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This is a mistake. Most software ventures, whether based on free or proprietary software, fail. Given that until very recently all software ventures were of the proprietary binary-only kind, it is therefore safe to say that the IP (Intellectual Property) model of software development and marketing is a very difficult way to make a living. Of course so was panning for gold during the gold rushes of the 19th century. But when software companies strike it rich they generate a lot of money, just like past gold rushes, so lots of people are willing to assume the risks in order to have an opportunity to ``strike gold.''
No one expects it to be easy to make money in free software. While making money with free software is a challenge, the challenge is not necessarily greater than with proprietary software. In fact you make money in free software exactly the same way you do it in proprietary software: by building a great product, marketing it with skill and imagination, looking after your customers, and thereby building a brand that stands for quality and customer service.
Marketing with skill and imagination, particularly in highly competitive markets, requires that you offer solutions to your customers that others cannot or will not match. To that end Open Source is not a liability but a competitive advantage. The Open Source development model produces software that is stable, flexible, and highly customizable. So the vendor of open-source software starts with a quality product. The trick is to devise an effective way to make money delivering the benefits of open-source software to you clients.
Inventing new economic models is not a trivial task, and the innovations that Red Hat has stumbled upon certainly do not apply to everyone or every product. But there are some principles that should apply to many software ventures, and to many Open Source ventures.
Many companies attempt a partially open-source approach to the market. Most commonly they will adopt a license that allows for free distribution of their software if the user is not using the software for a commercial purpose, but if he is he must pay the publisher a license fee or royalty. Open Source is defined as software that includes source code and a free license -- these partially open-source companies provide source code but without a free license.
And remember, we're in the very early days of the deployment and growth of market share for free software. If you aren't making money today it may be simply because the market for your product is still small. While we are pleased with the growth of the Linux OS, estimates being as high as 10 million users today (1998), you need to remember that there are some 230 million DOS/Windows users.