The Open Source Business Model: Turning Free Software into Big Opportunities
Open-source software has come a long way since its early days as a niche movement among hobbyist programmers.
Today, open source is mainstream – used by Fortune 500 companies, governments, and organizations of all sizes and industries. But how do open-source companies actually make money if they’re giving away their core product for free?
As it turns out, there are many creative and lucrative ways to build a business around open-source software.
What is Open Source Software?
Let’s start with a quick refresher on what open-source software actually is. Open source software has source code that is publicly accessible – meaning anyone can view, modify, or distribute the code for free. The open-source software movement believes source code should be open and shared so anyone can collaborate to improve it.
This is in contrast to proprietary or closed source software where the source code is kept secret by the company that owns it. With proprietary software, only the company that owns the code has the right to modify or distribute it. Open source provides flexibility, transparency, and freedom that proprietary lacks.
Some of the most well-known open-source software includes Linux, Apache, WordPress, and Android. These projects have millions of users but don’t directly make money from software licensing or sales like Microsoft and other proprietary companies do.
So how do the creators and maintainers of open source projects make money? Let’s explore some of the most popular open-source business models.
5 Open Source Business Models
1. Dual Licensing
One clever way to monetize open source software is called dual licensing. Companies release a product under an open source license to attract a large community of users and contributors. But they also offer a commercial license for extra features, support, or capabilities beyond the open source version.
Red Hat built a billion dollar business by offering a paid Enterprise Linux product built on top of their free community Linux distribution. This model provides the flexibility of open source while still offering extra value in the commercial version that companies are willing to pay for.
2. Selling Support & Services
Rather than monetizing the software itself, many open-source companies make money by selling support, maintenance, training, customization, and other professional services for their software.
Since anyone can access the community version, the paid services become the primary product the company sells to paying customers. Providing expert support and services on top of freely available software can be an extremely lucrative model, used by companies like Automattic, the company behind WordPress.com.
3. Open Core
Open core is another smart way companies leverage open source. Similar to dual licensing, they release a core software product as open source but keep some more advanced features proprietary.
The core base software is open to attract a community, but they charge for special enterprise add-ons and capabilities built around the open source core. Companies like MongoDB and Redis employ an open-core model.
4. SaaS/Cloud
Many of the most successful open source companies today leverage a SaaS or cloud business model. They open source their core software to reach a huge audience while offering it as a paid service via the cloud.
Elastic, the company behind open-source Elasticsearch, monetizes through a SaaS-based offering called Elastic Cloud. GitLab uses a similar model with their GitLab cloud product built on open-source GitLab software. The cloud offerings add functionality like advanced security, configuration, and management capabilities.
5. Open Source Foundations & Donations
Some open-source projects rely on donations from individuals and sponsor companies rather than offering commercial software or services. High-profile projects including Linux, Mozilla, Apache, and Wikimedia operate as non-profits supported by a community of backers.
Developers who contribute to open source projects often donate their time without direct compensation. However large open source foundations provide structure and funding to support the logistics and coordination of major projects.
Benefits of Building a Business on Open Source
The open source development model offers some unique advantages for creating a profitable software business:
Low Research & Development Costs
Proprietary software companies have to invest heavily in research and development. The benefit of tapping into open source’s huge community of developers is that much of the hard work of building and improving software happens organically. Companies can utilize existing open-source software as a foundation rather than having to build everything in-house.
Trust & Credibility
There is an implicit level of trust and credibility that comes along with open-source software. The transparency of the code and open peer review process helps ensure quality. And because anyone can inspect the code, open source is generally more secure and stable than proprietary counterparts.
Customer Acquisition & Promotion
Most proprietary software relies heavily on sales, marketing, and partnerships for promotion. One of the major benefits open source provides is massive built-in distribution and visibility. Projects with strong communities spread organically rather than needing heavy marketing.
