The five ages of vendor-led open source revenue strategies

Before I got waylaid with traveling I wrote that each of the various open source revenue strategies might have its place depending on the stage of commoditization and the short- and long-term goals of the individual vendor.

I was thinking it might be possible to describe the lifecycle of open source strategies, but I never got around to following up on that… until now.

I hereby present the five ages of Vendor-led open source revenue strategies, which takes us through the evolving revenue strategies of vendors that dominate their own open source-based products.

Some vendors may stay longer at one stage than another, or even skip a stage entirely. I don’t claim this to be perfect, and it doesn’t necessarily work for vendors that build a business around community-led projects (I’ll come back to that), but I think it is essentially accurate:

The Support Age
The vendor releases its open source project, prompting widespread downloads and disrupting the market. Since it has first-mover advantage (especially if it uses the GPL) the vendor is the only source of support and services and benefits accordingly from its support-based revenue strategy, which provides support, training and consulting. A dual licensing strategy may enable the company to generate additional revenue from open source-shy ISVs and enterprises.

The Subscription Age
As the software matures and users become more comfortable with it community-based support is a viable alternative to ad hoc support contracts, while third party training and consulting businesses appear. The vendor looks to ensure more repeatable and long-term revenue through the addition of a subscription offering featuring updates, bug fixes and support etc. The subscription offering also enables the vendor to commit to indemnifying its commercial customers without the need for a separately-licensed version.

The Value-add Age
Enterprise users have built up a decent level of expertise and are able to self-support with confidence. Given the maturity and quality of the underlying code some begin to question the need for long-term subscription plans for non-mission critical environments. The vendor responds by adding additional features and services to its subscription offering, such as management capabilities, while maintaining a 100% open source software strategy.

The Extension Age
With the underlying code base even more mature the vendor is struggling to convert large download numbers into paying customers and there is the constant need for newer services to maintain interest in the subscription offering. The vendor turns to the Open-Core strategy and begins to offer proprietary functionality either delivered as a service via the subscription offering, or as a standalone complementary product.

The ?????? Age
It remains to be seen. One possibility is The Golden Age whereby the vendor hits upon a revenue strategy that provides balance in supporting the needs of both community and commercial users, bringing an end to war and poverty, aligning the planets and bringing them into universal harmony, allowing meaningful contact with all forms of life, from extra terrestrials to common household pets.

More likely though is The Acquisition Age, whereby the vendor sells-out to a larger player. My money is on The Embedded Age, whereby the open source software becomes a component of a wider commercial package, either through the extension of the Open-Core model, or through absorption into a larger vendor’s commercial software strategy via acquisition.

UPDATE – As suggested in the comments, The Hosted Age should be added to the list of potential outcomes. I wrote previously about the convergence of open source and SaaS and how the two model complement one another. Several vendors are already moving in the direction of SaaS being the enterprise deployment model for community open source software. – UPDATE

Any other ideas?

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17 comments ↓

#1 Dorian Pula on 12.01.08 at 10:17 am

I am betting on the Embedded or the Acquired and Now Embedded Age. What the open source projects that everyone needs but nobody wants to dominate? Is the fate of all commercially important open source to become either embedded or run by a foundation?

#2 Matthew Aslett on 12.01.08 at 10:32 am

There will still be a space for community projects like PostgreSQL but I do think we’ll see a lot more foundations, and that is the other area I plan to address via another post soon. There will still be standalone open source vendors for some time but my long-term bet is on embedded.

#3 Jon on 12.03.08 at 8:46 am

I like Matt’s analysis and suggest that software firms may be in all ages at the same time. Assuming that’s possible, then clients have the choice of the “degree” of relationship they want – from nothing to something akin to traditional software business models. I think the hosted model fits in too – so don’t leave it out what ever you do.

#4 Matthew Aslett on 12.04.08 at 4:38 am

Providing customers with the choice of engagement is theoretically possible but it might mean the company spreading itself too thin. As for the hosting model, that is definitely a possibility – I’m adding it to the list.

#5 Silicon Florist’s links arrangement for December 01 » Silicon Florist on 12.02.08 at 3:02 am

[…] The five ages of vendor-led open source revenue strategies Via The 451 Group ” hereby present the five ages of Vendor-led open source revenue strategies, which takes us through the evolving revenue strategies of vendors that dominate their own open source-based products. Some vendors may stay longer at one stage than another, or even skip a stage entirely. I don’t claim this to be perfect, and it doesn’t necessarily work for vendors that build a business around community-led projects (I’ll come back to that), but I think it is essentially accurate….” […]

#6 Daniel on 12.02.08 at 10:19 am

The “Going out of business” age, as unfortunately a lot of those vendors were funded 4-5 years ago and need to start formulating an exit strategy in a crappy market and the “Software as a service” age for those vendors with apps that support the hosted model (think VMs running on Amazon EC2 here, not Salesforce model)

#7 Matthew Aslett on 12.04.08 at 4:39 am

I’m adding SaaS age – good call. As for going out of business – that will inevitably be the future for a number of vendors – I’m going to blog about that soon.

