How open source is changing software commercialization
Over the last years, we have seen successful open-source companies popping up all over the software industry. Some open-source start-ups like HashiCorp or Databricks reached terrific unicorn valuations, while others were involved in remarkable exits, like Red Hat (by IBM, $32 bn) or MuleSoft (by Salesforce, $6.5 bn). After the rise of enterprise software in the last two decades, it feels like a new era is dawning for software — and in particular for developer tools. Even renowned VC fund Andreesen Horrowitz, who created lasting headlines in 2011 with the quote “Software is eating the world”, now talks about open-source eating software [1].
This naturally raises the question of what this means for the software industry and its commercial dimensions. Software will become increasingly transparent and freely accessible, causing numerous long-established software vendors to re-evaluate their business model — or go out of business. Nevertheless, there will still be commercially extremely successful software companies, that is proven by the above mentioned valuations and acquisitions. But the way (open-source) software is commercialized will be revolutionized.
Why open-source will succeed
Before we dive into the changes for software commercialization, let’s quickly recap the advantages of the open-source approach and why it’s superior to the “old path” of bringing software to the masses.
The vendor perspective
Besides the obvious limitations, like the more complex monetization, developing and distributing software with an open-source approach brings some tangible benefits:
- Low cost of development: This aspect is certainly the most obvious — when external developers contribute to open-source projects for free, it simply saves internal development costs.
- Crowd intelligence: Software vendors don’t have to rely solely on the ability of their own developers, but can also count on the intelligence of the vibrant open-source community for the further development of products (e.g. through feedback, feature requests, etc.).
- Low customer acquisition costs: Instead of spending fortunes on inbound marketing and a large enterprise sales team, open-source companies let the product speak for itself and rely on building a large user base, which later makes it much easier to gain traction in the enterprise context.
The user perspective
If you look at open-source from the user’s perspective, the advantages are even more obvious. This is particularly interesting when you consider that there has been an enormous shift towards customer-centric organizations in the last decade. Startups in particular like to proclaim that a radical customer perspective is what sets them apart from established players. So what’s to stop them from following the will of the customers (“users”) here, too? So let’s see what’s in for them:
- Cost effectiveness: Why pay for software if you can have it for free, right? I think everyone would ask themselves why he should pay for a product which he can get for free (and better?).
- No lock-in: Vendors lock-in’s have been a painful experience for almost every company (just spend a thought about switching your cloud infrastructure). If you have the source code, you are free to refuse commercial offers and develop your own solution (starting from the open-source project). Furthermore, big open-source communities themselves are independent from individual developers and thus don’t experience a “dev lock-in”.
- Faster time to market: Integrating and just testing open-source solutions is simply faster than lengthy negotiations and implementations projects. Furthermore, the capabilities and ease of customization allow users to tailor products to their actual needs. This speeds up the entire development process and enables developers to go to market with their products more quickly.
- Transparency: By reviewing the source code, maximum transparency and trust can be ensured. This is especially valuable in a time where users expect backdoors in every piece of third party software. The open source community has an important monitoring role here. Just think of the run on Signal messenger after it was recommended by some members of the community [2].
- Security: Access to the source code gives everyone the opportunity to test the code for security vulnerabilities and bugs. Therefore, nowhere else CVEs (critical security vulnerabilities) are found, reported and fixed faster. A great example of community efforts to make open-source more secure is Google’s OSS Fuzz [3], which provides free infrastructure to fuzz test open-source projects.
Disclaimer: I realize that these lists are not exhaustive and that there can be downsides on both sides as well, but that should not be the scope of this article.
The impact on software commercialization
Now that we know that the rise of open source software is beneficial from the perspective of both vendors and users, let’s take a closer look at its impact on software commercialization. For this, we’ll dive into the typical themes software sales & marketing teams are dealing with today and give an outlook on the changes to come.
Business model
The way open source can be monetized is of course fundamentally different from the classic software licensing business. The dominant model right now is “open-core” with success stories like GitHub or Elastic. The basic idea here is to open source the core functionality of a product, while offering advanced features (e.g. CI/CD integration) as a paid version. Other monetization opportunities exist in consulting offerings, hosting services or marketplaces. We will cover this topic in more detail in a later article.
Strategy alignment
Enterprise software — and especially SaaS — has been a sales-heavy industry in the last decade. Successful companies have had to be sales-driven to compete against increasingly strong competition. There are numerous examples for companies who won their markets because of a superior sales force. With open-source, the software industry makes a shift to more product-driven organizations. The reason therefore is that when code is accessible on a free and open market (e.g. GitHub), the better product wins. The importance of a large sales team is therefore diminishing — although it is still important for enterprise-level deals. Let the better (open source) product win. :-)
Buyer persona
For vendors that hope to sell their software products and services to mid- and large-size companies, the buyer persona (the audience which has to be targeted by sales and marketing activities) changes from C-level executives (CIO, CTO, etc.) to the end-user (developers, system architects, etc.). As more and more open-source is used, the offerings and possibilities also become more fragmented. “No one gets fired for buying ibm” is no longer true in a world where individual solution requirements are increasingly complex and — in best practice — demand a composition of various open source modules (rather than an enterprise suite). Therefore, the users who have an understanding of the open source landscape and actually have to deal with the consequences are the ones who decide. We are thus observing a fundamental shift from the top-down to the bottom-up approach.
Activites
So what do you do to realize growth as an open-source company? The prerequisite for a successful open source business model is that you manage to create a vibrant community. Of course, this is achieved first and foremost through an outstanding product. But beyond that, active community management is key. Users have to be encouraged to use the product and subsequently perhaps even contribute to it themselves. For this, activities such as support (e.g. via slack), social media management (think reddit, stackoverflow, github) or community events (e.g. meetups) move into focus.
KPIs
The size and activity of an open-source community significantly determine the value of an open-source company. The reason for this is that a company that has 10,000 loyal users will always find ways to monetize it. On the other hand, it will be difficult for any company that has only a hundred developers using its open-source product (even though there are exceptions for highly specialized products). It might sound crazy, but gaining stars, forks and contributors suddenly becomes a more relevant metric than leads or closed PoCs in this new world, especially in the early stages of an open-source startup.
Staffing
The change in activities, of course, turns the sales & marketing teams upside down. There is no longer this huge need for performance marketers, sales reps and account executives — although of course they are not dying out. The need will just shift to a more specialized salesforce for large-scale enterprise deals. For efficient marketing, the modern open-source company requires community managers to take care of the crowd and trusted technology evangelists to spread the word. This will be a particularly big challenge, as it basically requires marketeers who have tech credibility. Anyone have any ideas where to find them?
Some finals thoughts
Obviously there are some major changes for the software business ahead and we should be keen to find out where these developments will take the industry. Especially the commercial units of software vendors will have to think about their new role in this product-driven, bottom-up world. The engineering teams of this world will certainly like this evolution.
To wrap this up, here are some key takeaways:
- Considering the mega exits of open source companies in recent years, we are at a turning point in the software industry right now.
- Making software free and open source brings tangible benefits for users and, in fact, for vendors as well.
- The shift towards open-source will therefore continue and fundamentally change the way software is commercialized (especially in terms of business model, strategy, sales approach, measured KPIs, staffing requirements).
- Particularly sales and marketing departments need to rethink their roles and adapt to the new environment.
[1] https://a16z.com/2019/10/04/commercializing-open-source/
[2] https://www.howtogeek.com/708916/what-is-signal-and-why-is-everyone-using-it/
