054.2 Lesson 1
Certificate: |
Open Source Essentials |
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Version: |
1.0 |
Topic: |
054 Open Source Business Models |
Objective: |
054.2 Service Provider Business Models |
Lesson: |
1 of 1 |
Introduction
Service providers are the backbone of any company or organization that operates in any way via a network. From the Internet Service Provider (ISP), which provides access to the global internet, to specialized applications such as e-mail or customer management, it is software-based services that make actual business operations possible.
Open source software is a component of many different service provider business models. For example, an open source operating system could form the basis of a hosting service business. An open source orchestration tool could be the backbone of an Infrastructure-as-a-Service (IaaS) or Platform-as-a-Service (PaaS) business, such as a public cloud provider or container platform. An open source application could be delivered online as Software-as-a-Service (SaaS). Some service providers also offer supplementary services related to open source software, such as consulting, training, or customer support.
Revenue Streams
When the service is based entirely or in large part on open source software, we can call it an open source business model. Because open source software can be downloaded and used without paying a fee, open source service business models have developed specific products and services depending, among other things, on the proportion of free software in the actual product.
If the entire software is under a free license, a business model can consist of hosting, i.e., providing the software on a reliable and secure platform. This eliminates the effort and risk of customers operating their own servers. In return, customers pay the service provider fees for use. The fees may be related to the number of user accounts, the volume of data that is stored or transferred, or certain time intervals. In some cases, multiple different providers offer paid services to the same open source software.
This popular business model often involves subscriptions, where customers pay a monthly or annual fee for access to the service. Access is often combined with additional services or functions. Providers may offer multiple tiers of subscriptions, charging a higher rate for more features, more users, more comprehensive services, or a stronger guarantee of reliability. Some providers may also offer a basic level of the service for free, a variation on the “freemium” model.
Another popular revenue stream for the open source service provider business model has always been to offer support. Support includes advice, documentation, and training for users who have problems using the software. If the customer prefers to host the free software on their own servers, installation in particular can often be difficult because the user may need to install other supporting tools and libraries, may not know where to put them to make all the pieces work together, or may run into problems on their particular hardware and operating system. Therefore, support and training from a service provider is valuable.
Extra services, such as additional functional or security-related features, can also be developed and provided on a customer-specific basis. Such features or adaptations of the software to a customer’s very specific requirements are a sophisticated and lucrative addition to the business model. It is then up to the service provider and the customer to decide whether the additions flow back into the basic project as free software or become proprietary.
A few open source projects offer a dual-license model. The software is available under a free software license, which serves many users' needs. But some users want to incorporate the software into a proprietary product, which cannot be done under a reciprocal license. Therefore, a standard copyright-based license is provided for these users. The dual-license model is most effective for databases, because many companies would like to offer a feature-rich and efficient database as part of a proprietary software product.
In an advertising revenue model, customers do not pay for access to the service. Instead, the service provider displays ads to the customers using the service and charges companies to place their ads. Open source service providers often avoid using proprietary ad services due to concerns about user privacy. However, alternative open source ad services do not engage in invasive ad tracking.
In a commission-based model, the service provider receives a percentage or fee for managing transactions through their online service. This model is the basis for most e-commerce sites, travel booking sites, and payment processors. Many open source projects in this space are general-purpose platforms intended to be either self-hosted by the service provider or offered as a secondary commission-based service, where the customer-facing website pays a percentage or fee for a hosted version of the open source platform.
An open content business model involves creating and distributing content under licenses such as Creative Commons so others can freely use, modify, and share it. Users are encouraged to contribute to the content, improving it over time. While the content itself is free, revenue can be generated through complementary products or services such as donations, displaying ads, offering freemium features, selling related merchandise, or providing consulting, training, or support services.
Choosing Between Hosted and Self-Hosted Services
Hosted services are ideal for organizations looking for ease of use, lower initial costs, scalability, and professional security management without the need for deep technical expertise. However, these services come with potential downsides in terms of control, customization, data privacy, and dependency on the provider.
Hosted services usually require minimal setup, and the service provider handles maintenance, updates, and system security. They often make global data centers available, providing better performance and reliability for international users. Service providers can scale resources up or down based on demand with minimal effort from the customer. Moreover, hosted services often have dedicated security teams to manage and respond to threats, and service providers may offer compliance with various regulatory standards.
On the other hand, hosted services store customers' sensitive data off-premises, which may raise concerns about data privacy and trust. A shared hosting environment can pose additional security risks. The service provider’s outages or downtime directly affect the customer’s service availability. Depending on a single provider can be problematic if the provider changes terms or discontinues the service.
