Open source software initially was a head-scratcher: “How can you make money selling something for free?” But once open source advocates clarified the meaning of free – “Free as in speech, not as in beer” – the open source economy took off.

Commercial software vendors have tried to defend their walled cities with both marketing pitches and legal threats while simultaneously lowering their drawbridges with an “if you can’t beat ‘em, join ‘em” strategy.

Even Microsoft, which has made billions selling software, won the approval Oct. 12 of the Open Source Initiative, which said the terms of the Microsoft Public License and Microsoft Reciprocal License meet the OSI’s definition of open source.

Still, Microsoft CEO Steve Ballmer continues his sabre rattling, warning that users of Red Hat Linux software have an “obligation” to pay Microsoft because there’s some Microsoft-owned code in there.

Craig Mundie, Microsoft’s CTO, called open source a failed business model on the order of the dot-com boom that went bust.

“It fundamentally undermines the independent commercial software sector,” Mundie said, in 2001, of the GPL requiring that any software developed using GPL-covered code is also subject to the GPL. “While this type of model may have a place, it isn’t successful in building a mass market.”

Tell that to Red Hat, which made $69 million profit on $463 million revenue in its 2007 fiscal year on its business model of charging for support and unique functionality of its open source Linux software.

Sun and IBM are among the converts, embracing open source while not completely abandoning their commercial software businesses.

Open source is on a roll. A Saugatuck Research survey showed nearly 50% of businesses plan to use Linux for mission-critical systems by 2012, vs. just 18% in 2007.

Although some of its growth is misdirected, with way too many Linux distributions out there, open source is cited as one of the top 10 “flatteners” in Thomas Friedman’s 2005 book The World is Flat: “Open-source … makes available for free many tools that millions of people would have had to buy in order to use. Open-source network [communities] can challenge hierarchical structures with a horizontal model of innovation.”

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