Changing Business Models

Matt Aslett has a new post today in which he pointed out that “a significant number of high profile open source-related vendors had stopped using the term open source as an identifying differentiator.”

As I read through his list of 14 companies, it seemed to me the reason that some of them are finally refraining from using open source as a differentiator is that they were never open source companies in the first place. Despite their best efforts to rebrand the term, they failed. Two of them, Groundwork and KnowledgeTree, haven’t had a “community edition” since 2009, so I think we can stop referring to them in any discussion of open source software, except perhaps as an example of what not to do. Red Hat is on the list, but they are still proudly open source and they are also still profitable.

When you get right down to it, profits are a major measure of the success of a company. When I find myself surrounded by VC-types, their measure of profit is often in how much money they made when selling a particular company. If that company does well or poorly after that is no matter to them. That doesn’t make them evil, but it also doesn’t mean they make great businesses.

More often than not, VCs have to make a decision about when to stop funding a company. Many of the companies in Matt’s list have been around for five years or more, and this tends to be the event horizon for VCs to cash out or quit, so I can fully understand why they are trying to rebrand themselves in search of a business plan that works. If they don’t, they die.

The survival of my company, on the other hand, is totally up to us. We adopted a business model that resulted in profits from Day One, and we work hard to keep it that way. Although this doesn’t gain us any respect in the Valley, it doesn’t matter all that much since we don’t need it. And that is kind of the point – the traditional VC model is dying as quickly as the open core model is dying.

Just to be clear, I am thinking of VC-backed software companies. With the rise in true open source solutions and the big growth areas in software coming in the form of inexpensive apps (think Angry Birds) and “freemium” applications (think Farmville), VCs are becoming unnecessary. I still think the VC model can work in areas such as biotechnology where huge startup costs are the norm.

The thing that really excites me these days is seeing how traditional business models are being disrupted. Open source is definitely changing the software industry, and the technologies open source enables are changing things on even a larger scale. I love reading about food trucks that tell customers where they are through Twitter. And I love what Kevin Smith is doing to the movie industry.

The entertainment industry is undergoing huge changes. First, digital distribution means that the cost to deliver content has gone way down. Second, decent home theatre systems are within the reach of many, which means a trip to the local multiplex, with its high costs, talking patrons and sticky floors, is becoming unnecessary. And much like VCs, the movie studios are trying to find a role for themselves in a world that doesn’t need them.

Today, Kevin posted a long rant about his new movie “Red State” (warning – profanity). In it, he has a novel idea for getting people into movie theatres. Instead of just showing a movie, he couples it with a personal appearance after the show for Q&A. Not only are people willing to pay for this, they are willing to pay a premium.

Of course, even a novice VC would look at this and say “it doesn’t scale”. Kevin addresses this in part by proposing using network technology to provide live Q&A over the network or via satellite. Using Twitter, Facebook, SMS, etc. people could still ask questions and interact with the artist.

This new “self distribution” plan has one amazing upside: it’s profitable. By using social media to market, he doesn’t need to spend millions on advertising. By running his art as a business, he’s already in the black – the rest is just gravy. Will “Red State” make as much as “Avatar”? Probably not, but it will net more than “Gulliver’s Travels” did, at least domestically.

And the best part is that most of that money will end up in the pockets of the people who created the content.

The movie studios that survive, like Lionsgate, will adapt and embrace these new models. Those that don’t will be looking for another business plan. Perhaps we’ll see on the cover of Variety a story reading “major studios stop using the term ‘movie production’ as an identifying differentiator.”