- Improved quality means that users can comfortably use older versions hence avoid/withhold paying for a new upgrade; the general talk is that Windows Vista is bad but then again Windows XP is adequate (competing with your own products will affect revenue). The better the software becomes, the more satisfied users are with older software - they may want to use it for longer periods, regardless of any new releases
- As a software firm starting out: success will come with a large user base so anti-piracy measures will most likely limit adoption
That said, if a proprietary company already has dominance, they may be able to slow down the effect of selling software. However this is not asily done as open source software can just as well become competitive in their own right (ref: Firefox).
Contrast the above with a setup where access to the code and binaries does not affect revenue flow that much. The nature of competition and cost (distribution and marketing for example) of running a software company may change.
It helps to see open source as a movement and depending on the license chosen, it is not an all-or-nothing proposition either: both proprietary (closed-source) and open source companies can participate in the movement. The best part is that market dominance is determined by product and service quality.
My two cents.
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