Demystifying Open Source as a Business

Open Source has come a long way. After years of labeling Open Source software as “communism” and a “cancer,” Microsoft changed sides under Satya Nadella’s leadership and bought GitHub, the platform that is home to nearly all Open Source projects, for $7.5 billion in 2018. IBM, which relies heavily on proprietary software, acquired Red Hat in 2019 for $34 billion. Outside mergers and acquisitions, Google open-sourced Android, and even Apple, known for being extremely closed, open-sourced Swift, indicating the value they find in this approach. Yet, building an Open Source company means you’ll hear the same doubt over and over again: “How will you guys make money?”

The root of the question is partially linguistic. In English, “free” can mean either liberty or unpaid, leading to expressions like “free as in freedom” (liberty) or “free as in beer” (unpaid). We find Open Source software of both kinds, often called Commercial Open Source Software (COSS) and Free Open Source Software (FOSS), to clarify the distinction. Beyond semantics, a significant portion of the developer community genuinely expects that Open Source software will not be charged for, an expectation that cannot be ignored.
So, do Open Source companies make money at all? 

• The short answer is yes. Looking at the past years of IPOs, many native Open Source companies grew to hundreds of millions of dollars in revenue:
• 
MongoDB, Inc. (MDB) went public in 2017 and has a current market cap of over $18 billion with $1.7 billion in annual revenues.
• Elastic N.V. (ESTC) went public in 2018 and now has a market cap of over $11 billion with $1.2 billion in revenues.
• GitLab Inc (GTLB) went public in 2021 and has a market cap of $8.5 billion with over $600 million in revenues.
• Confluent, Inc. (CFLT) went public in 2021 and has a market cap of $7.7 billion with over 800 million in revenues.

Other (still) private companies worth mentioning:

• 
Databricks was valued at $43 billion and reported $1.6 billion in revenues in 2023.
• Automattic, the company behind WordPress, was valued at $7.5 billion in 2021, with estimated revenues at $1.3 billion.

Ok, so Open Source can make money. But how?
The companies we mentioned provide us with clues.

Open core, tiers and addons

Even though GitHub is the home of almost all Open Source software, GitHub itself is not Open Source. Its counterpart, GitLab, follows an open-core model. Their true value lies in adding functionalities to the Open Source Git, created by Linus Torvalds for the Linux kernel. Both platforms provide tiered pricing for basic features, team collaboration, and enterprise solutions, alongside cutting-edge add-ons like GitHub Copilot and advanced cloud and security services. This strategic approach transforms foundational Open Source tools into powerful, revenue-generating ecosystems.

Support and services

Red Hat has developed an enterprise distribution of the Linux kernel and offers enterprise-level support, consulting, and professional services for it. The Linux Foundation itself offers training and certification for Open Source technology. 

Many CTOs prefer Open Source software due to its cost-efficiency, flexibility, customizability, community support, transparency, security, and to avoid vendor lock-in. However, support, maintenance and integration with existing systems can be challenging when using Open Source, creating opportunities for companies to provide these services.

Hosted version

MongoDB and Elastic both changed their licenses to the Server Side Public License (SSPL). The reason was to protect against cloud providers like AWS, which offered hosted MongoDB and Elasticsearch services without contributing back to the original companies. With the SSPL license, cloud providers can still use and profit from the Open Source software, with an important caveat: in doing so, they must disclose their own source code, not just the Open Source software used. This way MongoDB and Elastic can provide hosted versions of their own Open Source software. 

Copyleft licenses

Licenses that require users to disclose modified works and release them under the same license are called copyleft licenses. Examples include the GNU General Public License (GPL) and the GNU Affero General Public License (AGPL), in addition to SSPL. WordPress is licensed under the GPL and has enforced this license against competitors several times. The clever aspect of this licensing approach is that it is only enforceable against third parties, not the issuer. This means that while the issuer can prevent others from modifying and distributing the software without sharing their source code, they are free to modify the software themselves and share only what they choose.

Acquisitions and dual licensing

undefined. Sun was the owner of MySQL, OpenOffice, and the Java programming language. Oracle is known for its aggressive approach to monetizing its Open Source acquisitions, including lawsuits against Google for using Java in Android. This approach led to community forks to preserve the Open Source ethos, resulting in the creation of MariaDB and LibreOffice. While MySQL remains popular, OpenOffice has largely been replaced by LibreOffice.

Other reasons to buy can be found in the acquisition of MuleSoft by Salesforce in 2018 for $6.5 billion. Salesforce decided to acquire MuleSoft to diversify their product offering and access MuleSoft’s customer base, which included many Fortune 500 companies.

