I have been reading the debate about “Open Core” which was stimulated by Jorg Janke post about Compiere. http://www.compieresource.com/2010/06/compiere-open-source-failed.html. The open source community owes Jorge Janke a huge debt of thanks for his frank discussion of what happened at Compiere. People are rarely eager to share the details of their failures. I think that the most important lesson from his posting is the critical importance of management that understands its market. The venture capital industry learned this lesson long ago. When making a decision about an investment, venture capitalists focus on the management team; they understand that the technology is important, but great execution with mediocre technology will win over poor execution with great technology. This rule has been established by decades (and thousands) of investments. Open source companies pose particular challenges for management because of the critical role of communities and their expectations in the success of the company. These issues are very different from traditional software companies. Compiere is a very telling example of the nature of those challenges.
This post has launched a discussion of the “open core” business model and whether it is true “open source” http://www.computerworlduk.com/community/blogs/index.cfm?entryid=3047&blogid=41. I have great respect for Simon Phipps and his contributions to the open source community, but I strongly disagree with his statements. I am very concerned that if he is successful, end users will have fewer software programs under open source licenses. This result arises because of the law of unintended consequences: the successful demonization of the open core model will result in fewer venture capital investments in companies using open source licenses.
In the interest of transparency, I work with over twenty open source companies, most of who were funded by venture capitalists and the vast majority of which use the “open core” model. These companies have provided significant value to end users through the software licensed under open source licenses. Simon states: “But to use the package effectively in production, a business probably won’t find the functions of the core package sufficient, even in the (usual) case of the core package being highly capable.” This statement is simply incorrect. I have sat through many Board meetings and, in fact, the conversion rate from “open source” to “commercial” licenses is generally less than 10% for these companies. Thus, more than nine out of ten end users find the functionality of the open source version satisfactory.
Simon says that open core does not provide software freedom for “end users”. Yet, nothing prevents the end users of the open source version to modify it and distribute it or otherwise exercise the rights under the license. In fact, Compiere demonstrates the fallacy of this position because it created two different forks. Simon complains about the lack of access to the “commercial extensions” of open core programs. However, as Marten Mickos notes, the effect on the end user of the employment of the Apache license is the same as the open core model: commercial extensions are not made available to the community. http://webmink.com/2010/06/24/links-for-2010-06-24/#comment-870. I agree with Matt Aslett that the open core model does not violate the Open Source Definition, either literally or in spirit. http://blogs.the451group.com/opensource/2010/07/02/open-core-is-not-a-crime/. (please note that this position is a personal one and does not reflect the view of the OSI which has not yet taken a position on this issue). Simon appears to be suggesting that only a “copyleft” approach in which all of the software must be available under an open source license to meet the Open Source Definition, which is simply incorrect (the Open Source Definition was a reaction to the limitations imposed by the copyleft approach).
I agree with Matt at one level that ultimately this debate will be decided by the market (i.e. end users). However, I don’t agree that it is futile. Most venture capitalists will not invest in companies that do not use the open core model, so if the open source community leaders are successful in demonizing the open core model, they will decrease the willingness of venture capitalists to invest in open source companies (just a reminder, that a recent book, Mastering the VC Game, recently noted that venture capitalists typically look at 300 companies for each company in which they invest). Although not all open source projects need venture capital support, venture capitalists have been a significant source of support for open source projects (as well as new software made available under open source licenses) and end users have been the beneficiaries of their investment. If the open core model is no longer considered open source, the biggest losers will be the end users; they will lose the opportunity to benefit from that investment and that is certainly not consistent with the goals of open source
Red Hat has launched “Opensource.com” as the town square for the “open source” community http://opensource.com/should-be/10/1/welcome-conversation-opensourcecom. It provides for a single location to discuss the legal, social and economic consequences of the open source model. This site comes at an inflection point for the FOSS community: FOSS is now ubiquitous and many of the earlier battles for credibility and acceptance are won. Yet, with those victories, the FOSS community finds itself facing new challenges, such as how to deal with managing the numerous modules of open source in many products in a consistent manner (the so called “Bill of Materials” problem) and the continuing problem of dealing with patents http://opensource.com/law/10/2/looking-out-bilski-software-patents-v-foss. And open source is now being viewed as a model for collaboration beyond software http://opensource.com/business/10/2/what-could-politicians-learn-open-source-way. These discussions cut across wide variety of topics and have been spread out across many sites and blogs.
