Last week Glyn Moody advised open source specialist start-ups to give up on the idea of ever hitting the $1bn revenue barrier.

Basing his argument on an observation made by Red Hat CEO Jim Whitehurst, Glyn argued that:

“all other open source companies really need to stop chasing that $1 billion dream – the idea that if they try hard enough they will break through the magic nine zero barrier. It isn’t going to happen, for the very reason that open source will take over from proprietary software at most levels of the enterprise stack: because it strips away the traditionally high profit margins and leaves the money with the customer.”

My initial response was to ponder what impact that this will have on the valuation of open source specialists. It stands to reason that potential investors will be discouraged from investing in open source vendors if they consider that their software licensing strategies place a ceiling to their potential for revenue generation.

It later occurred to me however that the situation Glyn is describing is not a potential future for open source specialists but a description of the market forces that have led many of them to adopt hybrid licensing strategies that mix open source and proprietary software.

Rather than stop chasing the $1bn dream, many open source specialist vendors instead stopped chasing the idea that they could get there with open source software alone.

Recognising that, as Whitehurst put it, “selling free software is hard” many vendors looked for others methods to generate revenue from open source software and (rightly or wrongly) decided that selling complementary proprietary software products and extensions was an easier route to generating revenue.

At the same time proprietary software vendors also recognised that they could use open source software to disrupt competitors and also lower the development costs of their proprietary packages – leaving some money with the customers while maintaining some of their profit margins.

Which is not to say that all open source specialists will end up selling proprietary software – the likes of OpenNMS, Sourcesense, Sirius and many others prove that it is perfectly possible to run a successful, profitable business and remain true to open source software licensing.

I would argue, however, that all these companies have long-ago made the decision not to chase $1bn and have structured their businesses – without venture capital funding – accordingly.

In fact, as we discussed in last year’s Open to Investment report, a number of open source vendors take the view that by avoiding institutional investors, they have a better chance of achieving their business goals. (Or, as Simon Phipps put it: “some of us don’t believe in VCs…”).

Glyn’s post suggests, and in the comments section he makes clear, that what he is describing is “open source as leading the way… to understanding that we don’t need to be growth junkies to create viable companies/industries”.

This is a suggestion that has come up before – Dave Neary’s post from 2008 springs to mind. As he stated: “Free software doesn’t get developed like proprietary software, why should the free software industry look like the proprietary software industry?”

He, and Glyn, are quite right: the free/open source software industry shouldn’t look like the proprietary software industry. It is perfectly possible to run successful and profitable open source software businesses that don’t have VC funding are therefore won’t adopt proprietary licensing in order to chase revenue and profitability targets.

It is also clear, however, that proprietary software vendors are increasingly using open source as a means of maintaining their profits and disrupting competitors and that, given the option, many (former) open source specialists are more than happy to compromise their commitment to open source software licensing in order to compete.

Perhaps this is a short-term approach and Glyn is right that “open source will take over from proprietary software at most levels of the enterprise stack” but in the meantime a lot of proprietary and hybrid software vendors are going to make $1bn (and many of them a lot more than that) with the help of open source software.

See also our previous post discussing how Christensen’s law of Conservation of Attractive Profits can be used to explain why open source vendors are increasingly turning to hybrid development and licensing strategies to generate revenue from open source.