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Red Hat was the first commercial open source software company. For years, investors and entrepreneurs assumed there would never be another Red Hat.
Red Hat’s business was built around enterprise operating system distribution and support. Since the operating system is at the core of how users within a company are doing their job, Red Hat had a lot of leverage and a strong business model. But how many enterprise software products could be so critical to a business that they could manage to offer their software as an open source option yet still make money?
As it turns out, there are many ways to make money in open source.
MySQL ate away at the dominance of Oracle’s database business for similar reasons to Red Hat’s success: much like an operating system, the database layer is critical infrastructure. Cloudera and Hortonworks were able to monetize the open source Hadoop project because Hadoop was hard to deploy and manage.
As cloud infrastructure matured, it became easier to start companies that offered open source software as-a-service. Elastic offers an easy way to use ElasticSearch. RedisLabs offers Redis as a service. MongoDB (the company) offers MongoDB as a service. As it turns out, engineers love to see the source code for databases, but they do not enjoy deploying and managing them and they are happy to pay providers to save them time.
Still, there is continued skepticism of open source businesses.
Today’s debates center around whether individual providers like Elastic can offer a service that competes with an ElasticSearch service offered by AWS. We could just as easily be asking the inverse question– how can AWS compete with an entire company that is dedicated to the deeply technical problem of solving search?
The reality is that most of these open source product categories have an enormous total addressable market, and extremely good unit economics. This applies to both cloud providers and point solution providers. Investors often talk about how much they love subscription businesses. When a company starts purchasing infrastructure-as-a-service from you, it is like they are buying a subscription where the annuity increases over time!
When an investor says they are worried about a giant cloud provider offering the same service as an open source company, it is similar to the investor being worried that a new sales tool is going to be duplicated by Salesforce. The market always needs new sales tools–and the market needs those tools to be offered both by Salesforce and by smaller CRM companies.
In the world of commercial open source, there is plenty of room for both point solution providers and cloud providers. But they are competing for the same customers, and the competitive battlefield is expanding to the nuanced world of software licensing. By changing their licenses, open source projects like Kafka, MongoDB, and Redis can prohibit AWS from certain usage patterns. This might offer some protection for companies based around the point solutions–companies like Confluent and RedisLabs.
Beyond the fracas of the battle between cloud providers and point solutions, there are newer open source companies with models that do not fit tightly into any historical business models. HashiCorp makes a suite of differentiated open source tools that have not been seriously contested or offered as a service by cloud providers. GitLab makes an open source platform that is built with monitoring, logging, CI, and code hosting out of the box.
As the world of open source business models expands, more companies will find opportunity in open sourcing the code that runs their products. In many cases, they will find that it strengthens their advantage rather than weakens it. The defensibility of many businesses relies more on data and network effects than the contents of the codebase. We may see the default question gradually shift from “why should I open source my codebase?” to “why shouldn’t I open source my codebase?”
Mike Volpi is a partner at Index Ventures and has invested in many open source businesses over the last decade. He is on the board of Confluent, Cockroach Labs, Kong, and Elastic. Mike joins the show to share his perspective on open source business models of the past, present, and future.
The post OSS Businesses with Mike Volpi appeared first on Software Engineering Daily.
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