Chapter 12

The open source business in New Zealand

Johnny Chan

Moviemakers like to fantasise about the future with new technologies we can only begin to imagine. While it is entertaining to watch The Matrix, Minority Report or Surrogates, somehow there is always a lethal glitch in that extremely sophisticated system that is just about to take out millions of people if not corrected. Would the stories be told differently if those systems had been built using open source software?

It is quite possible that most anomalies would have been reported and then fixed by volunteers in the open source community before things started getting out of control. The features and functionality of the software would expand to satisfy the different needs of a growing number of users. If many people were dissatisfied with the software, it would become forked* and a new version would be created to compete with the old one, and the cycle of improvements would continue. The probability of the entire human race relying on a single piece of vendor-specific software system for survival would be low; the collective and self-correcting nature of open source software would save the day.

* To take a copy of the source code and use it as the basis for developing a new system.

Open source has been a hot topic since the term was officially defined in 1998, and the interest goes well beyond the software being free-of-charge. Open source offers potential benefits to the individual, business and wider society. This chapter explores the use of open source by New Zealand software companies. The idea of running a business ‘selling’ open source software does sound paradoxical at first, but as software-as-a-service gains more acceptance among the mindsets of managers, open source becomes a viable and competitive alternative to the traditional proprietary offerings.

How relevant is open source to New Zealand? Nathan Torkington, a well known open source spokesperson in New Zealand, points out that while we are behind the world in terms of open source adoption, that fact does not undermine the rising importance of open source. Firstly, open source firms in New Zealand are growing in size and reputation both nationally and internationally. Secondly, from a social perspective open source software development is about collaboration and knowledge sharing, which fits well with New Zealand culture. Thirdly, open source software eliminates a significant proportion of license costs, which could improve the competitiveness of the small to medium sized companies that dominate our economy. Fourthly, there is increasing acceptance of open source in the public sector through the establishment of open source policies. As the Patents Bill is revised, the select committee from the New Zealand Parliament has generally accepted that software should be excluded from the patent protection. According to their public report, software patents are inconsistent with the open source model and could prohibit both innovation and competition. Therefore, whilst open source may not have a long history, it is set to make an important contribution to the future of computing in New Zealand.

A brief history of software

The global software industry has evolved through four distinct eras. During the first era (1945–60) when the computer was invented and commercialised, software was never considered as a standalone commercial good or service. The development of software was carried out mainly by the manufacturers and customised for each specific machine. It was also common for knowledgeable users to write their own software for a specific purpose. When IBM released the mainframe computer System/650 and later on System/360 in the 1950s and 1960s, their astonishing success fuelled a huge demand for standardised software to work on their machines. Since IBM wanted to continue to specialise in making hardware, they unbundled the software components from their offerings and created a market for third party software to fill the gap. This change had marked the beginning of the software industry, and resulted in an inflow of innovation from smaller and newer entrants to the market.

The second era (1961–75) was celebrated by the emergence of these inde­­pen­dent software vendors. Initially they worked very closely with the manufacturer, but as the software industry became more mature they started to supply software directly to the users. In the third era (1976–94) packaged software products became popular as the personal computer came along to redefine the market. Access to computers was no longer limited to large companies and governments, and this created a growing demand for a variety of commercial software applications. The fourth era (1995–present) began with the boom in the use of the Internet. With the Internet it was now possible to connect almost every personal computer and mobile devices, which meant that software companies could develop web-based applications without worrying about deployment or installation.

During the first era and the beginning of second era of the software industry, only a few people based in corporate research laboratories or academia were developing software, and it was common practice to share and exchange the source code. Developers and researchers were able to work collaboratively to improve software without worrying about violation of intellectual property rights. Software was neither patented nor considered patentable during this period of time as its development was mostly subsidised by computer manufacturers like IBM and their clients.

Things changed substantially with the rise of commercial software in the third era and the arrival of the personal computer. Software firms built their business models around the software they developed and formal intellectual property rights such as copyright and patent were central to those models. Software firms sold their proprietary software without releasing the source code. Licence holders could install and use the software, but they were unable to make any alterations to the software or distribute it to others. This constrained the scope for follow-on innovation, and was viewed by some as limiting the rights of software users. Activists and supporters of the ‘original’ software development culture started to participate in projects belonging to the Free Software Foundation, which was established in the 1980s by a programmer at Massachusetts Institute of Technology (MIT) named Richard Stallman. The General Public License (GPL) was created at about the same time to promote a culture of sharing. The key message was that software users should always be able to learn, create, modify and circulate software without having to pay anything.

