FOSS or FLOSS is free (as in beer) to the end user. However FOSS is not developed at no cost! There are donations via open source enthusiasts, thousands of hours given freely by community developers (a cost in time to them) and large single donations from commercial giants such as Google in ventures such as the regular 'summer of code'. Clearly, costs can be attributed to the creation of the software and therefore the term "free" applies to the end user.
There is another aspect of 'free' that we must consider. The software is not restricted by the usual use copyright, but uses licences that ensures its freedom.
So if the software does not involve any immediate financial cost to the end user, why do companies such as Red Hat and SUSE give away free versions of their linux operating systems and still manage to continually increase their profit margin.
I suggest that by giving their product away, these companies such as Red Hat obtain very high quality research & development (R & D) and user feedback for absolutely no cost. This R & D carried out on the software can be fed back into their next commercially released product with a high confidence level of market success.
This practice of having peer-reviewed code ensures that security, robustness and performance of the product will be of the highest level and therefore there is a win-win situation for both the software company and the wider community:
1] The software company has a product that can be marketed at a very competitive price and I suggest; even more importantly, offer paid-for support for a product that is proven to be very stable and perform as expected.
2] The wider community (you and me) have the benefit of obtaining a product for free that is no more than one release cycle behind the commercially supported version.
An interesting slight variation to the above business model can be seen from a supplier of a linux varient called Ubuntu. Mark Shuttleworth is the founder of this very popular product. The product is backed by a Canonical Ltd. Canonical actually gives CD versions away for free via the Ubuntu website in addition to the usual download facilities. The business model appears to be very similar to the original Linux commercial providers, however Ubuntu is focused more on the desktop user in direct competition to Windows and Apple. Merchandise and technical support as well as bleeding edge development in mobile technology is clearly seen as a focus of the company.
As an educator one aspect of Canonical offering that interests me is a version called edubuntu. The attractiveness of this varient is its focus on educational needs and the included educational software bundled with it. In addition, as edubuntu will opperate quite successfuly on 4-8 year old computers within a thin or thick client environment the couple of hundred computers that my college pay to have dumped every year may have a new least of life.