What is the best open source business model? [best = sustainable + profitable + user preferred]


" It Started (And Ended) With Red Hat

Red Hat, the Linux operating system company, pioneered the original open source business model. Red Hat gives away open source software for free but charges a support fee to those customers who rely on Red Hat for maintenance, support, and installation. As revenue began to roll into Red Hat, a race began among startups to develop an open source offering for each proprietary software counterpart and then wrap a Red Hat-style service offering around it. Companies such as MySQL, XenSource, SugarCRM, Ubuntu, and Revolution Analytics were born in this rush toward open source.

Red Hat is a fantastic company, and a pioneer in successfully commercializing open source. However, beyond Red Hat the effort has largely been a failure from a business standpoint. Consider that the “support” model has been around for 20 years, and other than Red Hat there are no other public standalone companies that have been able to offer an alternative to their proprietary counterpart. When you compare the market cap and revenue of Red Hat to Microsoft or Amazon or Oracle, even Red Hat starts to look like a lukewarm success. The overwhelming success of Linux is disproportionate to the performance of Red Hat. Great for open source, a little disappointing for Red Hat."

" The letter to Twitter, the US company preparing for a $15bn stock market flotation, sounded reasonable enough - if cheeky. “We would like to partner with you to engineer acceptable, non-intrusive advertising,” said the blogpost from Adblock Plus.

But the sentence’s continuation seemed to carry a veiled threat: “We want you to do it responsibly, by adhering to our Acceptable Ads guidelines.” And if Twitter doesn’t? Then it would remain on the list of sites where adverts are blocked by the browser add-on, which its developer - a Cologne-based company called Eyeo - claims has 30 million daily users, and has been downloaded 200m times.

Adblock Plus’s model is straightforward: unless a site is on its “whitelist”, then it blocks all the ads shown there. And, as it makes clear, even big websites whose advertising methods (text only, no flashy gimmicks) it finds acceptable must hand over a share of their advertising revenue for the reward of being on the “whitelist” and showing their ads to visitors. “Small” sites - the precise definition of “small” isn’t given - don’t have to pay if their ads are deemed acceptable.

Twitter declined to comment for this article on its thinking about Adblock Plus’s offer. But for the many sites which rely on advertising - not only Twitter, but Facebook, Yahoo and many media organisations (including the Guardian) - the idea of millions of desktop users not seeing the ads that pay a significant part of their bills is a problem. Yet the idea of paying the company which creates the problem to make the problem go away might not seem palatable either."

"When we come to making money on open source software, at MySQL we had about 15 million users of our product and 15 thousand paying customers. That was like the needle in a haystack. In a haystack of a thousand users we would find one paying customer, and we made it work. We had a business that produced cash and paid for our expenses, but that’s at the extreme end of open source software.

We always debated on how to balance the act between who should pay and who shouldn’t? We boiled it down to a principle which is here on the slide saying: “There are always people who will spend any amount of time to save money, and there are other people who will spend money in order to save time.” Typically in your life, or in the life of a company, you go from one to the other.

“Why does Facebook run on MySQL?” I asked Mark Zuckerberg a long time ago. And he looked at me and said, “Marten, I grew up on MySQL.”

So when he was 15 or 14 or something, he started using it, so of course he would build Facebook on the LAMP Stack. They were a big non-paying user for the longest time, and one day they came to us and said, “Our business is growing so fast, we have so much to do. Why do we have all these people here maintaining our MySQL databases? Could we buy a support contract and the services from you to keep the site going?”

Then they became one of our biggest customers. They shifted from the mindset of saying, “I’ll do anything with my bare hands to save money,” to “I have other more important things to do, so I’ll pay money to get it done.” This is a philosophical principle, it’s not a business model, it’s not a licensing term. But it guided us and it has guided many open source companies in figuring out how do you figure out how to make money and who you think should be paying for your stuff.

Because if you can’t live with the fact that 999 out of 1000 of your users are not paying you anything, you will never succeed. You must love those who are not paying you anything as much as you love your customers.

We said that! We said, “We love you, we really love you, but until you pay us money, love is all you get.” Meaning if you need support or anything else, then you pay us. And you must also know that no matter how much customers love you because they said, “I love your product it’s fantastic!” They don’t love you as a vendor. They have no mercy with you. If they can get away by not paying, they will. They can be the nicest people, the most fantastic company. There’s nobody who will pay voluntarily.

We had one customer at MySQL who paid us voluntarily. Craigslist. So Craig Newmark sent us $10,000 saying, “I don’t find anything to buy in your offerings, but I love you guys and I would like to support you, so here’s $10,000.” And that was the reminder to us that we had no good business model. We had to figure it out and we had to build that which we called hard differentiation that said, “If you don’t pay you get this, if you pay you get this. You can take it to your boss, because it’s your boss who is the problem.”

