@Siddhesh
Canonical does make money by providing support for their products. I think they’ve been doing it since long time but haven’t heard any great success stories in terms of profits/market share -

http://www.ubuntu.com/cloud/support
http://www.ubuntu.com/support/services
http://one.ubuntu.com/

@Siddhesh Thank you for those points. Yes, a large number of Fedora developers are RedHat employees- the exact figure is probably available on that Wiki. Are you sure that dual-licensing doesn’t work though? Can you point me to some more literature on this?

@Michael Thank you for your elaborate comment. Your criticism is welcome.
Can open source progress, and progress faster than closed-source software companies?
I tend not to think of closed-source versus open-source as a competition. A significant number of closed-source software today uses several opensource software components. It’s like a happy co-existence. I believe that opensource software cannot exist without closed-source software, and that opensource software benefits everyone, especially large corporations who have access to this fantastic infrastructure to build/ deploy their revenue-generating products.

[...] open source becomes predominant in “old” markets (e.g. OSes), but closed source dominates in new markets
I’d word it differently. See this comment on HN and this article on opensource.

It also fails to address the use of open source as a competitive weapon.
Yes. I’ve not included that in the article.

Another issue is that if development is funded by companies whose interest is indirect [...]
It’s not that simple. Every project has a complex hierarchy, with several influential people on top. It’s not that easy for a company to change the direction of the project. Ofcourse, some opensource projects do fail because they choose to be funded by the wrong companies, and eventually lose track/ focus of what they were doing.

There are good explanations for open source, and how it can succeed
Could you point me to a few?

It’s particularly ineffective since you cite Red Hat
Right. RedHat might not be the best example to cite. I picked it because it’s been around for some time, it’s popular, and because its business model is well-documented.

The question is not: “Can open source progress?” it’s “Can open source progress, and progress faster than closed-source software companies?”

Claiming that either (i) companies who benefit indirectly from open source will fund development, or (ii) young coders looking to make a name for themselves will volunteer code, fails to address that question.

A key issue is the speed of development, and how much money people are willing to pay to have new features. If one assumes that closed source development can “innovate” faster, but open source can do so cheaper, then open source becomes predominant in “old” markets (e.g. OSes), but closed source dominates in new markets.

It also fails to address the use of open source as a competitive weapon.

Another issue is that if development is funded by companies whose interest is indirect (that is, open source is a loss-leader for later sales), those funds are directed towards making their money-making projects more attractive. The direction of development – what features are prioritized – changes.

There are good explanations for open source, and how it can succeed – but I don’t think you’ve managed to make your point in this post. It’s particularly ineffective since you cite Red Hat – which has yet to make money. At the end of 2009, if you sum the net income since its inception, Red Hat has made -$90.1 million. That is hardly compelling.

1) Red Hat does employ a lot of guys to specifically work on Fedora and upstream. So the code they get is really not free, they invest significant money into it.
2) Canonical is yet to make any money at all from Ubuntu
3) A large number of the regular contributors to FOSS are generally college students or freelancers who sell support for that particular software. The ad hoc contributors are generally unable to devote enough time
4) Microsoft sells software. FOSS companies sell support/services for software. Dual licensing is an ugly attempt at trying to sell software in the FOSS scenario. It does not quite work at all, which is why you see some companies actually waking up to that fact and releasing their software as free software, while selling support for it.

What I comprehend is the duality of this business model:
* a company C issues software S1 that is free, community-driven further development
* company C also issues software S2 that is paid, corporate-driven development
* S1 and S2 are very much related

Now my question is: how can a startup SU that needs new software to be written, use this model?
* if SU lacks a product to build upon
* if SU lacks a developer fanbase to build upon
* if SU is a very small operation that needs to earn money (unlike Linus Th., who from your story had some time to work on free code)

I would love some clarification on this point, guys!