A company with a solid open source project competing against a traditional closed-source product seems impossible to beat.I read this article wherein the author lays out this scenario:Suppose one could divide a software  marketsay network managementbetween  two products. One did everything  possible and cost $1 million, and the  other only did 10% as much, but was  free and open.The price tag of the commercial  solution would automatically filter  out a large number of users, and those  people would have to turn to open  source. But some users would be  satisfied with the 10% functionality  and choose it outright.For example, I have an original  Macintosh computer on my desk. It runs  a word processor called MacWrite. It  does everything, with the exception of  spell check, that I need a word  processor to do. I can format  paragraphs, choose fonts, make text  bold or italic, and even paste in  pictures and graphs. All in a what  you see is what you get user  interface.It takes up 76K of disk space. That's  K as in kilobyte.Compare that to Microsoft Word. I  think the last time I installed just  Word it was around 30MB, many times  larger than MacWrite, but I don't use  it for much more than I use MacWrite.  Like me, many users are happy with  basic functionality. They dont need  all the bells and whistles.But back to my analogy. In the  beginning, the commercial company  would probably ignore the open source  project. It represents no threat to  their revenue stream, so why should  they pay attention to an upstart?If this project is healthy and  sustainable, however, in a year or so  perhaps it does 15%-20% of what the  commercial product does. This should  bleed a few more users from their  business, and maybe now they start to  pay attention.Most likely, this attention would take  the form of marketing against the  project. They would claim it is too  small or too underpowered to take  seriously. And in the short run this  would probably work. But the mere fact  that they acknowledged the project  would pique interest. Some people  would determine for themselves that it  was neither too small nor too  underpowered and would start using it.Another year or two goes by and now  the project is up to 50% of the  functionality of the commercial  product. People start joining the  project in droves. The commercial  company now has to do something. What  do they do? They add more features.Remember, the commercial product  already did 100% of what people  needed. So what kind of features could  they add? Unnecessary ones. They might  change the look of the user interface  or add features outside of network  management. In any case, this  development will cost money, and that  will start to eat into the company's  margins.Finally, with a healthy community and  this influx of new users, the open  source project will eventually  approach 80%-90% of what the  commercial product does. Having  exhausted all avenues of generating  revenue, the commercial company still  has one final option: put the screws  to their remaining customers. Find  ways to charge them more, to eek out  what they can from their investment,  which ultimately will drive their  clients away.Farfetched? I don't think so. There  are only two main requirements:First, find a market where open source  provides a compelling alternative,  such as network management.Second, build a sustainable community  around the open source project.It seems very plausible. If you were the closed-source company, how would you compete??
How do you effectively compete with an open source project?
open source;closed source
Since you can't compete on price, then compete on all of the other selling points that the software has:featuresqualityeffectivenessintegration with other softwareservicesupportdirect sellingBasically, you do what every other company does when they're in price competition: keep pace, or change the game.