Open-source software powers much of the modern world, but how do the companies behind it stay afloat? While some rely solely on open-source solutions, others combine open and proprietary models to build sustainable businesses. The relationship between a business and its software project also varies—some companies are founded alongside new open-source projects, while others emerge later to commercialize an existing project.
Open-Source First, Business Later
Companies that emerge around an existing open-source project often rely on such software adoption to build demand for paid services. One good example here is Red Hat which created a business around a flavor of the GNU Linux operating system that was available under the terms of the GNU GPLv2 license.
They later developed Red Hat Linux, their own free and open-source Linux distribution that required a paid subscription for access to updates, security patches, and technical support. After some time, Red Hat created Fedora which is the community bleeding edge version of Red Hat Enterprise Linux (RHEL), the current name for their initial Red Hat Linux distro.
Red Hat made multiple acquisitions of open and proprietary software throughout the decades, most of the time keeping a similar strategy with a community-led version of the software and an enterprise version, sometimes even open-sourcing proprietary software that they acquired. Examples of Enterprise / Community versions in the Red Hat ecosystem are OpenShift (Enterprise Kubernetes) / OKD, Ansible Automation Platform / Ansible, Red Hat Satellite / Foreman & Katello, JBoss Enterprise Application Platform (EAP) / WildFly, Red Hat Quay / Project Quay, Red Hat Ceph Storage / Ceph, Red Hat Gluster Storage / GlusterFS, and so on.
Other examples include Databricks and Confluent, whose services and software are built around Apache Spark and Apache Kafka, respectively. Both companies were founded by the original creators of these open-source projects.
Business and Open-Source Grow Together
Some companies are built alongside their open-source projects, treating them as core components of their business from the start. One example is HashiCorp, which developed their software from scratch and initially focused on open-source only, but over time introduced commercial versions and cloud-hosted services, following an “open-core” business model, taking advantage of the large userbase and visibility built upon their open-source software. Unlike Red Hat, which emerged after Linux had already gained traction, HashiCorp developed both its business and open-source projects from the ground up. Other examples are GitLab and Elastic.
Examples of business models
You will find below some common strategies that companies that rely in some way on open-source software use. Note that a company can use one or a combination of the strategies presented below.
1. Open Core Model
- What it is: The company offers a free (0$), open-source version of the software (the “core”) but charges for premium features, enterprise-level functionalities, or proprietary add-ons.
- Examples: GitLab, Elastic, HashiCorp.
- Revenue streams:
- Advanced features (e.g., enhanced security, analytics, or integrations).
- Dedicated enterprise tools.
2. Hosting and Managed Services
- What it is: The company provides paid cloud hosting and maintenance of open-source software, removing the burden of setup and infrastructure management for users.
- Examples: Red Hat OpenShift, MongoDB Atlas.
- Revenue streams:
- Subscription fees for managed hosting.
- Usage-based pricing models.
3. Support and Consulting Services
- What it is: The open-source software is free, but the company charges for technical support, custom development, and training.
- Examples: Red Hat, Canonical (Ubuntu).
- Revenue streams:
- Technical support subscriptions.
- Custom development and integration.
- Training and certification programs.
4. Dual Licensing
- What it is: The company offers the software under a free ($0) open-source license and a paid commercial license. In some cases the commercial license allows the software to be embedded in proprietary applications, to be used for profit, by competitors, among others.
- Examples: MySQL (before acquisition by Oracle), Qt.
- Revenue streams:
- Licensing fees from businesses using the software commercially.
5. SaaS (Software as a Service)
- What it is: The open-source software is provided as a fully managed SaaS platform with a subscription fee.
- Examples: Grafana Cloud, PostHog.
- Revenue streams:
- Subscription fees for hosted and maintained services.
- Additional charges for premium features or higher usage limits.
6. Marketplace Ecosystems
- What it is: The company fosters a marketplace for plugins, extensions, or services related to its open-source software, taking a cut from transactions.
- Examples: Kubernetes with managed cloud services, WordPress.
- Revenue streams:
- Revenue sharing with third-party developers.
- Selling proprietary plugins or services.
7. Custom Solutions for Enterprises
- What it is: The company tailors the open-source software for specific enterprise needs, such as security hardening, scalability, or compliance.
- Examples: Cloudera, Confluent (Kafka).
- Revenue streams:
- Custom engineering projects.
- Long-term enterprise contracts.
8. Sponsorships, Donations, and Grants
- What it is: Some open-source companies or projects rely on donations from individuals, sponsorships from larger corporations, or grants from non-profits.
- Examples: Blender, OpenSSL.
- Revenue streams:
- Crowdfunding platforms like Patreon.
- Corporate sponsorship programs.