In July 1991, Linus Torvalds, a computer science student in Finland, sent an online invitation to anyone who might be interested to work with him on developing his Linux kernel project into a real operating system. All the source code was made public under the GPL licence. As the project proceeded it exceeded expectations; not only had the kernel been developed, but numerous utilities and innovations had been created to work on top of Linux to enrich its usefulness and competitiveness against commercial counterparts. The adoption of a version of Linux by Google as the operating system of their gigantic search engine provided a solid statement about the quality of the software.

By the 1990s the term open source software was adopted by a group of supporters who strongly believed in collaborative software development, but did not entirely reject the role of proprietary software in the existing market. Following on from the success of Linux with its famous penguin logo, more open source projects appeared on the web, such as Apache and GNOME.

Hello open source

The simplest definition of open source software is ‘software that is made freely available to all’, and it is not only ‘free as in free beer’ but more importantly ‘free as in free speech’. The main idea of open source software is that the source code is made freely available to users, allowing them to change and redistribute it as they wish. This differentiates open source software from freeware and shareware, where the software maybe free but the original source code is not available, so users are unable to make any changes themselves.

When source code is made available to everyone, intellectual property is no longer a commodity, and there are limited opportunities to make a direct profit. Therefore, open source software is often viewed as a common good. The development of open source software usually occurs in an online community-based environment, coordinated among participants who take part in code writing, testing and maintenance of the software. The number of developers involved can vary from a mere handful to thousands. The underlying philosophy is that when users and developers are allowed to work freely on the source code, the software quality will inevitably be higher because collaboration means errors are more likely to be spotted, and the software can more easily be adapted to unique requirements and hardware platforms.

Like any other commercial software, open source software is released under a license. Some like the GPL are quite restrictive; other licences such as the Berkeley Software Distribution (BSD) are more flexible and easier to integrate with a commercial model. The GPL requires all derived work or enhancement of the software to be freely modifiable, distributable and usable under the same license as the original. Developers have a legal obligation to release the source code if they make changes to some GPL licensed software and intend to commercialise the modified version as a product. This viral effect prohibits integration of GPL licensed software into proprietary software. GPL is also known as copyleft, as it uses the copyright mechanism to enforce unlimited access to the software and its derivatives. It is designed as a deliberate protection of openness in open source software. Permissive licenses on the other hand, like BSD, impose almost no conditions on what can be done with the software, including integration with proprietary software or modifying it without releasing the changes to the public in any form of commercialisation. Broadly speaking, the restrictive licenses tend to protect the freedom of the developers whereas the permissive licenses focus on the freedom of the users. The existence of various open source licenses make open source software more ‘friendly and approachable’ to the business world. It is possible for software firms to adapt, collaborate or even commercialise open source software as a viable form of business.

The majority of open source software developers are volunteers, and they are not being sponsored or subsidised by manufacturers or corporate labs directly. Yet many open source software projects have huge commercial value. For example, the Apache web server is being used to host more than 50% of all websites in the world. This ongoing support of open source software by individual participants breaks many conventional assumptions about the nature of software business and challenges traditional business models.

When penguin meets kiwi

The New Zealand Linux Users Group (NZLUG) was launched in 1998, and was organised as an online forum open to everyone. However, the first visible provocative act from the open source proponents was the open letter publicly sent to multiple government ministries in November 2001. The letter was prepared by the director of a Christchurch-based open source software firm Egressive, and had been co-signed by more than 400 New Zealanders. At that time the Ministry of Education had entered into a $10 million contract with Microsoft to supply software to our schools, and the letter addressed the vital role of open standards and open source in our IT industry, and questioned the existing practice of relying on foreign proprietary vendors in the public sector. At that time the governments of France, Brazil, Mexico and China were considering legislation which favoured open source software.

Auckland Linux Users Group, a spinoff from NZLUG.

