marketing costs are more challenging to segregate between an investment and an expense. Again, the nature of the business plays a role.

For example, if the company is in the business of developing and creating brands, then a significant portion of marketing costs can be treated as investments. At the same time, for other companies, they can treat them as expenses.
In a management consulting company, the highest cost is the people cost.

However, their intellectual property (patents, know-how, processes) are their assets, and management needs to decide how much they’ll invest in growing their IP based on their assessment of its revenue-generating ability over a while.

Applying economic understanding to FOSS

For some, open-source contributors, don’t work for money, and some open-source projects are almost too big to even for IT giants to replace with a proprietary clone. On top of that, consider that many developers will switch off any solution which smells of corporate interest, especially if there is an open-source alternative.

For others, especially when contributions are ongoing or require significant time, getting paid to contribute to open-source is the only way they can participate, either because the project requires it, or for personal reasons.

Maintaining popular projects can be a significant responsibility, taking up 10 or 20 hours per week instead of a few hours per month.

Paid work also enables people from different walks of life to make meaningful contributions. Some people cannot afford to spend unpaid time on open-source projects, based on their current financial position, debt, or family or other caretaking obligations.

That means the world never sees contributions from talented people who can’t afford to volunteer their time.

It’s easier to make a case for open-source work if your employer actually uses the project.

An insight into financing FOSS and why it is a good thing™

Open-source software (OSS) is a catalyst for growth and change in the IT industry, and one can’t overestimate its importance to the sector.

Besides, there has been a surge in venture capital dollars are invested in the industry in recent years. Several high profile funding rounds have been completed, with multimillion-dollar valuations emerging

Facebook, Google, Amazon, Apple, and Microsoft are certainly driving open source, often with ulterior motives, consciously supporting the sale of proprietary tools and services.

While providing free software is useful for consumers, it still costs money to develop. Intensely few companies can live on donations and sponsorships. And with fierce competition from proprietary software vendors, growing R&D costs, and ever-increasing marketing requirements, providing a “free” product necessitates a sustainable path to market success.

As a result of the above, a commonly seen structure related to OSS projects is the following: A “parent” commercial company that is the key contributor to the OSS project provides support to users, maintains the product, and defines the product strategy.

Historically, the vast majority of OSS projects have pursued a monetization strategy from the first category. Still, at their core, all of these models allow a company to earn money on their “bread and butter” and feed the development team as needed.

Red Hat is an example of a commercial company that pioneered the open-source business model. Founded in 1993 and going public in 1999 right before the Dot Com Bubble, they achieved the 8th biggest first-day gain in share price in the history of Wall Street at that time.

At the time of their IPO, Red Hat was not a profitable company, but since then has managed to post reliable financial results.

Instead of chasing multifold annual growth, Red Hat has followed the “boring” path of gradually building a sustainable business. Over the last ten years, the company increased its revenues tenfold from $200 million to $2 billion, with no significant change in operating and net income margins.

The above indicates, therefore, that OSS companies do have a chance to build sustainable and profitable business models. Red Hat’s approach of focusing primarily on offering support and consulting services has delivered gradual but steady growth, and the company is hardly facing any funding or solvency problems, posting decent profitability metrics when compared to peers.

Business models for FOSS?

As noted, the difference between free software and open-source software is that the latter focuses on licensing even though both promote commercial distribution.

Companies whose business centers on the development of open-source software employ a variety of business models to solve the challenge of how to make money, providing software that is, by definition, the software is licensed free of charge.

Each of these business strategies rests on the premise that users of open-source technologies are willing to purchase additional software features under proprietary licenses or purchase other services or elements of value that complement the open-source software that is core to the business.

The following lists three categories.

Friendly FOSS business models

Somewhat friendly FOSS business models

Unfriendly FOSS business models

The categories are not mutually exclusive. For example, a project might have a foundation but also use crowdfunding to raise money. Someone else might do consulting and also have a donation button, etc.


So answering the canonical question of “is paying for free and open-source software, an investment, or an expense?” the answer is a resounding, yes. Yes, it is an investment.

Not only does FOSS promote software liberties, but it also cares for the users' protection, privacy, and safeguard of their data.

It also paves the way for many innovations and highly encourages the participation of everyone that is interested in building something better for the greater good.

Furthermore, enterprises have the means to build new products or services that allow them to have an advantage over their competitors.

Conclusion

For a long time, these differences did not need to under examination or articulated. Still, free and open-source software’s burgeoning success in the business world made the issue unavoidable.

Uri Adonay Herrera

Written by

I’m a Graphics Designer, Linux user and founder of Nitrux.

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