Free Software Business Models for Residential Networking

Posted 26 Jan 2001 at 06:54 UTC by thull Share This

I've been working on a business model which has the potential to build and support a large scale service industry. I see free software and services as a viable alternative to proprietary efforts to control the residential networking and automation market, and have posted a free business plan to show how this may be accomplished.

I've been thinking about a business model based on free software, similar to what Frank Hecker calls "Software Franchising" (Setting Up Shop). And I've been thinking about how this business model could be applied to a specific, relatively large and growing business area: residential networking.

My idea is to build a Linux computer (appliance, gateway, server) and network into every new house. This system could be adapted to existing housing (probably more emphasis on wireless than on structured wiring), apartments, etc. This system would connect to the Internet, and internally could interface to telephone, audio, video, HVAC, security system, lighting controls, and pretty much anything else that the user fancies (and can trust).

Everything I've mentioned exists now, and there are dozens of companies actively trying to foist such systems upon the public. Their progress is being slowed by many factors, including (in no particular order): incompatible technology, high price, poor reliability, lack of training and understanding, and bad software. What all of these problems cry out for is service.

People who think about free software business models gravitate naturally to service, because that's what's left after you free the software. However, if you start from the need to offer a service business, what does free software offer you? For starters: code that is built to need; that adheres to common, non-proprietary standards; that is open to document and understand; that is widely used, broadly tested, and more robust; that costs much less to develop, and next to nothing to universally deploy. So whatever else we need, free software is a necessary part of the solution.

We can identify several other parts to solving the service problem:

  • Some activities, such as information dissemination, are very scalable, so a single huge organization has a marked advantage.
  • Other activities, such as installation, are one-on-one, not scalable. Here the advantage goes to individual owner-operators, who have the strongest motivation.
  • The large organization can lower costs by pooling buying power and playing off competition.
  • Small, local operators are more flexible, which can provide a better fit to their customers needs.
  • Marketing would be most cost-effective through a single brand name.

When one looks at the industry building new houses, the most striking thing is how diverse it is. In the US, there are no less than 128,000 general contractors building new single-family houses. Those contractors in turn choose from many thousands of subconstractors: electricians, plumbers, masons, sheetrockers, and many other trades. The general contractors and sub-contractors are effectively service businesses, plugged into a market which produces over 1.2M single-family houses per year (averaging $203K each).

Given this industry, the ideal solution nearly jumps out at you: one big organization in the middle, sharing information and software, and acting as an industry-wide coop; and independent affiliates signed up from the 100,000's of small businesses already serving the industry. (As an added bonus, those same small businesses also work on existing houses and small businesses.) The two levels are bound together by a franchised brand, by investment of affiliates in the central organization, and by open communications. The combination should be both an integrating force in the industry, and an unbeatable value for customers.

So, given that the technology is pretty much ready, that the market is pretty much ripe, and that the business model is obvious, why isn't anyone doing something about this? I think part of the answer is that the businessfolk among us are much too much in love with ideas like high margins, high leverage, get rich quick. While there are ways to squeeze a little extra margin out of this business (e.g., brand management), the basic fact is that one of the great strengths of the free software movement is the willingness to do it for much less.

Another great strength is our affinity for working in the open. I've written up a draft of a business plan for developing and applying free software business models to the residential networking industry, and I've put it up on the web here. As far as I'm concerned, this business plan is free game for anyone who wants to run with it. (Although it should be noted that, in theory, whoever is broadest and most all-inclusive with it will be the most successful.)

One relatively novel concept in the business plan is the proposal to establish a pro-active development fund independent of service revenues. One problem with most well-known free software business models is that they refocus price away from the software, so they tend to provide negligible funding for new development.

A second thing that should be noted is that while Linux advocates joke about world domination, the opportunity to control the home network and to provide the home Internet connection is uniquely strategic. (If that isn't clear, Bill Gates will be unhappy to explain it to you.) What makes this possible is, of course, the trust that comes from free and open systems, and from service professionals who build their business on free and open foundations.

Similar business models could be applied to any service industry where there is a strong technical component. For instance:

  • VAR channels, both for generic Linux services and for specific widely distributed vertical markets.
  • Local assembled computers (my so-called Linux Craftsmen Guild proposal).
  • Web page designers.

Details are left as reader exercises. It will be interesting to see whether others resort to posting open business plans. In my case, this is necessitated by the scale and complexity of the industry, especially in comparison to my own mediocre business skills. It is often said that in business nothing happens until someone sells something. That is certainly true here.