Opensource.com provides a forum to discuss these topics in one place and the opportunity to collaborate in the best tradition of the FOSS community. However, the site will only be valuable if it is used by the community. Red Hat has done the community a great favor and provided the platform, but now the community needs to step up and participate in the discussion. Let’s get to it!
I am participating in SDForum’s Global Open Source Colloquium for the third year. This Colloquium is held the day before OSBC. http://www.sdforum.org/index.cfm?fuseaction=Calendar.eventDetail&eventID=13371 The event is always fun because it is much smaller than OSBC and permits you to interact with the speakers on a personal basis. The speakers are always drawn from major figures in the open source industry with a leavening of speakers from overseas.
This year has a particularly interesting set of presentations with Larry Augustin as the keynote. Larry is a seasoned entrepeneur and a very successful investor in open source companies. We will also have several panels with open source CEOs which focus on the global market. And we will have a great panel of venture capitalists who invest in open source (I know because I will moderate the panel!).
The Colloquium will begin at 11:30 am at the Palace Hotel on March 23. I hope to see you there!
Olliance Group has recently announced the dates of the Open Source Think Tank: March 1-3, 2009. http://thinktank.olliancegroup.com/.
This year represents the fourth Think Tank sponsored by Olliance Group and DLA Piper. I go to many open source events each year and the Think Tank is my favorite because it combines a sophisticated audience, a reasonable size and interesting discussion. Those who have attended also enjoy the format:
The Open Source Think Tank that was hosted by Olliance Group and DLA Piper was ideal, not only for the chance to share ideas and address the challenges surrounding commercial open source with my peers, but for the networking and business development opportunities. CollabNet was able move at least three partner and potential customer relationships forward at the event itself.”
Bill Portelli, CEO, CollabNet
During the 2008 Open Source Think Tank, 120 CEOs, CIO/CTOs, VCs, attorneys and industry luminaries representing the entire open source ecosystem from venture backed startups to Fortune 100 companies. The event is invitation only and it has sold out each time, so sign up early!
Business models in open source continue to evolve. We are seeing a very interesting dialog on this issue, started by Matt Aslett in his post last week http://blogs.the451group.com/opensource/2009/01/05/commercial-open-source-business-strategies-in-2009-and-beyond/. He notes that David Rosenberg’s described the dominant business model for commercial open source products is the “open core” model which he describes as follows:
“Typically we now see an “open core” freely available with “exclusive” or proprietary features only available when you pay. If you are trying to build a commercial business on top of an open source project, this is likely the right answer.”
In the past, this model has been called “dual licensing” and has been the basis for the successful open source businesses built by Zimbra and SugarCRM. It is not the only business model: as I noted in my post about the confusion on open source and business models, Marten Mickos found over thirteen different business models for open source companies. http://lawandlifesiliconvalley.com/blog/?p=130
Business models for open source companies are continuing to evolve. However the “open core” model poses the very significant challenge of deciding where to draw the line between the functions in the community edition and the “commercial” edition. This issue was the most interesting to the audience at the presentation to the Silicon Valley Chapter of the Association for Corporate Growth last Thursday by John Roberts on “Open Source and the Future of Software.” We set up the presentation as a dialog and my question to John about business model brought the most comments from the audience. The discussion reminded me how new “commercial open source” industry is: SugarCRM started in 2004. We should not be surprised that the model is still evolving.
Matthew also makes the point that many traditional proprietary companies are adding open source elements to their business model. I have assisted a number of proprietary companies on these issues and I expect this trend to accelerate in 2009.
He has followed up this week with a post this week about the importance of the community in any open source business http://blogs.the451group.com/opensource/2009/01/12/commercial-open-source-community-strategies-in-2009-and-beyond/. I think that the management of communities is one of the core differences between open source companies and proprietary companies. Communities provide open source companies many of their core advantages and their management is critical to the success of open source companies. Yet as more open source companies adopt the “Open Core” strategy, they need to ensure that their communities remain active and engaged.
After a busy year end, I have time to reflect about the last year and developments in open source. I was particularly interested in the cascade of articles and comments about how the “Open Source” business model is broken started by Stuart Cohen’s article in Business Week on December 1. http://www.businessweek.com/technology/content/nov2008/tc20081130_276152.htm. I believe that Stuart is just wrong. I think that Charles Babcock got it right in his blog responding to Stuart. http://www.informationweek.com/blog/main/archives/2008/12/open_source_bus.html?cid=RSSfeed_IWK_ALL.
