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Venture Dollars Flow to Open Source

Although Azure is now an enthusiastic backer of the segment, it was a struggle to overcome the built-in distrust of open-source evidenced by many industry veterans. Mike Kwatinetz, a general partner in the firm, says, "We didn't want to invest in a company that thought of itself as communist."

Kwatinetz, who was speaking tongue-in-cheek, was making a serious point. The open-source business model is radically different from that of conventional software companies, and the cultural differences can be profound.

Red Hat's business model has a number of subtleties, but in general it works like this: Potential customers can download Red Hat's version of Linux and try it for free. If they like it, they may then buy a subscription from Red Hat that provides support, upgrades and access to newer versions of the software.

Unlike conventional software, open-source software functions under a general license that gives customers access to the source code, and they are free to modify it as they see fit.

Meanwhile, tens of thousands of open-source programmers hammer out patches and additions to open-source software and make their work freely available to users.

Siebel, No; Open Source, Yes

The growing popularity of open source in the business world is based, in part, on dissatisfaction with expensive -- and often unsuccessful -- installations of mainstream software.

Siebel Systems, for example, developed a terrible reputation (deserved or not) for installing problem-fraught customer relationship management software. Eventually, the former highflier was forced to sell itself to Oracle (ORCL).

In contrast, IT managers can download open-source software and test it to their hearts' content for free. If they don't like it, all they've lost is the labor time. If they do like it, they can buy a subscription instead of a license that commits them to large payments for a number of years.

Moreover, the same IT managers can modify the code themselves, or troll the Web for improvements hammered out by members of the open-source development community.

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