Self-hosted services are thus suitable for organizations with the necessary technical expertise and resources to manage their infrastructure. However, self-hosting involves higher initial costs, ongoing maintenance, and scalability challenges. The choice between hosted and self-hosted services ultimately depends on each customer’s needs, technical capabilities, budget, and priorities for control, customization, and data privacy.
Impact of Licenses
Basically, open source software licenses work well with service provider business models because the customer doesn’t expect to own the software that provides the service. Instead, they’re paying for access to the service.
On the other hand, the use of open source software in services such as IaaS, SaaS, or PaaS raises legal issues that are often not clarified. Only a few licenses, notably the GNU Affero General Public License, explicitly regulate the use of free software “in the case of network server software.”
With other popular licenses — both the more restrictive copyleft licenses such as the GNU General Public License, and permissive licenses such as the BSD licenses — there is room for discretion as to what can be considered "'copying,`" “conveying,” or “distribution” when the software is used over the network. Decisions about whether and in what form the source code is to be made available to the application or attribution requirements depend on such definitions. The connection with proprietary software components or the licensing of self-developed supplementary components must also be legally clarified. For these reasons, it is crucial in the context of service provider business models to clarify licensing issues relating to the use of free software.
It is good practice for service providers to publicly list all the open source software they use together with their respective license, even when they aren’t legally required to do so.
Considerations of Security and Privacy Protection
The success of a service provider business model relies heavily on a satisfying customer experience, especially with open source software, where customers have the freedom to self-host the software or choose a competing service provider for the same software. Thus, the main competitive advantage of an open source service provider is the customer experience they offer, which may be more convenient, cost-effective, reliable, secure, or performant than self-hosting. However, the trade-off is that customers must share data with the service provider, which may introduce privacy concerns for personal or sensitive data.
For security, customers should ensure that the service provider has a robust process for promptly applying security patches. It’s worth evaluating how the service manages dependencies on other open source projects to ensure all the software is up-to-date and secure. The customer should also assess the provider’s security policies, including how they handle data encryption, access controls, and incident response.
The transparency of open source software allows for thorough code review by the community, which can enhance security by identifying and fixing vulnerabilities. So customers should look for reviews or audits of the software by reputable third parties or security experts within the community. These audits should confirm that the provider follows secure coding practices and standards during the development process, and should consider whether the provider uses CI/CD pipelines with integrated security checks to catch vulnerabilities early.
For privacy, customers should verify that the service collects and stores only the data necessary for its operation, minimizing the risk of data exposure. The service should encrypt data both in transit and at rest, using strong encryption. Access control mechanisms should ensure that only authorized personnel can gain access to sensitive data.
The customer should check that the service gives users control over their data, such as the ability to delete or export it. The service should comply with relevant privacy regulations, such as the European Union’s General Data Protection Regulation (GDPR) and California’s Consumer Privacy Act (CCPA), and provide transparency about its data handling practices.
It’s important to check that the provider has clear policies and procedures for responding to data breaches, including notification requirements. The customer should also review the provider’s privacy policy to understand how data is collected, used, shared, and protected, and consider any third parties the provider may share data with and ensure they also adhere to strict privacy standards.
In general, it’s valuable to look at community feedback and reviews to gauge the reputation and trustworthiness of the software and the service provider. A robust community or organization should be actively maintaining and supporting the open source project. The customer should verify that the provider has regular data backup procedures and robust disaster recovery plans, and check whether the service uses data redundancy to ensure availability and reliability.
Service providers should be aware that customers will be evaluating their security and privacy practices, community reputation, compliance with regulations, and transparency in handling data, and consequently should take steps to follow best practices.
Common Agreements Between Service Provider and Customer
Service providers commonly adopt legal terms and agreements that form the legal and operational backbone of the relationship between the company and their customers. These agreements help ensure clear communication, set expectations, define responsibilities, and provide legal protections for both parties.
The Terms of Service (ToS) for a service, also known as Terms and Conditions (T&C) or Terms of Use, is a legal agreement between a service provider and the customers or users of that service. The ToS outlines the rules, responsibilities, and limitations that govern the use of the service. It protects both the service provider and the customer by clearly defining what each party can and cannot do while providing or using the service. Some common elements of a ToS agreement are confirmation that the user agrees to comply with its terms, guidelines on acceptable behavior and prohibited activities, details on who owns the content created or uploaded by users, information on account creation, security, and termination, arbitration or mediation processes for resolving conflicts, and limits on the service provider’s liability for damages.
A Privacy Policy is a statement that outlines how the service provider collects, uses, stores, and protects user data. Some common elements of a privacy policy are the types of data the service provider collects and their collection methods, how they use the data, conditions under which the service provider may share data with third parties, and information on user rights regarding their data, such as access, correction, and deletion.
