Past, Present, and Future of the Open Source Business Model

In the past six years there has been a major technological shift that has dramatically altered the way open source business models work. The open source business model was born in the early 90s thanks to Redhat and MySQL. Then, in the mid 2000s, a second wave of open source business models emerged based around enterprise applications thanks to companies like SugarCRM (CRM), Pentaho (BI), Talend (ETL), and ProcessMaker (BPM).

Now, the business model of open source enterprise application companies is under threat from four forces that have drastically altered the technological landscape: the Cloud, the rise of the API, virtualization, and IP indemnification.

This presentation will look closely at these four technology trends to see what effect they have had on the open source business model and what to consider for those thinking about starting an open source enterprise application company today. We will also look at the main business strategies being used by commercial open source companies today to compensate for these fundamental changes in the economics of the business model. We will look at the business models of Drupal, Mulesoft, and others to see how open source may still be a viable business model for enterprise application companies.

First, let’s talk about the Cloud. The cloud solves a number of inherent problems that open source software business models could not solve. First, it has a distribution mechanism that is even better than a free download. Second, it makes support less complex by reducing supported platforms to just one. Third, it solves the information dilemma by providing the software developer perfect information regarding user activity. Perhaps the only negative with regards to the cloud as a distribution model when compared to the free software download is that the cost of the freemium model is born by the developer.

Second, the rise of the API is another recent phenomenon working against the need for access to the internal code. With complete API exposure and the ability to extend the API, most developers are much less interested in developing software. Value comes in the “mash-ups” and this is being done through the API and not in the core code. Also, with so many more things to connect in the world today and so many more ways to connect them much of the creativity around being a “maker” has moved to the level of combining things instead of doing the work of the developer.

Third, virtualization has become another problematic point for most commercial open source vendors. A server is no longer a server, so the relatively simple scenario in the early 2000 where open source companies could offer an annual recurring fee for support of the open source version and throttle based on servers is no longer very easy to do. This means that many open source companies need to throttle on mechanisms like users which makes these companies look, smell, and sound much more like traditional software companies.

Finally, the legal offering of the dual-licensing software model has fallen short. One of the major offerings of the commercial license offered by open source companies is the IP Indemnification clause. However, litigation and risk continues to rise around the world. The result is that the amount of protection that most companies can afford to offer around indemnification is very small. For an open source company, these means that protecting the client can no longer be used as a big selling point for the paid version.

These four forces are certainly working against open source as a business model. Bare in mind that most of these forces are only affecting enterprise application companies and not open source companies that are attacking the lower layers (OS, Containers, etc.). As we explore these forces we will also look at some of the mitigating factors that might still make open source the right business model choice for some enterprise application companies in certain markets.
Brian Reale has more than 15 years of experience managing high tech companies. Prior to founding ProcessMaker in 2000, Mr. Reale was the General Manager of Unete Telecomunicaciones Ltda., a long distance voice and data carrier in South America that Mr. Reale founded in 1997 and sold to a publicly traded US Telecom company in 2000.

Mr. Reale graduated magna cum laude from Duke University in 1993 and was awarded a Fulbright scholarship in linguistics in Ecuador in 1994.