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A counterintuitive business model
A guide on how to evaluate the long-term sustainability of the business behind any open-source software you are using or considering working on yourself. Article co-authored by Mike Freedman. Interested in helping us build the next great open-source company? Timescale is hiring! As open source software becomes more and more popular , one of the most common questions we hear is: How do these projects make money? All are variations of the same straightforward question. But the answer is complex, and quickly evolving. Here are over 30 of them. In this article we describe that common pattern by sharing 5 business models these open-source software companies use to make money. If you are adopting open-source software in your own company, or working on an open-source business of your own, or even just considering working for an open-source startup, understanding these business models will help you evaluate not just the software, but also the long-term sustainability of the business behind that software.
A cloudy landscape
Comment 1. As open source software becomes more and more popular , one of the most common questions we hear is: How do these projects make money? All are variations of the same straightforward question. But the answer is complex, and quickly evolving. Here are over 30 of them. In this article, I describe that common pattern by sharing 5 business models these open-source software companies use to make money. If you are adopting open-source software in your own company, or working on an open-source business of your own, or even just considering working for an open-source startup, understanding these business models will help you evaluate not just the software, but also the long-term sustainability of the business behind that software. But first, there are two requirements every open-source company needs before it can even consider making money. The first prerequisite is broad adoption: the open-source project needs to have a large user base and community. Broad adoption is necessary because an open-source company can capture only a small amount of the value it creates. To be clear: an open-source company gives most, if not all, of its developed software away for free, and most of its users will never pay for that software. In fact, most open-source monetization rates the conversion rate from users to paying customers are fairly small: often in the low single-digit percentages if not lower.
What every open-source company needs before it can consider making money
More posts by this contributor Tracking the explosive growth of open-source software How viral open-source startups can build themselves into enterprise-IT powerhouses. Even major enterprise-IT vendors are relying on open-source for critical business functions today. Despite the growing popularity of open-source software, though, many open-source companies are not financially healthy. Source: Publicly available data. Just how challenging is it to build a big, profitable open-source business? But success, for entrepreneurs and investors alike, is possible.
Software as a Service (OpenSaaS)
Talk about starting a business based on open source software and the conversation will inevitably shift to Red Hat. That’s because the Linux vendor is a shining example of a company that’s making money from an open source product. But how easy is it really to establish an open source startup that makes money? It’s tempting to believe that the Red Hat business model, which is based around selling subscriptions for support to a maintained and tested version of Linux or a closely related model that offers consultancy and customization to an open source software solution as well support and maintenance , is the most viable way to make money from open source software. But Sam Myers, a principal at Balderton Capital, a technology venture capital company, says that most open source startups are unlikely to succeed using these business models. Because it is head-count driven, the model doesn’t scale, and you get low renewals. And you have competition from other consultancies. Myers admits that the subscription model can occasionally be successful, but asserts that a more promising business model is to build a product line around an open source core. This can involve developing premium software modules that add features to the core open source software or, alternatively, building supporting applications that complement the core. Another open source startup business model involves offering hardware that is suited to the software in the way that Digium sells telephony hardware to run the open source Asterisk telephony software. But Myers warns that this model can be difficult to sustain because customers typically only buy the hardware occasionally. Instead, he recommends looking for a business model that produces a recurring revenue stream. These can include offering open source software as a service or charging for API use in addition to selling premium modules or supporting applications as mentioned above. What quickly became apparent from speaking with Myers is that there is no «best» open source business model, and Allison Randal, president of the Open Source Initiative, says that open source startups should avoid searching for one.
How do Open Source Companies and Programmers make money?
There is a common misconception that there is no money to be made in open source software. It is true that open source code is free to download, but you should think of this as an opportunity rather than a limitation. A sophisticated open source application like Zimbra may be free soucre download and install, but it is a complex piece of software. Setting it up requires expert knowledge. Maintaining the server over time can require someone with know-how. Who better to turn to for this kind of sourcf than the people who created the software? Many open source businesses sell their own support services and contracts.
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Open Source software is nothing new to. It is free computer software that is made available along with its code. Many big companies, including Oracle and Google, too support open source software. It can be taken for granted that people create open source software because they love mak. But do Open Source developers make money? The objective of this post is to identify and list the methods by fan such software companies and developers can make money.
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