Engaged Communities
Perhaps the biggest asset for open-source companies is the communities they cultivate. Passionate users and contributors provide real-world testing and feedback to improve software. They often spread awareness and even do some promotional legwork to organically grow open-source projects.
Challenges of Monetizing Open Source
However, building an open-source business is certainly not without its challenges and risks:
Leaving Money on the Table
Giving software away for free can sometimes mean leaving revenue opportunities on the table. Trying to monetize open source requires creativity and thinking beyond traditional software licensing models. Companies have to find the right balance between openness and commercialization.
Commoditization Risks
Once open source software becomes ubiquitous and commoditized it can be hard to differentiate your commercial offerings. Popular projects also face competition from lean startups building on open-source code. Offering premium software and services on top of free open source requires continuous innovation.
Community Management
Managing open-source communities effectively can make or break projects. Poor coordination or lack of engagement from maintainers and contributors can stall momentum. Companies have to dedicate internal resources to properly support communities and ecosystem partners.
Licensing & Legal Complexities
The many open-source license types and variations add complexity for both users and creators of open-source software. Companies must carefully consider licensing tradeoffs and implications when building business models around open-source projects.
Examples of Successful Open-Source Companies
Let’s look at a few real-world examples of successful open-source software businesses employing some of the models discussed:
Red Hat
One of the earliest and most prominent open source companies, Red Hat builds and supports solutions based on free Linux and other open source software. They pioneered the dual licensing model by offering paid enterprise Linux distributions and support in parallel with the free Fedora community project. Red Hat has also expanded into middleware, virtualization, cloud, storage, and other enterprise solutions. They generated over $3 billion in revenue in 2019 after being acquired by IBM.
MongoDB
MongoDB provides a popular open-source NoSQL database used by millions of developers. The core database engine is open source under the AGPL license. On top of this open source foundation, they sell the MongoDB Enterprise product which includes advanced security, management, and analytics capabilities. The company has raised over $430 million in funding and generates hundreds of millions in annual revenue.
GitLab
GitLab develops a DevOps platform centered around open source GitLab software, a complete toolkit for managing code repositories. They utilize an open core model where the core GitLab code base is open source while they monetize through their SaaS-based GitLab.com product and enterprise offerings. Backed by over $450 million in funding, GitLab earned an estimated $100 million in annual recurring revenue in 2019.
Elastic
Elastic is the company behind open source Elasticsearch, a popular search and analytics engine. Similar to GitLab, they open source the core Elastic Stack and then monetize through SaaS-based cloud offerings via Elastic Cloud. Elastic has raised $104 million in funding. Although not yet profitable, their revenue grew over 70% year-over-year in 2019.
Automattic
Automattic is a rare open-source unicorn startup success story. The company behind WordPress.com built a highly profitable SaaS business around free open-source WordPress software. They monetize through premium plans on WordPress.com, WooCommerce extensions, enterprise hosting, and other services for WordPress customers. WordPress powers over 35% of all websites from blogging hobbyists to major publishers and Fortune 500 companies running on WordPress.com.
The Future is Open
Today, open source is mainstream – disrupting traditional software business models and enabling a new generation of highly successful companies. The incredible innovation and growth in the open source ecosystem is a testament to the power of open, collaborative development models.
Rather than resisting open source, more and more proprietary software giants like Microsoft, Google, and Facebook are now embracing open source. They are open sourcing internal projects and making key acquisitions of popular open source technologies. Open source has essentially won – the future of software is open.
Yet, monetizing open source technologies remains an evolving art. Striking the right balance between openness and commercialization takes creativity and experimentation. But companies who leverage open source in smart ways continue defying skeptics by building wildly profitable businesses around free software.
We’ve only just scratched the surface here of the myriad ways forward-thinking companies are monetizing open source. The rules of software business are being rewritten in real-time thanks to open source. Existing models will be iterated on and entirely new models will emerge. The coming decade will be defined by open source going even more mainstream as incumbents adapt and young startups continue riding open source to incredible heights.