Why there likely hasn't been much interest..., posted 26 Jan 2001 at 20:23 UTC by cbbrowne » (Master)

There is high propensity for "free software" folk to be engineers, of a sort, but to focus on the software side rather than the hardware side. Those that are engineers are likely oriented towards "computing," with far less interest in digital hardware, let alone brick, mortar, nails, and paint.

Further, many of us have no formal "engineering" background; we're software guys, not hardware guys.

Throw in a third consideration: If the requirement is to have a good understanding of "business modelling," that dictates an even "softer" focus, of the "business major" rather than "hard technology." (And brick and mortar start fading from sight way off in the distance...)

I'm sort of a cross between the latter two categories; joint majored in computer science and accounting. And while I'm reasonably comfortable playing with SCSI hardware, keep hammers away from me!

It seems to me that there's an unfortunately fatal flaw in your business plan; it depends on there being voluntary spending on something that doesn't clearly provide benefit:

We believe that the free/open source software approach is the right one, but propose to "grease the skids" a bit by raising money which can be used to focus and support development.

The way we propose to do this is to encourage franchises, affiliates, and end-users to tack an optional Development Funding Contribution on to their bills -- much like a tip in a restaurant. These funds would be managed separately from XC service funds, and dedicated to development work.

It's not going to be viable just based on an "optional contribution;" that needs to be something for which the contributor sees an immediate and tangible benefit that is clearly caused by the contribution.

Unfortunately, I think your plan is much too complex. Vastly so. If the idea is to be viable, there needs to be an economic model that justifies how it will be viable that can be described in a couple of sentences. A full business plan does indeed need all the details, but if the critical parts can't be outlined in a sentence or two, then it's probably got a horde of details that are secondary in importance. The section that outlines Income describes a horde of small business options that are nice but that do not directly follow from the basic economic model of the enterprise. In effect, all I see as a main theme is that "XC" would be in the business of selling franchises and rights to trademarks and such; that doesn't forcibly connect to free software, and it needs to.

There may be an approach that makes XC viable, some reason that makes it important for people to give XC money in return for whatever it is that XC does; my sense is that you need to head back to the "drawing board" and search for that important thing. The details may be useful in finding where the important thing is; until then, I suggest that the details may be distractions from the presentation. Many represent things that might happen once XC becomes a "dominant force;" if they don't cause that "domination," they're secondary.

On the Path to Domination, posted 26 Jan 2001 at 22:38 UTC by thull » (Journeyer)

Thanks to cbbrowne for the comments. I posted this on Advogato simply because this is the forum that I'm most familiar with. Any suggestions as to better targeted forums would be appreciated.

I'd like to reply to two points that were raised:

  1. That voluntary development funding contributions are a fatal flaw in the plan. To be so, they'd have to be critical to success (cause domination). I presented the contributions as an accelerator. In their absence, software would still be developed like we usually do it: as a side-effect of usage and service. I see much of this coming from affiliates and hobbyists, with XC more in a coordinating role. While is is true that better software is needed to penetrate larger markets, I think that the software that is already available puts us well ahead of the power curve. (BTW, there is another reason for breaking development funding out into a separate line item, which is educational and provides a pretext for selling the free software development methodology.)
  2. The need for a simple statement of what causes domination: I believe that there is a pent-up demand for something like this, especially in the house building and selling industries, which are very competitive, but also among home buyers. This demand biases the industry to participate. The XC approach works with the existing businesses in the industry to support them in adding services to meet this demand. It does this by building a shared knowledge and methods base, which collects the best solutions that the industry has to offer, and propagates them throughout the affiliate community. This forms a virtuous circle: greater expertise, lower costs, broader market share and growth, more demand, etc.

One source of the complexity of the plan is that it represents an elaborate balancing act. For instance, in order to grow the market, one needs to cut costs. Common costs, like software and purchasing, are straightforward, but cutting costs by increasing competition cuts into affiliate margins, which could indeed become a fatal flaw. On the other hand, exclusivity to protect affiliate margins slows growth and invites outside competition, which could also be disastrous. So I've tried to design in some gears and levers for effecting this balance, and that is certainly a source of some complexity, and no doubt also a source of errors.

My assumption of demand is another potentially serious weak spot. I suspect that at least some aspects of home automation will turn out to have negligible demand, and that others may be adequately satisfied with less powerful, less expensive solutions.

One more possibly important thing occurs to me: while the nominal business model is franchising (something that is sold down), I tend to think of this more as a cooperative (something that is built up). However, I've always assumed that to make it happen one has to sell down, since the target community is not well disposed to building up. Maybe that assumption is counterproductive?

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