Thanks for a thorough reply. I'll try to address the concerns.
"I found a list on Wikipedia[1] which has quite a few entries (though quite a few of those companies either no longer exist or were bought out by companies that don't exclusively work on free software)."
Appreciate the list. A bunch of those, including yours, are proprietary software companies that also GPL stuff. Or hybrids were a huge chunk of the revenue is support or GPL-component consulting instead of licensing proprietary addons. Still worth considering but not a "free software" company if issuing paid licenses.
" it's also security updates and bug fixes (which are sometimes written by us and contributed back to the community). This sort of business model allows you to sell completely free software, because you're not selling the actual software you're selling licenses and support."
That's true. It's also the model that rarely makes any real money. Red Hat and SUSE are exceptions to the rule, esp Red Hat. That they both license proprietary software on top of that model clouds the issue further. We'd have to have companies with only FOSS offerings plus support and services matching those or proprietary revenues to make the argument. I'll look at your link to see if I find those plus if there's financial data on app/feature vs support licensing to see what split of the revenue/profit they make.
"but you have no practical freedom in that case because you cannot share your improvements to create a community -- one of the goals of the free software movement."
You can do that exactly how I described. You underestimate how powerful of communities that can develop around proprietary software. Microsoft and IBM are extreme examples that had more to do with monopolistic practices. So, maybe Borland's Delphi or even early Solaris are better examples. The community is just limited to those that are willing to pay. That's FOSS's advantage.
" If you don't have the freedom to distribute modified and unmodified copies then you're (practically) at the mercy of the company that gave you the software."
This is a huge problem. It's why I'm working to eliminate it but FOSS has clear advantage here. We saw this with Oracle dropping OpenSolaris followed by others picking it up.
"Proprietary software is distributed in binary form only."
That's not true at all. MCP, the villain in Tron & brilliant OS for Burroughs, was distributed in source form to clients in the 60's with their modifications/fixes often going into new releases. Many proprietary software since were similarly shared source. The high-assurance security kernels even mandated vendors supplying source so you could meet A1-class requirement of inspecting and building it yourself. Even Windows source is available to some partners. There's also dual-licensed model where free software is a byproduct of licensing proprietary, shared-source software. So, proprietary and source available are not contradictory in any way. It's just distribution part as you said where distinctions must be made.
"If you sell support (clients pay for you to develop new features for them, providing security fixes, bug fixes, etc) then you can make money selling completely free software."
This is true. The question is "Do I make the same money at same market share as if I license it for low pricing?" I can imagine a database that cost even $5,000 per organization that's competitive with popular RDBMS on common usage with better reliability or security will probably break even on its development cost after first few dozen or so customers. That's plenty for development with enough left for support and administrative stuff. A $1,000/yr support agreement will take substantially more customers to cover all costs, especially development. Only exception I could see is if the developers were the admins and support people as well with obvious productivity issues.
So, that's the key difference. If it's paid, I can put more into the product to benefit my users while making some good profit along the way. Or hardly any at all depending on my goals. A support-driven organization can't compete unless they have crazy market share. I can also afford better talent, 3rd party solutions to tough problems (eg enterprise integrations), and patents for leverage in suits. Worst case, I can [L]GPL a specific product after a certain number of years to ensure minimum amount of investment recovered with it going to support contracts from there on.
Quite a few possibilities. I contend the only advantage FOSS has... maybe temporarily or maybe inevitably... is network effects of spreading as other benefits can be had in shared-source, paid agreements. Even isolation of risk of company with its charter or license terms.