A Service Level Agreement (SLA) is a formal, documented agreement between a service provider and a customer that outlines the expected level of service, including the specific performance metrics, responsibilities, and expectations. The SLA defines the standards for service delivery, providing a clear framework for measuring and managing service performance. Some common elements of an SLA include a detailed description of the services provided, specific targets for service performance such as uptime and response times, methods for measuring and reporting performance, consequences for failing to meet performance targets, and procedures for reviewing and updating the SLA.
A Service Level Objective (SLO) is a key component of a Service Level Agreement that specifies measurable targets or goals for service performance. These objectives quantify the expected level of service between a service provider and a customer and are used to ensure that the service consistently meets the agreed-upon standards. Some common elements of SLOs include specific metrics the service provider will measure to evaluate the service performance (for example, uptime, response time, resolution time, and throughput) the desired or expected values for each performance metric, the techniques and tools used to measure and monitor the performance metrics, the specific components or aspects of the service that the SLO covers (for example, hardware, software, network components, or specific processes), and the consequences or rewards based on whether the service meets or fails to meet the SLOs (for example, financial penalties, service credits, or performance bonuses).
A Data Processing Agreement (DPA) is a contract between a customer (the data controller) and a service provider (the data processor) involved in processing personal data. The DPA details the responsibilities and obligations of both parties to ensure compliance with data protection laws, such as the GDPR. In some jurisdictions, a DPA between a service provider and a customer is mandatory.
Cost Structures and Investments
The most significant expenses in a service provider business model are the fixed costs related to hosting the services, such as purchasing server hardware, paying for data center space, electricity to power and cool the servers, network bandwidth, and salaries for deployment and maintenance staff. Some service providers may also have variable costs for software licenses or third-party services. Customers who choose to self-host their services bear these costs directly.
By choosing open source software, service providers and customers can reduce or eliminate licensing costs compared to proprietary software, because by definition open source software charges no fee for the software license. Employing open source software to build services can also save on development time and resources, and community-driven maintenance and updates can lower long-term costs. However, it’s important to consider the total cost of ownership (TCO) of the open source software, including potential support, maintenance, and integration costs.
Guided Exercises
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Name some ways that service providers can earn revenue without charging the users of the service.
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What are some reasons that a service provider might offer its software for self-hosting by customers?
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Why would a service provider release its software under the GNU Affero GPL license?
Explorational Exercises
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What is an Acceptable Use Policy (AUP)?
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What is an End User License Agreement (EULA)?
Summary
This lesson discusses service provider business models that rely on open source software, and various revenue streams, including subscription, ad revenue, hourly rate, and commission-based models. It highlights the impact of open source software licenses on service providers, emphasizing their benefits and obligations. The considerations of security, privacy, and reliability of services, along with the importance of Terms of Service (ToS), the Service Level Agreements (SLA), and the Data Processing Agreement (DPA) are also addressed.
Answers to Guided Exercises
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Name some ways that service providers can earn revenue without charging the users of the service.
The service can offer ads, for which the advertisers pay. The service can charge a commission to vendors who offer products or services on the site, such as retail or travel. The service provider can sell customer data, a practice that many customers would object to and that should be explained in the Terms of Service.
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What are some reasons that a service provider might offer its software for self-hosting by customers?
Potential customers can try out the software to check its features and reliability before signing up with the service provider. Customers might also find bugs and even propose fixes.
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Why would a service provider release its software under the GNU Affero GPL license?
The Affero GPL requires other service providers to release any changes they make to the software under the same license. This provision prevents competitors from taking advantage of the service provider by adding a few enhancements that they keep proprietary and then promoting their version of the service as superior to the original.
Answers to Explorational Exercises
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What is an Acceptable Use Policy (AUP)?
An Acceptable Use Policy (AUP) is a policy that defines acceptable and unacceptable uses of the service, to prevent abuse and ensure a secure and reliable environment. Some common elements of an AUP include a description of specific actions that are not allowed, such as spamming or hacking, obligations of users to use the service responsibly, actions the service provider may take in case of violations, such as suspending a user’s account, and procedures for reporting and addressing violations.
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What is an End User License Agreement (EULA)?
An End User License Agreement (EULA) is a legal contract between a proprietary software provider and an end-user (not a company or organization), granting the user the right to use the software under certain conditions. Some common elements of EULAs include the scope and limitations of the license (for example, personal use or non-transferable license), prohibited actions (for example, reverse engineering or redistribution), conditions under which the license can be terminated, and ownership and protection of intellectual property rights. Fully open source services substitute an open source software license in place of a proprietary EULA.