In a recent blog post, we discussed IBM’s plans to acquire Red Hat for $34 billion. We would like to expand on the business surrounding open source software and how open source companies can generate billions a year in revenue.

Open Source Business Models

"Open source" is a phrase that refers to software whose source code is available to the public for free. There is also a broader movement around open source, where developers and large corporations alike are open sourcing software, projects, developer tools, libraries, and more.

While the core software is available for free, entire companies have been formed to offer additional features, hosting, support, training, and more for popular open source projects. Here is a look at the 5 most common open source business models.

Open Source + Training

There are companies that offer training for your internal team to better utilize open source tech. Training can include courses, lessons, best practices, and even certificate courses to get your team ready to support enterprise deployments of open source technology.

Examples include…

  • Red Hat
  • Sirius Open Source
  • Rogue Wave Software

Open Source + Support

Similarly, companies offer developer support for open source projects. When customers interact with an enterprise, like a national airline or bank, they expect 100% uptime and availability. As a result, enterprises invest in having 24/7 support to help troubleshoot issues.

Examples include…

  • Red Hat: support packages for Linux
  • Canonical: support packages for Ubuntu

Open Source + Hosting

For some products, the value comes not only from the code itself but from the hosting and maintenance. For example, Magento is available as both an open source product and as a hosted solution.

Despite being available for free (with no strings attached), Magento generated $150 million in revenue in 2017! Clearly customers find value in offloading hosting, maintenance, backup, and more to Magento rather than being responsible for these services internally.

This model works particularly well for small businesses, who do not have the resources to staff dedicated engineers to manage the software. By comparison, a $50/month or $100/month fee is a small price to pay in exchange for peace of mind.

Examples include…

  • Magento
  • Automattic: the company behind WordPress
  • Docker

Open Source + Features

Another common business model surrounding open source is gating functionality. In these cases, the main product (called "open source", "developer edition", or "community edition") is available for free. For those who require additional product or security features, a paid "professional edition" or "enterprise edition" is also offered.

When gating functionality, products can either charge a one-time fee or a monthly recurring subscription.

Examples include…

  • PyCharm
  • MySQL
  • Canonical: Ubuntu Enterprise

Open Source + Advertisements

There also a less common path to generating revenue from open source software: displaying advertisements. In this case, companies monetize the attention of their users. In 1996, NetScape Navigation – the first consumer web browser – was $49 to download. Now we expect offerings from Mozilla, Google, Microsoft, and Apple to be free.

What changed?

First, search engines became very robust and highly used. Today, there are more than 3.5 billion Google search queries each day! And second, browsers started to sign deal with search engine companies in order to secure a piece of this revenue.

As a result, Mozilla is able to generate hundreds of million in revenue while building and shipping open source products.

You could also consider Android as an open source project that is supported, indirectly, by advertisements. By increasing the amount of devices running Android OS, Google ensures that it has a steadily growing audience for its search ads.

Do Open Source Businesses Generate Revenue?

Yes, open source businesses generate billions in revenue each year. For example, Red Hat had subscription revenue of $2.1 billion and services revenue of $276 million in 2017 according to the company’s SEC 10-K filing.

We also find companies like Magento, Docker, and Automattic rapidly growing revenues. The latter two have also found it easy to raise capital in the private markets.

Other Strategic Advantages

Open source companies also have domain expertise, often in cutting-edge technologies such as virtualization, containers, hybrid public-private clouds, data science, and machine learning. This valuable experience makes them ideal partners for multinational corporations, nonprofits, government entities.

Furthermore, open source companies also have high strategic value for acquirers. Recently we have seen both IBM acquire Red Hat and Adobe acquire Magento. In addition to capturing the customer base and revenue, these acquirers are also looking to position themselves for the next decade.

Conclusion

It can be helpful to think of an open source business as a freemium model on steroids. In a typical freemium business, a slimmed down offering is available for free while comprehensive versions are placed behind a paywall.

Open source is similar, except developers can poke around, see the source code, and modify it as they see fit. In the open source community, it is typical to expand upon the existing code to suit your specific need.

Open source businesses capture their value through various channels, including training, support, hosting, additional features, and more. These organizations can grow to employ thousands of people and generate hundreds of millions, or even billions, of dollars in revenue.

In addition, companies that have an expertise in supporting open source projects have a strategic advantage in the market. Adobe purchased Magento for their market position in ecommerce and to closely interlink Adobe’s core products with ecommerce.

Similarly, IBM bought Red Hat – yes, for their revenue – but primarily for their Linux expertise.

 

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