From my point of view, Charles’ most important point is that “open source” is not a business model, it is a means of developing and distributing software. And 451 Group makes a similar point in their report on open source business models (which actually pre dated Stuart’s article). http://www.the451group.com/caos/caos_detail.php?icid=694. I represent over fifteen open source startups (as well as large companies developing open source software) and they have a variety of ways of making money on open source software, ranging from “dual” distribution to support for proprietary additions. Marten Mickos in his keynote at OSBC in 2007 noted thirteen different ”open source” business models. http://akamai.infoworld.com/weblog/openresource/archives/OSBC2007%20-%20Marten%20Mickos%20Keynote.pdf. Second, “open source” cannot be a single business model because it spans a wide variety of different products: the business models for application software are quite different from infrastructure software. Third, most of the companies that I represent use a mix of business models, such as dual distribution and SAAS. In fact, even the “dual” distribution model has two forms: the newer model in which the company distributes a commercial version which has additional functions compared to the open source version and the older model in which the open source and the commercial version are the same. While the characteristics of “open source” development have strong similarities across different types of products, the business models are likely to quite different and will continue to evolve.
The open source community also owes Charles Babcock (and his colleagues at InformationWeek) a vote of thanks for the Analytics report “Open Source Enterprise: Its Time Has Come, And the Price is Right.” It provides an excellent summary of the state of open source software in the enterprise, with plenty of specific examples. However, I think that the most interesting part of the report is “What Happens After the Acquisition”. This section describes the challenges faced in the integration of open source companies into larger companies. The nature of open source companies and their communities requires a different approach from traditional acquisitions. In particular, the acquiring companies need to consider carefully the effect on the open source companies employees and their community when modifying the business model. As more open source companies are acquired by traditional software companies, these issues will take on increasing importance. Both sides need to understand that such an integration will require flexibility.
I think that 2009 will be a very interesting year for open source!
Gartner just reported that 85% companies currently use open source software and the remaining 15% expect to start using it within one year. http://www.gartner.com/it/page.jsp?id=801412. They noted that OSS is frequently replacing proprietary software for applications. For new projects OSS is being equally adopted for mission critical and non mission critical projects. TCO and reducing development costs continue to be the lead drivers of OSS adoption, but concern about vendor lock in with proprietary software remains important.
They noted that governance remains the number one problem. They noted that 69% of companies surveyed do not have a formal policy for evaluating and cataloguing OSS use. This number is even more dramatic than the findings of the survey for the DLA Piper Global Technology Summit. http://lawandlifesiliconvalley.com/blog/?p=108
Gartner notes:
“Just because something is free doesn’t mean that it has no cost,” said Laurie Wurster, research director at Gartner. “Companies must have a policy for procuring OSS, deciding which applications will be supported by OSS, and identifying the intellectual property risk or supportability risk associated with using OSS. Once a policy is in place, then there must be a governance process to enforce it.”
I strongly agree with this recommendation. As I have noted in the past, an open source use policy is essential for any company using software (in fact, a third party use policy is a more accurate description of the need because many “commercial” software components are readily available on the web). http://lawandlifesiliconvalley.com/blog/?p=18. The failure to have a OSS (or Third Party Software) Use Policy runs the risk that a company will be liable for monetary damages due to intellectual property infringement and may even be prevented from distributing its products due to an injunction. The recent Jacobsen case, in particular, raises the risk of injunctions being granted for failure to comply with OSS licenses. http://lawandlifesiliconvalley.com/blog/?p=64.
An OSS Use Polcy provides the best protection from these risks. And such a policy can be lure for the best programmers if it permits contributions by employees to open source projects. Many programmers now contribute to open source projects and want the assurance that they can continue to do so even when working for a corporation.
The question of how Microsoft will respond to competition with open source software is beginning to be answered. I have already discussed the views of Stanford and Harvard Business School professors in an earlier post http://lawandlifesiliconvalley.com/blog/?p=74.
Jean Louis Gasse, a smart entrepeneur and technologist who is now a venture capitalist, suggests that Microsoft is working on a comprehensive strategy for the threat to its Windows operating system which includes responses in all three areas of risk: servers, mobile and desktop. http://www.mondaynote.com/?p=1022. As he describes it:
Microsoft’s Live services are but a rehearsal for a much bigger act, Microsoft’s Cloud OS, sometimes called Strata. And, based on Microsoft’s own Cloud services, we’ll see a Danger-based smartphone, as proprietary as the Xbox and the iPod competitor Zune. Put another way, Microsoft’s future business model will borrow from Apple and Google, it will have two components: proprietary devices and “universal” Cloud services
I recommend that companies using open source stay alert for the next month as this new strategy rolls out.