Open Source Business Models, Revisited

I had breakfast the other day with Mike Olson, CEO of Hadoop ecosystem leader, Cloudera.  We met because we run in similar circles in data management land and because Mike had some quibbles with my post, The Open Source Software Paradox.

My premise was that open source presents a fundamental paradox:   the larger the community, the better the software, and the less people need to buy support for it.  Thus, that open source market opportunities were inherently flawed / paradoxical because you could only sell services for projects  that were not terribly successful.  Simply put,

You can have a large community who doesn't need to buy from you or a small community who does.

I think Mike's overall take on my post was "1990s thinking" because things have evolved over the past decade and businesses now try to monetize open source opportunities in more sophisticated ways.  This approach doesn't actually contradict the paradox I observed, but instead looks  for more creative ways around it.

Another key point Mike made was that open source is not a business model.  I agree.  Open source is a way of developing software.  There are many different possible business models for monetizing open source projects.

Rather than attempt to replay the back-and-forth of our discussion, I will simply list my revised take on the 4 basic open source business models.

• Professional services.  The most basic way to make money around an open source project is to offer related consulting (and training) services.  For example, ThinkBigAnalytics, seems to  building a consulting business around Hadoop and NoSQL databases (most of which are also open source).

• Support.  A vendor offers certified distributions and/or  technical support services to go with them.  For example, as one of their offerings, Lucid Imagination offers support services for Lucene.  (I'd argue that this model suffers most from the open source paradox.)

• Dual licensing.  A vendor offers (1) a free version under the GPL license which freely enables internal use but contaminates on redistribution and (2) a paid version under a different license that doesn't include GPL's copyleft provisions.  This model reeks of the vig as you force people under threat (of open sourcing their system) if they don't move to the non-GPL version.  In addition, since SaaS or cloud services use but don't redistribute software, this approach loses its teeth in the SaaS / cloud world.

• Open core.  A vendor promotes an open source version of a system and makes money by extending it with proprietary additions.  In this model, the vendor "has some IP" and is not totally dependent on support subscriptions which may or may not be renewed.  Cloudera is executing this strategy by offering both (1) the Cloudera Distribution on an Apache license as well as (2) Cloudera Enterprise which is built on the Cloudera Distribution but also includes production support and management applications.

The open core model clearly sidesteps the paradox I'd outlined because open core vendors offer more than support.  Open core is a freemium business model and possesses all the strengths and suffers from all the weaknesses of other freemium models.

• First, can you build a large community on the free version or service?
• Second, through what mechanism and at what cost you monetize members of that community to a higher-level service?
• Third, once monetized at what rate can you keep premium members renewing the premium service or moving them up to an even higher service level?

LinkedIn has done freemium spectacularly well.  I've never paid them a dime (as a free service user) but somebody paid them the ~$250M they made in the first 9 months of the year.  (Turns out it's about 33% each of premium subscriptions, hiring solutions, and marketing solutions.)

The newspapers still haven't figured out freemium though FT and The New York Times are making headway.

How will open core play out for open source vendors?  I don't know.  I do know the freemium code is hard to crack.  I do know that freemium models are constantly evolving.  I do believe that freemium is a better business model than simply offering support or services.  And with the  IPO window opening, I do believe we may get a chance to see the financials of a few open core companies in the coming years.