Sounds too good to be true, How is it possible?.
 
In a nut shell  : Open source software is funded by  Independent Developers, Commercial Companies, Venture Capital Companies & Governments/Public Authorities. There are many many reasons why open source is funded and there are thousands of Organizations that support open source such as IBM, Red Hat, Sorceforge, Linux & Sun Micro Systems.

Funding of open source software 

The funding of open source software by people and organizations implies that there must be some benefit to the funder beyond the production of the open source software itself. As the software is distributed free to some or all users this benefit is not a profit from the sale of the software.

Funding sources

The following table summarizes some of the funding sources for open source development and the possible motivation for the funding.

Who How They Provide Resources Possible Motivation
Independent Developers Provide development time.
  • Use the final product.
  • Recognition for their effort and skills from their peer group. May be valuable for young developers to add weight to their résumé and for independent consultant to foster their reputation.
  • Receipt of donations either directly or through open source support organizations.
  • The sale of documentation
  • Many independent developers enjoy open source implementation to advance their technical capabilities and get feedback from real users.
  • Provide consulting and maintenance for the product.
Commercial companies
  • Provide development time.
  • Provide infrastructure (bandwidth, source management and web hosting services). For example: SourceForge that hosts tens of thousands of open source projects or IBM that hosts the Eclipse project.
  • distribution of low cost or free security software helps to prevent world wide outbreaks which could result in the loss of billions in revenue.
  • Gain free improvements to software that is used internally by the company.
  • Use the software as a base for commercial products. For example: IBM sells a professional version of Eclipse, Sun sells a professional version of NetBeans.
  • Sell services related to the software (e.g. support, training, documentation, packaging). For example Red Hat sells and supports a version of Linux. The Jboss Group sells training, hosting and development services for JBoss.
  • Sell advertising space on the support sites (e.g. SourceForge).
  • Improve corporate image, in particular striking a contrast with companies like Microsoft.
  • Undermine the business model and market share of a competitor who provides a similar product but charges for it.
Venture Capital Companies
  • Provide funding.
  • Provide management advice.
  • Exit and sell their shares with a profit.
  • For example SugarCRM, Jboss Group and one of the leading open source database companies MySQL have received substantial amounts of venture capital.
Governments/Public Authorities Provide funding.
  • Save money on commercial licenses by using open software.
  • See software as a strategic asset over which control should be maintained
  • See open source software as way to lessen the dependence of the country upon foreign companies
  • See open source software as a way of creating local skills and jobs.
Private users Provide funds either directly to developers or through sites such as:
  • SourceForge that allows users to donate to specific projects or even specific developers.
  • SPI that funds a set of open source projects
  • Speed up development of software that they need.
  • Agree with the ideals of free software.
  • Get tax reductions. Donations to open source charities (e.g. SPI) are tax-deductible in some countries.