There is something funny to it. Each time a new technology comes along that tries to change the game, the first thing people try to do is to apply the old business model to it. Shorty after that, people start complaining that the old business models don't work here and start to criticize the system.

"It is not ready!", "there is no way to make money with it!" etc ...

It has happened with the Internet, it has happened with the Open source, it has happened when the music and film industry has been attacked by technology. And every time, people found a way and made a fortune out of it.

In my opinion, we are at this state in Ethereum where a few have an idea how to make money with it but people are mostly experimenting.

I want to take the same approach and talk about the business model leading Ethereum projects take, what people say about them and why I think they are missing the point.

The duplicable software issue

During the entire evolution of the Software industry, we have always looked at the balanced way to bring value to the customers while forcing them to pay as much as possible. This conflict comes from the fact that Software is first and foremost and idea, not something physical. It's like a recipe or a technical paper. It is easy to copy by design and the industry has found clever ways to make sure people pay to use their work.

The Closed Source Era

In the beginning, the code was closed source. On the Software company side, it is a good way to:

Protect their IP. Because the code is not human readable, it prevents people and other companies to steal their work and ideas
Makes it easier to integrate protection mechanisms. It is far from trivial to remove a security check in a compiled application.
It makes the users dependent to them. If someones needs a feature, they have to go through them

For the customer, it means that he has to trust the IT company to:

Maintain and not abandon the application
Fix any bugs in the application
Improve the application to meet its needs

Also, as a customer you have to hope the terms won't change suddenly and the Software Company won't abuse its power because you have already invested so much in their software.

In general, the biggest issue in this approach is that it is impossible for the community to help find and fix bugs or even to bring improvements to the software. Also, the incentive of the Software company is to make as much money as possible out of their software and will always try to play with the price so that the customer pays as much as possible and yet gets a positive value out of it.

In conclusion, here you sell software the same way we sell a car. The company has put a lot of effort into it so you need to pay to use it. You have to trust the company that the software's quality is good and that it will work as advertised.

The Open Source Era

And then the dreamers joined the party. The GNU foundation and people like Linus Torvalds brought numerous applications that were open and free.

But even though the beginning of this movement was more political and academic than business oriented, business men saw an opportunity here.

But the old guard was reluctant to play by the new rules.

"If the code is open, then why would people pay for software?" "How do you reward people's hard work if everything is free and open? "

Those questions are legitimate. People work hard to make quality software and the engineering know-how needed to write complex software should be valued.

So how did the companies like Redhat and MySQL made it to the billion $ valuation ? They did it by giving services around their software. Suddenly, the business model was not to be paid for a software but rather to give special licensing to other companies so they can use their application or customer service.

Suddenly, the Software company has a community of users who not only give them money for their work but contribute to it by analyzing bugs, develop new features and even give services on it.

The third party service provider is critical for smaller software companies who cannot compete with the army of engineers some bigger companies have.

The customer knows that he can check the code and judge by himself the quality of the software. He also knows that the software can outlive the company that has created it. This means that each customer knows that he can take control of the software he is using if he has the know how in house and he knows that the license protects him from being forced to pay outrageous fees to continue using the software.

The customer service part is a way for customers to pay for insurance. They know that if something goes wrong, they have someone to call and open source companies usually have SLAs. In this situation, the customer is ready to pay to have the piece of mind to know experts are always a call away and open source companies have now an incentive to produce top quality software because the better the code, the less they have to go on site and resolve nasty bugs at their customer software.

For the community, this revolution has level the plain field by letting start up concentrating on their core business and not reinventing the wheel. Before the open source projects were available, small software companies would have to create their own database because using the one from Oraclewas too expensive. The same for almost every library or infrastructure. Developers work everyday with open source projects without even thinking about it anymore.

Open source has also brought standards. When your business model is not based on keeping your customers captive, it is easier to push standards forward.

In conclusion, we move away from the old "buy a car" model and we work with a service and quality insurance. Companies build their products on existing blocks with the promise to either split the benefits (licensing) or the company promise support and assistance for a fee. The business model here is the quality of service and code and with an emphasize on transparency.

The Software as a Service Era

And then came the cloud. And with the cloud its army of services. As a result, customers get a software that works always, that scales incredibly and that auto updates.

But there is a cost here! Because you pay for a service, the software does not belong to you anymore. This means that you are back to square one. You depend on a service that may stop at anytime. Even worse, if the company stops the service, you can't even continue to use the version you currently have like on the old closed source days.

For the Software companies, this is the new heaven. They realize that recurrent payments are the best and maintenance for both their customers and themselves is much easier that way.

For the customer it's a mixed feeling. In one hand, he does not have to take care of infrastructure anymore. No more downtime, everything is automatic. There is something very calming. You have the feeling that you are really taken care of, you pay for a service and you get it.