#8 Silicon Florist’s links arrangement for December 01 : Oregon Startup Blog on 12.03.08 at 1:59 am

[…] The five ages of vendor-led open source revenue strategies Via The 451 Group ” hereby present the five ages of Vendor-led open source revenue strategies, which takes us through the evolving revenue strategies of vendors that dominate their own open source-based products. Some vendors may stay longer at one stage than another, or even skip a stage entirely. I don’t claim this to be perfect, and it doesn’t necessarily work for vendors that build a business around community-led projects (I’ll come back to that), but I think it is essentially accurate….” […]

#9 Tristan Rhodes on 12.03.08 at 11:42 am

Matthew,

I think the open source lifecycle that you have defined is fairly accurate. It also has similarities to what Matt Asay wrote:

A time to reap, a time to sow: A phased approach for open-source businesses
http://news.cnet.com/8301-13505_3-9945870-16.html

Next up, lets identify which companies are in which stage:

Subscription: Vyatta
Extension: Digium Switchvox

Others?

#10 Matthew Aslett on 12.04.08 at 4:41 am

That’s funny – I don’t remember reading Matt’s post before but it definitely overlaps the five ages.

#11 451 CAOS Theory » The five stages of community open source engagement on 12.04.08 at 11:25 am

[…] I wrote recently that the “ages of vendor-led open source revenue strategies” I’d come up with wasn’t suitable for vendors that build a business around community-led […]

#12 Joe Bachana on 12.04.08 at 9:09 pm

Consider the “ecosystem” age — distribution/subscription companies that emerge as the leaders in an open source project that has already been in existence can be a galvanizing force to rally the contributors and implementers around their flag. However, in general the company has to lay out guidelines that are often met with resistance by the characteristically free-spirited open-source community.

The challenge — and opportunity — is for the vendor to nourish a large ecosystem of these companies working together and with the vendor to add value to the customers.

One company that has done this masterfully is Microsoft. Whatever one can say about their software products, they have executed a partner community that is unparalleled on Earth.

I imagine that in the next 24 months we will be able to evaluate and write about how companies like Acquia, EZ systems, Al fresco and the like were successful in growing their market share, and how their success is tied to the ecosystem of partners that they developed.

#13 Matthew Aslett on 12.05.08 at 4:30 am

Hi Joe. Good idea. Although I would generally consider what your describe as a strategy for engagement in community-led projects, it is the point where the vendor- and community-led strategies begin to merge.

#14 Joe Bachana on 12.06.08 at 3:01 am

Yes a strategy, but I also think that in the ‘maturity model’ approach that you seem to suggest in this and the community open source engagement blog, this is the highest order since it represents a level of organization by the vendor that allows for rapid, federated acquisition of new customers globally. Most software companies never get to this stage because they’re stuck going from sale to sale, also servicing the customers themselves. By distributing implementation and sales through a channel, they create a network of coordinated companies that become virtually unstoppable. Strategic? Absolutely. From a revenue standpoint, this is where the rubber absolutely meets the road and I submit that none of the OSV’s have achieved this yet. The day one of them does will be the day they ‘win’ the market if not put a serious dent in the other companies’ (OSV and copyprotected vendors) market share.

I might blog about this, since I think I’ve got a handle on where some of these OSV’s might be failing to get to this next ecosystem stage….will mull it over.

Thanks for the great blogs, am subscribed to your feed now. -JB

#15 Matthew Aslett on 12.06.08 at 3:15 am

Thanks Joe,

I think you are right that this could be the nirvana that combines the benefits of vendor/community strategies. As such most – if not all – vendors will never get there. Look forward to reading your post on the subject.

#16 451 CAOS Theory » Open source in 2008 in pictures on 12.18.08 at 12:35 pm

[…] The five ages of vendor-led open source revenue strategies […]

#17 451 CAOS Theory » Commercial open source business strategies in 2009 and beyond on 01.07.09 at 5:40 pm

[…] previously noted that Open-Core licensing was a key element in the Extension Age, the fourth of five ages of […]