The future of commercial open source software lies in commercial licensing strategies, but which are the strategies that are more likely to deliver the results vendors are looking for?

Much of the open source blog chatter over the Christmas period was related to open source business models/strategies, largely triggered by a post written by Dave Rosenberg in which he declared that commercial licensing, and specifically open core licensing will be all the rage in 2009:

“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.”

During 2008 it became clear that the open core approach - in which the core software is open source while an enterprise version is also available with proprietary extensions - has many benefits for vendors of open source software, including providing up-front revenue and in balancing the requirements of community and enterprise users.

As Matt Asay wrote recently, the result is that the line between open source and proprietary vendors is beginning to blur:

“Open source needs some hook - however mild - to encourage prospects to pay, thereby earning a reasonable return and justifying further open-source development. Proprietary companies, for their parts, are looking to open source as a new distribution channel for their products, plus want to tap into the development benefits open source can afford.”

Proprietary vendors tapping into the benefits of open source development tend to generate revenue from other products or embed open source within larger commercial products, rather than building proprietary extensions on top of open source (think of IBM’s use of Apache within WebSphere).

Clearly there is a fine line between the two (one takes a bottom-up approach to commercialization, the other is top-down), but the two commercial open source business strategies that I expect to show significant growth in terms of usage in the next couple of years are Open-Core and Embedded open source.

Note: That does not mean that support and subscription-based strategies are going away any time soon. Subscription remains one of the most popular open source revenue drivers and will continue to be the bedrock of open source revenue, while ad hoc support will remain the long tail of open source revenue and will continue to drive good revenue for smaller open source support specialists.

The move towards more commercial revenue strategies should also not be seen as some kind of failure. Open source is not broken, and has not failed, but success has been redefined based on commercial reality rather than theoretical ideals. In fact the growth of embedded strategies around open source software shows how pervasively successful open source has been as a development model.

Open-Core
As we saw in our report, “Open Source is Not a Business Model“, Open-Core licensing is already a popular licensing strategy - used by 23.7% of the 114 vendors we covered.

It is more likely to be used by vendors that dominate their own open source projects (such as Talend, xTuple and Zenoss) although EnterpriseDB is an example of Open-Core built around community-developed open source software.

I previously noted that Open-Core licensing was a key element in the Extension Age, the fourth of five ages of vendor-led open source revenue strategies.

Given that there are a large number of smaller vendors making their way through these five ages we can expect Open-Core to be a significant strategy for vendors that dominate their own project communities for the next few years.

However, just because Open-Core is a popular answer, does not mean it will be easy. As previously noted, it does bring its own problems, such as balancing what functionality will be available in the enterprise or community versions.

As Carlo Daffara put it:

“The model has the intrinsic downside that the FLOSS product must be valuable to be attractive for the users, but must also be not complete enough to prevent competition with the commercial one. This balance is difficult to achieve and maintain over time; also, if the software is of large interest, developers may try to complete the missing functionality in a purely open source way, thus reducing the attractiveness of the commercial version.”

To put it another way, I previously noted that with the Open-Core approach the open source disruptor is disrupted by its own disruption and that in the context of Christensen’s law of Conservation of Attractive Profits it is probably easier in the long-term to generate profit from adjacent proprietary products than it is to generate profit from proprietary features deployed on top of the commoditized product.

Open-Core also theoretically contradicts one of the claimed benefits of open source software: that of eliminating the upfront licensing cost while replacing the ongoing maintenance cost with a subscription-based support contract.

This is evidently not much of an issue for CTOs in practice, however, if Matt Asay’s recent experience at New York CTO Club is anything to go by. What he heard from the assembled CTOs indicates that are happier to make a monetary contribution than a code contribution to the underlying open source software:

“Many indicated that it’s too hard to contribute back to open-source projects due to internal legal issues and the high bar to knowing how to contribute. They suggested that they would instead prefer to pay the open-source companies to do that work for them.”

However, the vendor misses out on the benefits of lower development costs and wider testing enabled by open source development while Open-Core is also potentially confusing to both the vendor and its customers.

That is why I placed the Embedded Age further along the evolutionary scale as a potential fifth age of vendor-led open source revenue strategies in the diagram above.

Embedded open source
An embedded open source strategy is often used by proprietary vendors to lower development costs while tapping into the experience and expertise of a wider community. Examples include IBM’s use of Apache and Actuate’s use of Eclipse BIRT. In Open Source is Not a Business Model, 11.4% of the 114 vendors covered were using embedded software as a revenue strategy (while 13.3% were using open source embedded in hardware products).

However, that report just looked at open source specialists, and the use of this strategy is more widespread. Almost every proprietary vendor in the technology industry is somewhere on the five stages of community open source engagement.

(Based on a graphic used by The Eclipse Foundation and research done by Carleton University and Nortel. For more see this post).

It is based on the widespread use of open source code beyond open source specialists that I believe the Embedded strategy may well be more significant than Open-Core in the long-term. To put it another way, if Open-Core was a significant revenue strategy of open source 3.0 (vendor-dominated open source projects such as MySQL, JasperSoft), then Embedded is one of the commercial open source strategies of open source 4.0 (vendor-dominated open source communities such as Eclipse, Symbian).

Glyn Moody predicts the increased influence of open source foundations in 2009, although refers to the likes of Mozilla and Gnome. I believe we will see the increased use of foundations that follow the Eclipse model in 2009 and beyond as vendors look to collaborate on the creation of nondifferentiating code in order to cut development costs while focusing their research dollars and euros on value-add products and services.

Matt Asay (again) recently speculated whether open source foundations might provide a potential exit for open source specialists.

“What would happen… if the industry had a mechanism for allowing interested corporate parties to provide an exit for Project X’s (or Company X’s) core team? Instead of selling to one company, in other words, Project or Company X would sell to the industry, as it were, and would become Foundation X, with its value would becoming industry property.”

Matt points out that it would seem unlikely that an industry sector would spontaneously coordinate such a transaction. However, as Nokia’s purchase of Symbian and the creation of the Symbian Foundation has shown, it only takes one vendor to act as a catalyst.

Although The Acquisition Age is offered as an alternative to The Embedded Age in the chart above, the fifth age of vendor-led open source revenue strategies may well be a combination of the two.

I certainly expect to see more vendor-dominated communities created as vendors seek to use “The Law of Conservation of Attractive Profits” as a strategic competitive weapon with which to undermine rivals and boost revenue generation opportunities.

While larger vendors have tended to form foundations around previously-proprietary code it is not unreasonable to think that open source specialists could also provide attractive acquisition targets for the same purpose.