But on the other hand, you are totally dependent. If the service stops, there is nothing you can do. If suddenly they raise the price, you can tell them you are not happy but that is pretty much it. Moving from one service to another is not easy and is usually costly.

In conclusion, the software company has found a perfect way to have a stream of cash for each software. They sell the ease of use and always up-to-date argument to their customers. Maintenance is much easier for the software company because they have full control over the platform. And in the service model, it is very hard to copy it. Everything is only API. No code is published and even if the code is available, it's because the data generated by the main instance has more value than the code itself.

The blockchain Era

If you follow what is going on in the blockchain space, you will see a lot of confused people. Everybody says it is amazing but what is it good for actually? Because of the nature of its first use, Bitcoin, people have seen first hand the power of a Blockchain and how it can handle value securely.

This kind of result make people wonder. How can I replicate that? How can I create tokens that have a total valuation of several billions $ ?

As of today, one of the biggest question still remaining is how regulators will react to this technology when it will become bigger and more mainstream than today. Even if Bitcoin's +8B$ valuation is impressive, this is still nothing compared to the big shots in the high tech Industry, Facebook and its 320B$ valuation for example.

But let's assume for a second that the regulators will mainly accept the system or at least some version of it. How should we approach this new opportunity in order to bring value and better the world but still making money?

Even though the change blockchain brings is more profound than Open source, I think it is similar. When Open source came and started to get traction, the established company started to belittle the movement saying that they will never be able to bring the level of quality and service they were giving. They said that no software company will invest in open source simply because there were no way of making it profitable.

And we have the same issue today with Smart contracts and blockchain technology. People want to build solutions on public blockchain like Ethereum but the same sentence comes again and again: "What prevents someone to copy your smart contract and give the same service for free or for a smaller fee?".

In one word, Reputation. Let's take slock.it's USN project. What will prevent anyone to copy the USN when it is ready and avoid paying any fee when they share their home, their car? The blockchain is used here as the middle man for two parties who don't trust each other to do business together. So for the lender, he wants to be sure that nobody beside the one who has pay will be able to use its flat. And for the one paying to get access to the flat, he wants to be sure that he will get access to the flat after sending his money. This can be done only if the USN has enough reputation and people trust that it works. And this is not easy to copy. If a shady group of unknown people create a copy of the USN and tell people to trust them with their homes, I am pretty sure that no discount will be enough for people to take the risk.

Security, Trust and how Reputation brings value

Bitcoin, Ethereum and any other public blockchain's valuation is based first and foremost on the trust people put in them. People trust that if they send 1 BTC to an address, it will get there relatively fast and nobody can steal their account without their private key.

People need to find business models where what they sell is first and foremost the insurance that:

They will get what they want
If something goes wrong, someone else will pay for the risk taken

The biggest issue blockchain technology is facing today is that you are the sole owner. If someone gets access to your account and empties your account, there is nothing you can do. If someone puts in place a smart contract and tells you to send there money and disappear with it, there is no one you can go complain to.

Blockchain is crucial for us to reclaim the ownership of our identity, our information. But this comes with a price that not everybody is ready to pay. Security and insurance will be big in the crypto currency space. We can create risk mitigation by mutualising it. And in this space, the better your reputation the better your network will become.

This is the same for payment system. The main reason, I think, people use credit cards like Visa or MasterCard is because you have insurance with it. This means that shops are confident they will get paid and they don't need to take the risk on their own if the card has been stolen. This kind of insurance will be needed in the crypto currency world too.

Core business

Companies want to focus on their core business. They don't want to take care of something that is crucial to their business but where they don't have enough expertise. Blockchain makes it possible to integrate any third party very easily. It is near trivial to work with a remote smart contract and integrate it in your system. Businesses will gladly pay transaction fees to use a system they know will work, they don't have to monitor or handle and they can build their own service on top and get their cut.

Administration & middle men, endanger species

The administration, being from governments or big agencies, is under attack in this new model of management of human interaction. Suddenly, we can create automatic processes for complex interaction that cannot be hacked. Being on the same blockchain makes it much easier to integrate with one another. And when something becomes easier, it becomes naturally cheaper. Organizations like The DAO shows what the new possibilities are in term of human organization and collaboration. The size of your company won't matter anymore because you will be able to externalize everything but your core business and be sure that everything is done according to the (smart) contract between the different companies. The new age of human collaboration begins now!

Conclusion

The golden age of XaaS is being challenged by new decentralized applications. It does not mean that it will cease to exist but a new model is emerging with blockchain and the Software industry needs to get ready for it, actually everybody needs to get ready for it. People will always need closed source applications, appliances or cloud computing but we get to a new business model where the reputation of the network you are building has the most value. So be ready! Show that you know how to create value to this new world and make the world a better place, together!