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Why the open source business model is a failure

Paul Rubens | July 7, 2015
Most open source companies can't thrive by selling maintenance and support subscriptions. But the cloud may be the key to revenue generation.

It's an important point because although sales and marketing activities are costly, they're also effective. If they weren't, companies wouldn't waste money on them.

So it follows that open source companies miss out on sales even when they have a superior offering, because having the best product isn't enough. It's also necessary to convince customers to buy it, through clever marketing and persuasive sales efforts.

The problem, summed up by Tony Wasserman, a professor of software management practice at Carnegie Mellon University, is that when you're looking to acquire new software, "open source companies won't take you out to play golf."

The result, says Levine, is that open source companies simply can't compete with proprietary vendors on equal terms. "If you look at Red Hat, MySQL, KVM ... in every case where there's a proprietary vendor competing, they have more business traction and much more revenue than their open source counterparts."

As an illustration of the scale of the problem, Red Hat is generally held up as the poster child of open source companies. It offers an operating system and a server virtualization system, yet its total revenues are about a third of specialist virtualization vendor VMware, and about 1/40th of Microsoft's.

Hybrid future

This is why Levine has concluded that the way for open source companies to make money out of open source software is to abandon the standard open source business model of selling support and maintenance subscriptions, and instead to use open source software as a platform on which to build software as a service (SaaS) offerings.

"I can run a SaaS product by using Fedora as a base, but then building proprietary stuff on top and selling the service. So the monetization goes to the SaaS product, not to an open source product," says Levine.  "I think we'll start to see an increasing number of SaaS offerings that are a hybrid of open source and proprietary software."

He adds that many SaaS companies including Salesforce, Digital Ocean and Github (two companies Andreessen Horowitz has invested in) already use a mix of open source and proprietary software to build their services.

And Levine says that Facebook is the biggest open source software company of them all. "I was shocked when I realized this, and Google probably is the second biggest," he says.

Facebook has developed and uses open source software for the infrastructure on which its social network is built, and adds its own proprietary software on top to produce a service it can monetize. Google also generates a large volume of open source infrastructure code, although its search and advertising software is proprietary, he adds.

While the existence of free-to-download software undoubtedly makes it harder for open source businesses to monetize the same software by adding support, maintenance and so on, it's also the case that these low-cost alternatives must make life more difficult than otherwise for proprietary vendors trying to sell their products into the same market.


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