" What every open-source company needs before it can consider making money

Prerequisite #1: Broad adoption

The first prerequisite is broad adoption : the open-source project needs to have a large user base and community.

Broad adoption is necessary because an open-source company can capture only a small amount of the value it creates. To be clear: an open-source company gives most, if not all, of its developed software away for free, and most of its users will never pay for that software.

In fact, most open-source monetization rates (the conversion rate from users to paying customers) are fairly small: often in the low single-digit percentages (if not lower). But given a large enough community, that conversion rate can be enough. This dynamic is one of the drivers behind the economies of scale in the open-source model. In other words, the need to have broad adoption is one of the reasons why there are often category “winners” in open-source.

This need for a large up-front investment in adoption is also why most successful open-source companies today start off as projects in a large company (e.g., Hadoop/HDFS at Yahoo!, Kafka at LinkedIn, Kubernetes at Google), as research areas in academia (e.g., Spark at Berkeley), or as VC-backed startups."

" What is open core?

For definitions of open source business models (which this isn’t, but whatever…), I nowadays usually refer to the 451 group’s Matthew Aslett, but for a complete historical picture I should note (as Matthew does) that open core licensing was first articulated by Andrew Lampitt (a JasperSoft employee). Perhaps fittingly, Andrew got his inspiration from Mårten’s categorizations of open source business models. (Check it out, especially the InterBase categorization is hilarious :slight_smile: Indeed, MySQL was one of the first to practice this model.

In short, open core is a model where a company produces a product that is mostly available as open source, but then there are some closed source components around the open source “core”. The point of the model is that it is supposedly easier to sell closed source than open source. Most open core companies (including MySQL, Eucalyptus and JasperSoft) started by being fully open source, but then start adding closed source components as a way to boost sales.

The closed version is often called “Enterprise” version, this terminology was first used by Red Hat (which is not open core) and is the same as used by closed source software companies. (For instance Oracle Enterprise is the costly version of the Oracle database.)

So why is open core not an open source business model?

For instance Julie’s Networkworld.com article goes into a discussion on whether open core is good or bad. Usually as part of the discussion you start name calling the opponents as “purists”, “free software zealots” or others. I think Mårten used to question me why you have to be “holier than the pope”.

I think it is worth repeating again and again that open source is a very well defined concept. You can read the Open Source Definition at opensource.org. This is a definition that was agreed in the last century. It is not being discussed anymore.

And open core does not qualify as open source, as per the definition. It is closed source. It is the opposite of open source.

So is it evil? What are you complaining about?

Actually, when articulating the concept of open core, Andrew Lampitt identifies the problem and possibly even wanted to help solve the problem:

It seems that this model did not work for some vendors in the past due to ‘angering the community.’ I suspect the tension arises from how commercial open source companies are sometimes perceived as hi-jacking the term “open source” for marketing commercial gain. In my view, the business model could probably be better received by the community if it were named more specifically, such as “open core” that has a specific definiton attached to it.

Precisely!

As Julie says in her article, we in the open source community fully recognize that a developer has the right to publish his software under any license he chooses, including closed source licenses. Closed source is not illegal. (Although, many will argue it is unethical.)

However, what is not acceptable is that you market yourself as an open source product when in fact your business model is to sell closed source. This is confusing, I’d say it is border line lying. Well, marketing often is lying, but in the open source community we call out such lies, however subtle."

x#### "It’s not “Free”, It’s " Free "

According to the Open Source Initiative, “free software” and “open source software” are interchangeable phrases. It’s just that the word “free,” in this case, doesn’t mean “without cost.” Instead, it has to do with being liberated from the traditional walls of proprietary solutions , as programmers are able to use open source code

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as a foundation upon which to build.

That’s one of the primary allures of open source technology: rather than having to invest countless hours into building code from the ground up, programmers are able to collaborate and build it together , or at the very least, use someone else’s code as a starting point for their project that will then also be released back into the open source community.

In these kinds of environments, code is reviewed and edited regularly so as to ensure its best iteration."

" Over the last few weeks I’ve interviewed a range of open source project maintainers, most of which don’t directly get paid for supporting their projects. Some, like Gerald Combs of Wireshark, eventually get approached by companies (in his case, Riverbed) that have a financial interest in ensuring a project sees active development. But most, whether through choice or simply (bad) luck never get dedicated commercial backing.

Is this a bad thing?

It’s not completely clear. Linux Foundation executive Chris Aniszczyk has been an outspoken opponent of open source “tip jars” that seek to sustain projects with donations. “These [open source developers] should be encouraged to start businesses or your business should hire them directly,” he argues. But many such developers don’t want a 9-to-5 corporate job, preferring the independence of contract work. Open source sustainability, in other words, is messy."