Even though supporters were generally unimpressed with the official noncommittal reply from the Minister of State Services, the letter did increase the awareness of open source among the government officials, and contributed towards the development of the Open Source Policy in 2003 by the Ministry of State Services. As of today, all government agencies are encouraged to assess the feasibility of adopting open source software internally alongside with proprietary software based on criteria such as cost, functionality, interoperability and security. The policy does not favour open source software to the same extent as the open letter asked for, but clearly it opens the door for open source firms to compete against their proprietary software vendors in the public sector, which was very difficult, if not impossible, in the past.

After the open letter, discussions continued within the NZLUG and it became clear that the open source community in New Zealand needed its own organisation at the national level to represent its interests. Hence in 2003 the New Zealand Open Source Society (NZOSS) was established. Founded and led by Peter Harrison, NZOSS aimed to educate, advocate and advance the use of open source software in New Zealand. Since 2007, they have organised the annual New Zealand Open Source Award to recognise the contribution of individuals and organisations in the ongoing development of open source in New Zealand. In 2008, the Ministry of Justice updated their open source policy, giving preferences to open source software over proprietary solutions. Don Christie, the president of the NZOSS at the time, considered that groundbreaking compared to the previous policy from State Services. In 2009, the New Zealand government did not renew its software licensing deal with Microsoft, leaving the door open for open source vendors.

Throughout the last decade, the open source community in New Zealand has grown together with the rest of the IT industry. While it is certainly good news for supporters to hear that open source friendly policies are being established, the key to making the open source model sustainable is still contingent upon its more widespread uptake by the IT industry.

In the coming sections, two case studies of open source companies in New Zealand are presented to show how the open source business works. Both firms are small in size but big in their vision.

The shining of SilverStripe

In 2008 the Democratic Party of the United States had their Democratic National Convention official website implemented by a small company in Wellington called SilverStripe. ‘The agency that represents them actually came to us, we didn’t go to them’ says the CEO of SilverStripe, when he explains how open sourcing their SilverStripe content management system (CMS) has brought a 70% annual growth in revenue. In the same year, SilverStripe won the New Zealand Open Source Award in the software project category, and in 2009 they were chosen as the 37th fastest growing company in New Zealand by the Deloitte Fast 50.

SilverStripe is an open source software firm that specializes in building websites and applications for business and government agencies. Their story began in January 2000 with three cofounders. The first version of the SilverStripe CMS was developed in 2002–03. It was designed to run on the open source platform (i.e. the LAMP stack) but itself was a proprietary product. The software license fee of the SilverStripe CMS was about 10% of the overall cost of an average commercial project. Therefore, for larger projects, the software license was never considered a big component. Yet selling software-as-a-license was a common business practice. SilverStripe tried to sell discounted licenses to web designers but it was not very successful because cheaper products were available in the market.

During a strategy session the company held over a weekend in 2006, open sourcing the flagship product was put forward as an idea. Since 90% of the project revenue came from service based work rather than license fees, giving up 10% of it to potentially grow a larger service revenue stream became an appealing proposal. Regarding the open source license, cofounders preferred a GPL-based license at the beginning, but later settled for the BSD license that the CEO advocated. He believes that the BSD license is the ‘freest of the free licenses’, which would help the company to get maximum adoption of their software. Finally the executive decision was made to convert the proprietary company into an open source software firm.

Before that decision was made, the company had recently undertaken a six months redevelopment of the SilverStripe CMS to build in a modular architecture. This had two important implications for the coming open source process. Firstly, a modular architecture amplifies the incentives for volunteers to join and remain involved in an open source software project. It makes the software easier to extend and upgrade without necessarily breaking the earlier versions. The company could also maintain a balance between control and freedom by using a core-periphery governance structure. They would retain more control at the kernel level but at the periphery they could be more open to contributions from external developers. Secondly, the new version of the SilverStripe CMS as a proprietary product had only been sold to a handful of clients in the same year, and so it was relatively painless for them to notify those clients about the change of license, and to deal with any potential legal disputes.

The process of switching to open source process took about three months to complete. SilverStripe CMS 2.0 was released to the public as BSD licensed open source software in October 2006. The real challenge after that was to build an open source community for SilverStripe and to develop a network of users and volunteer-developers. The co-founding Chief Marketing Officer (CMO) worked hard to bring the right people into the circle, or, in his own words, he was ‘evangelising, creating awareness and building up trust’ both inside and outside the community. At the beginning, he put much effort into identifying the hangout spots of people who might have an interest in their products, whether they were government, journalists/bloggers or open source fans.

