Open Core Business Model Revisited

After the Open Source Business Conference last week a few analysts have been chiming in on the ‘open core’ business model for commercial open source companies:

Matt Aslett : http://blogs.the451group.com/opensource/2010/03/25/winning-and-losing-with-open-core/

Brian Prentice : http://blogs.gartner.com/brian_prentice/2010/03/23/open-sources-reality-distortion-field/

Matt’s first point is that:

The proprietary vendors are now using open source collaborative development and code to lower the costs and improve the quality of their own product development, and are better quipped to compete with open core vendors thanks to their installed base, larger resources, and product maturity.

What I don’t think Matt appreciates is that than open source business model is not just a different development strategy. Executing well using this model affects every department within a company – particularly sales and marketing. You use mass-marketing techniques instead of enterprise-sales techniques. I don’t see the large proprietary vendors changing that much. Also you have to factor in ratios of open source code to proprietary code: from 100% open in a pure-play, 80-99% in an open-core play, and 0-2% for the big proprietary vendors. If a large vendor manages to reduce their development costs by 10%, you are not going to see them drop their license fee by 80%, particularly because the license fees cover the sales and marketing costs.

Another mistake is to view the ‘product maturity’ of the incumbent proprietary vendors as an advantage for them. Some of these product are bloated, and very hard to install and configure. This is not an advantage against open source software which needs to be easily to consume – otherwise the model does not work. In many cases the large vendors want to limit (or carefully manage) access to the software before customers purchase it, because they know the experience of using it is not great.

Matt’s second point is:

The shift towards software services (SaaS, managed hosting, cloud-based delivery), where the value being delivered is via services, rather than products.

Matt’s point here is that an open-core approach is irrelevant in this environment. That’s true, but you can say the same of pure-play open source and proprietary software. Since this applies to all software development strategies I don’t see the relevance of it.

Brian’s first point is about the VC-centric nature of open source start-up in the USA:

There’s a yawning gap between the value open source provides a venture capitalist (VC) and what it provides an end user.

I think this is the wrong comparison. Brian seems to think that VC-based companies and self-funded companies have different attitudes towards making money. Having done two self-funded start-ups, and now a VC-backed one (Pentaho), I can say that we would still be using an open-core model if we were using our own money.

His second point:

Open-core is a largely a re-tread of tired, old SMB packaging strategies which have almost universally failed in the market.

This is ridiculous. An open source distribution model, and the adoption of the software by an active community, is nothing like the SMB packaging strategies of the proprietary vendors. The community and enterprise editions are marketed consistently to all companies of every size – there is no different positioning or pricing for the SMB space. Making software available for $0 and converting a small (<1%) set of the community into customers, is very different from taking a huge expensive piece of enterprise software and trying to sell a cut-down version of it for less down-market.

Second point:

I’m not sure most open-core business models have been successful in building large external code contributions

Brian is fixating on code contributions – a common failure. Ignoring the other (in my opinion) 95-99% of all contributions. Take Apache Tomcat – the majority of the code has been written by a small group of people (lets assume 100), but the user base is in the millions. Certainly the software would not exist without those 100 developers, but without the large community of millions, Tomcat would be a hobby for 100 developers, nothing more.

His third point is about the companies that acquire these start-ups:

Who are those likely buyers? Increasingly it appears to be the very same established vendor community that are saying “ya, I do open source too!” So much for a compelling new business model!

When it comes to the M&A decisions and processes of large proprietary software vendors (and I’ve been through a few of these), I doubt whether the issue of ‘open-core’ or ‘pure-open’ would ever come up. It will come down to sales, brand, traction, and community. If ‘pure-play’ open source companies are as successful (or more successful), than the open-core companies, they are just as likely (or more likely) to be acquired by proprietary vendors as open-core ones. I don’t see the relevance of this point.