What is an “open source company?”

"Open source companies" are built around and rely on open source software to generate revenue and create value. Other companies may also use open source, but it is not the main focus of their business operations or revenue.

Many companies with open source products aren't purely open source. They offer both open-source and proprietary products. In these cases, the open-source product or division usually follows one of the five business models, even if the overall company has different revenue strategies.

Why open source companies need specific business models

Open source companies face a special set of business challenges and opportunities. To thrive, they must make money while sticking to the open source culture's values, such as transparency and collaboration. They need to balance their commercial interests with the needs and goals of the open source community.

Successful open source businesses know that the key to long-term success is to increase the value of the community around their projects. They make money by growing the overall value of the ecosystem and working together with others in the community for mutual success.

In contrast, a company that just uses open source may not face the same challenges. Their use of open source is simply a means to an end. They are not as closely tied to the open source community, so they do not need to navigate the same trade-offs between commercial interests and open source ideals.

The danger arises when an open source company starts to act as if it is independent of the open source ecosystem around its projects. They are more likely to adopt zero-sum strategies that place them at odds with their communities. This may succeed for a short time, but it leads to long-term decreases in the value of the ecosystem. Companies that take this approach are looking for a larger share of a smaller pie.

Open source business models

The common needs of open source companies have led to the development of five common business models. These are 1) the Ketchup Model, 2) the Dual License Model, 3) the Proprietary Crust Model, 4) the Infrastructure Model, and 5) the Adjacency Model. Some companies may borrow parts of multiple strategies at the same time.

The Ketchup Model

The Ketchup Model is a business strategy that uses branding and quality control to stand out from competitors. The goal is to provide an open source product similar to others on the market, but with a unique brand and high-quality product that customers are willing to pay for. The strategy is similar to how Heinz ketchup differentiates itself from other ketchup brands with its strong brand and high-quality product.

Red Hat uses the Ketchup Model. They offer a version of Linux for enterprise use. All of Red Hat’s source code and packages are available to anyone. Red Hat's value is in offering support, security updates and quality control. Many of these services are not directly monetized. Rather, these services strengthen the Red Hat brand and make enterprise customers feel comfortable.

Benefits:

• Provides a way for companies to differentiate their product in a crowded market
• Allows companies to control the quality of their product and ensure that it is up to their standards
• Widely understood to provide value

Drawbacks:

• Can be difficult to build a strong brand, takes time
• Quality control can be expensive, and companies may not be able to maintain their standards if they become too large
• Other companies can use the same underlying software to directly compete

The Dual License Model

The Dual License Model allows companies to monetize their open source software through the sale of proprietary licenses. At the same time, it allows them to participate in the open source community by making their software available under an open source license (usually a copyleft license like the GPL). This model is often used by companies that have a strong commitment to open source, but also see an opportunity to generate revenue by selling proprietary licenses to customers who want a closed solution.

MySQL (now owned by Oracle) is an example of a company using the Dual License Model. Oracle offers MySQL under the GPL license, but also offers a proprietary license for those who want to use the software without complying with the copyleft requirements.

Companies that have the ability to relicense sometimes move to a dual license model. For example, MinIO originally offered its object storage software under the Apache license but moved to an AGPL/commercial dual license model in 2021.

From the perspective of the open source community, the Dual License Model can seem one-sided. The company is placed in a better position than other community participants, and is set up as the only participant that can benefit financially from the project. This can discourage community development. If people know their work can be used in a closed version of the software, they might not want to contribute. This can slow down innovation and growth and may cause resentment.

Benefits:

• Provides companies with a way to monetize their open source software
• Offers users a choice between open source and proprietary solutions

Drawbacks:

• Can be confusing for users to understand the difference between the open source and proprietary licenses
• Disfavored by most open source/free software partisans
• Can limit the spread of the software, as proprietary users may not be as likely to contribute to the open source community

To be continued...

In the next part: The Proprietary Crust Model, the Infrastructure Model, and the Adjacency Model.