As the number of software downloads and registered members increased, the next item in the to-do list was to motivate participants to keep on contributing. In the case of SilverStripe, they publicly embraced top contributors by putting up short interviews and photos on their website. Being an open source software firm, the CMO believed strongly that their company needed the contributions from volunteers and since they could not pay them financially, any chance to recognise and reward their work was considered for the nurturing process of the community.

In order to accommodate a variety of participants and potential contributors to the SilverStripe community, the company set up multiple subsystems to tailor for different purposes and needs, including a discussion forum, an Internet Relay Chat (IRC) channel, a core developer mailing list, a source code tracking system, a wiki-like documentation system, and a repository for different translations of the software. The company believes that any form of contribution is valuable, whether it is a piece of art work from a graphic designer or a complete translation of the software from English to Serbian by an enthusiast, and so their task is to make sure they capture and organize these contributions effectively. As it turns out, there are over 200,000 downloads, with around 4000 registered members in the discussion forum contributing more than 40,000 posts; hundreds of add-ons like themes, widgets and modules are being uploaded and maintained by volunteers; bugs are reported and fixed in a daily basis; documentations are peer-reviewed and there are over 50 different translated languages for the SilverStripe CMS. The firm has been very successful in harnessing collective intelligence to build their community.

The increasing popularity of their product has attracted commercial projects from larger clients both inside and outside New Zealand. The size of the projects has also grown tenfold compared with those before the conversion to open source. The open source journey of SilverStripe represents an ongoing learning process for both the individuals and the entire organization. Throughout the process, the company has utilised openness as a strategy, starting from community building, software development and maintenance, to business practice and inter-organisational collaboration. For instance, they have been working with Microsoft closely to enhance the performance of the SilverStripe CMS running on Windows, which involves knowledge sharing with the proprietary vendor’s engineers. In 2009, the company initiated the partner programme for third party IT vendors who build websites using the SilverStripe CMS. The firm offers free training courses and resources to these partners at the early stage, all the time knowing that they could be spending money on training potential future competitors.

Being the Catalyst

Catalyst is a software firm established in Wellington, which specialises in delivering customised solutions. It was founded in 1997 by five directors with no other employees. As of 2010, the workforce has grown to around 120 employees, mostly technically oriented. The organisational structure remains flat with only three layers to separate the founding directors, managers and software developers.

The firm first began to explore open source technologies because of one employee who had a good knowledge of Linux and other open source platforms. From that single individual an understanding of open source spread throughout the business. Pragmatism also played a role here simply because open source software eliminated the license fee they needed to charge their clients. Another important factor came directly from of the founder:

We’ve seen companies dealing with clients in the 1980s and 1990s which was where software development type companies were appropriating all these copyrights and other sort of intellectual properties themselves despite being paid by people to do that development work. We were kind of seeing companies constantly looking for ways to lock their clients into their services.

The founder’s ideology in running the business matches with the general ideology of open source, and was a major influence in the firm’s decision to use open source software exclusively for development tools and delivering technologies. Once the firm had made that decision, they went to their clients and either persuaded those with proprietary software to convert or to discontinue the services.

Not only did they integrate open source software into their core business, they also mimicked the software development model and governance structure from open source software projects as well. For instance, the firm considers that it is a desirable and valuable quality if an employee has a strong commitment to some external open source software projects. Aside from bringing in new knowledge from the public domain, it can also help to build up trust and reputation for the firm among open source supporters. From the founder’s perspective, he believes that working in Catalyst as an employee is also a great way to build up individual reputation too. The firm sponsors their employees to attend conferences to talk about their own open source software projects. In many ways, the firm is nurturing the dual identities of their employees proactively — besides from being employed in Catalyst they are also responsible for the open source community. As one manager says:

We have a very kind of an open attitude to people contributing to things externally, so we aren’t making the separation between personal involvements and business interest involvement, potentially what we say is that if you are doing it within business hours, in other words Catalyst is paying you to do stuff, then what you do must be open source, and [they] must be returned to the open source [community].

