How can a company give away its flagship product and still make money? Ask Red Hat, because it's doing a great job at doing just that. Really. Go here to download it. You can modify it and re-distribute it, or distribute it with only token modifications. You can even sell it, if you can find paying customers.
"What?" you say, "this is a just big blob of source RPMs. What the heck am I going to do with that?"
Well, you could compile them and build your own customized Red Hat-based Linux. Or you could download a prefab distribution from someone else who has glommed the SRPMs and made them into a polished, complete distribution. Like CentOS, Lineox, Pie Box, Tao Linux. You can even purchase Oracle Unbreakable Linux if you think the Oracle brand name is worth paying for, because it's just re-branded Red Hat Linux.
Red Hat's entire product line is available for free. So how do they make money? By selling support. As far as I know, Red Hat is the only "pure" Open Source company in existence. They don't sell hardware. They don't offer dumbed-down free versions, then put their best efforts into their paid products. They don't sell client-access licenses, which I think is a huge ripoff. Servers are supposed to serve clients- that's what you pay for. It's like charging per-user fees for a bucket. Who cares how many people carry stuff in it, or how much stuff? That's the customer's problem, not the vendor's.
But I digress. With Red Hat Linux, what you see is what there is. There's nothing sneaky. You don't to set up a special server to calculate your software license costs and to monitor compliance. You don't need to phone home to the mother ship for permission for every little thing. Service contracts are priced per machine, not per CPU or CPU core. The stormtroopers, pardon me, that's such a common typo that I make all the time, I mean the Business Software Alliance (BSA) won't raid your premises, turn your business inside out, and then demand tribute. Red Hat doesn't treat customers like enemies, and they don't put up artificial barriers to lock customers in.
Despite all this, they are prospering. Go to finance.yahoo.com and see for yourself. Their ticker symbol is RHT. They have partnerships with Tier 1 vendors like IBM, HP, and Dell, and show consistent growth and profitability. From whence cometh this miracle? Mark Spencer, the inventor of Asterisk and the founder of Digium, said it best: "Open Source means you have to be better."
Digium puts a slightly different twist on the Red Hat model. Digium is both a hardware and software company that makes IP telephony hardware, and sponsors the very popular Asterisk iPBX server. Asterisk is free, and Digium just released AsteriskNOW, which is a specialized version that includes the operating system and an excellent graphical Web-based administration interface. The Business Edition costs money, and it gives you goodies such as intensive quality assurance and vendor support. There are several vendors of good VoIP telephony hardware, and Asterisk supports all of it; you're not locked into Digium hardware. Yet Digium is also prospering.
If there is a moral here, perhaps it could be: if you don't trust your customers and have to treat them like criminals and have to continually tighten the screws, if you have to keep everything a big secret, if your product line is so unattractive you have to force people to purchase anything and lock them in to have even a chance of keeping them, perhaps the problem is not them derned defective customers, but your approach to running a business.