Questioning open-core licensing for open source software

Returning from OSBC last week, Gartner analyst Brian Prentice writes a post questioning the conventional wisdom of open-core licensing. Prentice argues that open-core licensing provides significantly less value to the customer than it does to the vendor or the vendor’s venture capital (VC) backers. I agree with his conclusion, but don’t think that vendors or VCs should shy away from open-core licensing as a result.

Prentice writes: “The VC communities’ interest in open source, as I see it, is based on the view that a project’s associated community will lower development and sales costs. That allows them to build an attractive proposition when selling the company.”

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Let’s begin by looking at single-vendor-controlled projects. These are the most common examples of successful — in terms of revenue potential — open source projects. If VCs still believe that a vendor will benefit from lower development costs as a result of selecting an open source development approach, they need to wake up.

Look at virtually any single-vendor-controlled open source project and you’ll note that the vendor severely limits contributions from third parties. Among other reasons, ownership of the copyright and being able to track pedigree of the code contributions are key justifications for limiting outsider contributions. These are necessary steps for offering a commercially licensed product with confidence.

Single-vendor-controlled open source projects do benefit from testing, documentation, and translations from the user community, but these expenses pale in comparison to the actual development costs. As such, I’d argue that lower development expenditures are not really a reason for VCs to invest in an open source project.

I posit that lower selling costs are possible through an open-core-based open source distribution model. However, Prentice calls into question the value of open-core distribution:

The first is that open-core is a largely a retread of tired, old [small business] packaging strategies that have almost universally failed in the market. Businesses don’t blindly jump into a free open source offering and then upgrade to a full-cost, proprietary product like it was some stimulus-response behavior. From my experience, they assess these products, from Day One, based on the full version. That eliminates any sales benefit from the open source component of the overall strategy, which, in turn, makes these open-core vendors just like any other small software provider slugging it out in a crowded market space.

Businesses don’t blindly jump into any offering, free or otherwise, but developers absolutely do. I’m fairly sure that the Gartner customers asking for assistance regarding open source policies or open source product guidance are doing so because developers at the customer site are already using, or would like to use, an open source product. As long as the product is free, easy to acquire, and easy to learn, and it has industry success or buzz and helps the developer be productive, the developer will at least evaluate the product.

This is true for SugarCRM, Tomcat, Geronimo, Spring, Alfresco, Drupal, or Eclipse as much as it is for closed source products. For instance, at IBM we’ve seen strong uptake in WebSphere Application Server for Developers since making it available for no charge last year.

A happy developer quickly becomes a proponent for the vendor’s product. This opens the door to a sale predicated on existing and productive usage of the product in the company. In the case of open-core licensing, the sales rep still has to spend time explaining the differences between the open community version and the commercial product, and the rep still has to justify the price of the commercial product in terms of business value. This will be a discussion with a customer much closer to making a purchase decision than by cold-calling a customer without any previous usage history of the product.

Going back to Prentice’s conclusion: that open-core licensing favors VCs more than customers. Agreed, but is that a bad thing? Customers benefit, in the form of new features, faster defect fixes, and better documentation when the open source vendor is paid for its work.

The previous attempt by open source vendors to balance customer and vendor needs by charging for support proved challenging at best. Most large open source vendors have moved away from selling support directly to selling product licenses that also include support. This approach aligns with the standard industry practice of paying for product licenses according to the business value received.

Until, or if, the cloud becomes the leading monetization route for open source vendors, I’d argue that selling product licenses, as is the case with open core licensing, is the best approach for open source vendors and their customers — oh, and their VCs.

Follow me on Twitter at: SavioRodrigues. P.S.: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

This article, “Questioning open-core licensing for open source software,” was originally published at InfoWorld.com. Read more of Rodrigues et al.’s Open Sources blog and follow the latest developments in open source at InfoWorld.com.