9. Education and Certification
- What it is: The company offers courses, certifications, and exams around its open-source software.
- Examples: Kubernetes certification (CKA/CKAD), Red Hat Certified Engineer (RHCE).
- Revenue streams:
- Certification exam fees.
- Training program fees.
10. Hardware Bundles
- What it is: Open-source software is bundled with hardware, and the company charges for the hardware or its maintenance.
- Examples: Arduino and Raspberry Pi (indirectly through hardware sales).
- Revenue streams:
- Hardware sales.
- Support and warranties for the hardware.
In summary, while the software itself may be free ($0) and/or have the source code available, companies monetize by offering value-added services, convenience, and solutions tailored to specific business needs.
Business Source License
The Business Source License has been a hot topic in recent times. In August 2023, HashiCorp transitioned its suite of open-source tools—including Terraform, Vault, Consul, and others—from open-source licenses to the Business Source License (BSL) 1.1. The BSL is a non-open-source license whose code under its terms is automatically released into an open-source license after a delay. It’s designed to help companies generate revenue for developing open-source by allowing them to make it commercial-license-only for a limited time in which they collect revenue for its licensing, and then the work goes open-source.
What’s the catch with the Business Source License for HashiCorp? The license allows users to access and modify the source code for non-production purposes but restricts production use by cloud service providers and other competitors. Besides, under the BSL, HashiCorp commits to relicensing the software under an open-source license compatible with GPLv2 or later after four years.
Implications of the Change:
- Impact on Cloud Service Providers: Companies offering managed services based on HashiCorp’s tools are now required to obtain a commercial license, potentially affecting their business models.
- Community Response: The decision has sparked discussions within the open-source community, with some expressing concerns about the shift from open-source principles to a more restrictive licensing model. This led to forks of two of their projects:
- OpenTofu: In response to HashiCorp’s licensing change, the community initiated OpenTofu, a fork of Terraform, aiming to maintain an open-source version. The Linux Foundation announced its support for OpenTofu, providing infrastructure and resources.
- OpenBao: Similarly, a fork of HashiCorp’s Vault, named OpenBao, was created and is being incubated by The Linux Foundation, led by IBM developers through LF Edge.
HashiCorp’s move to the BSL 1.1 license reflects a broader trend where companies seek sustainable revenue models while balancing open-source contributions. This shift underscores the evolving dynamics between open-source communities and commercial interests. HashiCorp, at the time, complained competitors made profits out of their work without contributing to the codebase. Other companies have done similar moves such as MongoDB and Elastic, which means HashiCorp’s shift isn’t an isolated case at all. This is not even something new, as the BSL was created in 2013 by Michael “Monty” Widenius, creator of MySQL and MariaDB.
Dual Licensing
Businesses opt for a commercial license in the Dual Licensing model for several key reasons:
- Integration into Proprietary Software: The commercial license allows companies to incorporate their code into their proprietary products without having to worry about the restrictions or incompatibilities between licenses. This is important when they want to embed the software into products they plan to sell or distribute.
- Avoiding the GPL’s Copyleft Requirements: Many open-source licenses, like the GNU GPL (GNU General Public License), require that any modified versions of the software also be open-source (be compatible with the original license, to be more precise). A commercial license often allows businesses to use, modify, or distribute the software without these obligations, making it easier to protect their intellectual property.
- Access to Enterprise-Level Features: The commercial version often comes with additional features, advanced support, and services that are crucial for businesses in production environments, such as custom features, performance enhancements, or integration with other proprietary systems.
- Legal Assurance: Commercial licenses often include warranties, indemnities, and liability protections that aren’t available under open-source licenses. This helps mitigate legal risks for businesses, especially when using the software in critical, enterprise-level applications.
By offering both free and paid versions, companies can cater to individual developers or small teams while still capturing larger enterprise clients that need the added features and security of a commercial license.
Sustaining Open Source: Why Revenue Matters
Sustainable funding is crucial for open-source innovation. While donations and grants provide valuable support, they often lack the stability needed for long-term growth. Open-source projects require ongoing investment—not just to pay developers but also to cover infrastructure, security, and maintenance costs. Many projects rely on donations and grants, but the unpredictability of these funding sources can hinder progress, delay critical fixes, and make it difficult to scale or modernize the technology to meet evolving user demands.
In conclusion, open-source business models showcase the diversity and creativity of modern software companies, which find innovative ways to balance freedom / free access with sustainable revenue generation. Some of these companies truly embrace this ethos by ensuring open-source tools remain free, fostering progress in multiple fields and collaboration. Meanwhile, the business models presented above allow the company to sustain and grow while supporting the community. By striking this balance, these companies not only empower users and organizations but also create a robust ecosystem where innovation thrives.