That policy not only permits but also encourages employees to contribute towards different external open source software projects. On the other hand, the firm does not expect their employees to timesheet the hours that they work on open source projects. So the employees are paid with a salary when they serve clients, but they are paid with an improved reputation when they serve the open source community.

As employees are given freedom in terms of choosing which technologies they like to learn and use to deliver solutions to clients, it is very common for them to bring in new tools and practices to the firm. Sometimes the firm will dedicate even more resources towards developing those new technologies, making a contribution back to the open source community if there seems to be a commercial potential.

In addition to contributing to existing projects, the company also encourages employees to share their innovations among their peers. Instead of organising formal sessions for knowledge sharing among workers, the company has ‘Curry Wednesday’ and ‘Pizza Thursday’ to facilitate the idea generation, discussion and cross-fertilisation. All employees communicate with each other via the IRC channel accompanied by a wiki-like internal facility. The knowledge sharing does not stop at the boundaries of the company, as employees often engage with people from other firms or government agencies in some open and self-organised participant-generated conferences commonly known as barcamps and unconferences.

Since Catalyst builds all kinds of software systems for their clients, they have invested both money and programmer-hours into multiple open source software projects such as Drupal, Moodle, Mahara, WordPress, PostgreSQL, and One Laptop Per Child (OLPC). The company treats these open source software projects as partners to their business; and the firm sees itself as a member of the wider open source community with an obligation to contribute back on a regular basis just like any other volunteer. Sometimes that can lead to further commercial opportunities, for example Catalyst had a government-funded project to deliver some online learning solutions, and chose the open source product, Moodle. They invested heavily to make the software scalable as an enterprise solution then they contributed the code back to the open source community. Before Catalyst was involved, Moodle had only 350 known installations worldwide, but now there are over 60,000 installations and the company has built a reputation for delivering Moodle at the enterprise level. Eventually they attracted a project partnership with one of the largest IT corporations from the United States.

As an open source icon in our country, Catalyst has been a strong advocate on open source issues, and in 2007 one of their directors took over the presidential position of NZOSS. It is clear that both the employers and the employees of Catalyst are serving both their clients and the open source community.


While there are many more open source businesses in New Zealand, these two case studies from Wellington give us a glimpse of how successful open source firms operate in our country. We are just beginning to understand the open source business, its dynamic nature, and how these new business models can work. As commercial entities, open source firms sell both their openness and their software to clients. Whether software is developed internally and then spun-off, or whether it is initially developed by a community and then sponsored by the firm, the degree of openness of the firm and how that is perceived by the open source community affects the overall adoption and contribution from hobbyists and business users. To succeed, open source firms need to find a balance between how open and how closed their position is. This balance is important because it reflects their dual commitments towards their commercial clients and the open source community.

In the case of SilverStripe, the company gave up selling their content manage­ment system as a software product and instead released all the source code to the public under the Berkeley Software Distribution license. This attracted users, developers and potential clients who began to use and extend their software. As the original developer, the company has a deep and full knowledge of the software, which is not easily challenged; this means they are able to exercise a certain level of governance. This knowledge is also more visible to the public precisely because the software is open source. In the case of Catalyst, their knowledge assets are their employees who are encouraged to learn by making contributions to many different open source software projects. This open attitude has been rewarded with an excellent reputation not just within New Zealand but also around the world. Both cases demonstrate the fact that software businesses based on the open source model can work and are sustainable.

It is also interesting to observe the changes that the growth of open source has brought to traditional software companies like SAP, IBM and Apple. Microsoft has altered their position completely from attacking open source outright to embracing it with a dedicated page on their official website. The open source paradigm shift is beginning to spark new insights into what it means to be a software firm in the age of the Internet, a platform that by its intrinsic nature favours knowledge sharing and collaboration. Will open source software eventually become more popular than proprietary software? Only time can tell.

Johnny Chan has been lecturing in the University of Auckland Business School for the last eight years, teaching information technology and software programming courses in the Department of Information Systems and Operation Management. He is currently completing his PhD study in the area of open source innovation. Apart from being a freelance software developer, he has also served as a consultant for Technology New Zealand, helping a number of SMEs establishing their IT strategies under the TechNet programme. As an immigrant to New Zealand from Hong Kong, he still finds it difficult to understand why the world cup here means rugby but not soccer.


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