Platform, community and developer adoption

Apple open-sourced Swift to attract developers to build apps for iOS and macOS, thereby strengthening its platform. Google open-sourced Android to create a large ecosystem of devices and apps. Similarly, Shopify shared its design system, Wix its React library, HubSpot its content management system, and Squarespace its template developer kit, all to grow their ecosystems.

Open Source is preferred by developers worldwide and tends to gather a community of supporters and educators. This community involvement makes development easier and more appealing, creating a flywheel effect that attracts even more developers. With developers creating the apps, themes or plugins, this approach makes the platforms more attractive to users, ultimately driving growth and engagement.

From the makers of…

Makers of Open Source projects often offer additional services and products by leveraging the reputation of their well-known initial product. Confluent is a good example. The founders were working at LinkedIn when they created Apache Kafka as an internal project. Recognizing its potential, they founded Confluent to provide enterprise-grade features and support for Kafka.

Similarly, Databricks’ founders were working at AMPLab when they created Apache Sparks. Seeing the potential for big data analytics, they established Databricks to offer a cloud-based data platform that integrates data processing, machine learning and analytics, while also offering enterprise-level features and support.

Both projects were developed as Open Source software, which means they were intended to be freely available and could be used and modified by anyone. While anyone could do it, the founders leveraged the reputation they gained as the authors to have a competitive edge in the market.

It’s easy, then?

There is a significant difference between being Open Source and having no revenue, as the cases above highlight. Does this mean it’s without challenges to create a sustainable Open Source model? Of course not. Every endeavor has its pain points, which are where the beauty (and the margins) lies.

For starters, it’s hard to move an Open Source project beyond hobby status. If you want a profitable company, be clear on why you want to Open Source it. 

Is it to increase adoption? Open sourcing can put your project in the hands of many people. Then, you should also focus on developer experience and ease of use. Be aware though if your business relies solely on mass adoption to succeed or if you can find alternative revenue streams. Consider offering premium features, support services, or enterprise solutions to create a sustainable model. Balancing Open Source principles with a clear business strategy can help ensure long-term success.

Are you in it for the community? Community can mean different things: users advocating for your product in their companies and to their friends, resources generated by the community such as courses, blogs, and Q&A, or code contributions.

We developers are unique individuals who often enjoy coding outside of work. Contributing to Open Source is a way of learning, enhancing our portfolios and being part of something bigger. Contrary to intuition, though, most software is built by a few dedicated individuals and having too many Open Source contributions can shift your focus. Many Open Source projects are now limiting contributions to manage the overload. Although community feedback is crucial for staying current with tech trends, being Open Source doesn’t mean depending on the community to handle coding.

Not all communities are created equally. Understanding why you want a community is crucial for measuring its success effectively. Your metrics will vary depending on whether you’re seeking users, community resources, or code contributions. There’s no one-size-fits-all approach. GitHub stars, for instance, can be either a meaningful indicator or a vanity metric, depending on whether your target audience values them. Make sure your metrics match your project’s goals to accurately measure its success.

At Webcrumbs.org, we use a few proxies for Open Source metrics:

• GitHub Stars: Reflect initial curiosity.
• GitHub Forks: Indicate interest in analyzing the code.
• GitHub Watches and Maillist: Show interest in receiving updates.
• GitHub Contributions: Demonstrate a sense of ownership.
• Discord Members: Reveal a desire to be part of the community.
• Npm or GitHub Dependencies, GitHub Issues, and Stack Overflow questions: Reflect actual usage.

When measuring, ensure you do it right. Some projects, like “ullaakut/astronomer,” help identify fake stars. Tools like “star-history.com” let you compare your evolution with others.

Almost no companies are exempt from using Open Source software, whether they are aware of it or not. You may use them too, just make sure to respect their licenses and make the necessary disclosures. If the reliability of the underlying solution is a concern, platforms like GitHub provide SBOM (Software Bill of Materials), which offers a quick report of a project’s dependencies.

Finally, take care of the community. Abrupt changes, or even the fear of changes, in licensing and prices can have unintended consequences. Care about your brand and reputation as the maker of the Open Source project, as this constitutes a large part of your company’s advantage.

Building a profitable Open Source project is challenging, but far from impossible. Success stories from companies like MongoDB and Databricks show that substantial revenue can be generated through strategies like open core models, tiered services, and hosted solutions. Key factors include community engagement, proper metrics, continuous innovation, and maintaining a strong brand reputation. Only by understanding their own strategy can Open Source projects transition from hobby to sustainable and profitable enterprises.

This article is part of our series on Practical Open Source (POSI) program. POSI aims to facilitate discussions about doing business with and for Open Source. The 2024 edition consists of blog posts on OpenSource.net and a panel at All Things Open in October. More details and how to pitch on the POSI 2024 page.