Where’s the Money? Options for Commercializing Technology, Part 1: Open Source Software – Tech & Sourcing @ Morgan Lewis
When the topic of technology commercialization strategies comes up, the most common options typically mentioned include the sale of a technology or building a business around technology by selling products or providing licenses or subscriptions to technology-based solutions.
In this series, we will look at technology commercialization options that are less commonly discussed. In Part 1, we discuss how companies may be able to utilize open source software (OSS) as a commercialization strategy. In a forthcoming Part 2, we will focus on the option to “white label” technology as a commercialization strategy.
WHY OPEN SOURCE?
We have highlighted issues related to OSS in a number of blog posts: we spoke about trends in leveraging OSS, as well as issues to consider in the context of representations and warranties in M&A transactions. Our colleagues also discussed business risks associated with the use of OSS.
In this post, however, we turn our focus to why a business may choose to pursue an open source strategy and how businesses may still receive commercial benefit from OSS.
The central idea of OSS is to leverage the breadth and depth of the developer community, which helps in identifying and eliminating bugs and security issues, as well as improving software features and user experience based on user feedback.
This remains the core benefit of OSS-based businesses: as demonstrated by a RedHat report on the state of enterprise open source, 89% of respondents saw enterprise open source as more secure or as secure as proprietary software. However, open source companies have also proved that they can be profitable businesses, and a few recent initial public offerings in the sector prove as much.
OSS COMMERCIALIZATION OPTIONS
Before we look into how OSS owners can make money, it’s worth mentioning that the commercial success of OSS is mostly attributable to (i) the scale of interest in the product from both the developer community and customers in order to utilize the core benefit of open source as highlighted above; and (ii) the credibility and reputation of the OSS owner, as cybersecurity issues are often top priority for customers. Now, let’s turn to the options.
Open But Not Free
While OSS is often perceived as a free software, that is not necessarily the case. The creator may publish the source code under a license that would limit the use and modification rights or impose an income-sharing obligation on the licensee if a product embedding the software is commercialized, which incentivizes potential commercial users to enter into a separate commercial license with the creator.
This option is also called restrictive licensing and has been criticized by the open source community as departing from the original intent of OSS. Note that converting to a restrictive license after a product was first marketed without any restrictions may not be well received by users (see our coverage of the Dungeons and Dragons case earlier this year).
Free vs. Paid Versions
This option is sometimes called dual licensing, as the software owner may allow free use of the software with basic options but will charge a fee for the versions that include additional functionality or are intended specifically for enterprise use. This pricing strategy is sometimes called “freemium.”
A variation of the dual licensing model is known as the “open core” model. In the open core model, the developer open-sources the majority of the code and allows it to develop as an ordinary OSS, but keeps certain features and functionality proprietary and available for commercial licensing.
For example, envision a browser or mobile operating system that comes with a marketplace of add-ons and extensions created by the owner as well as independent developers, where some of those add-ons and extensions are available for a fee.
Because not all businesses have the necessary capacity to deploy and run OSS, some vendors may choose to offer a remote server to run the OSS with added functionality such as backups and upgrades of the OSS.
However, given that remote servers generally are the territory of cloud vendors, there may be competition between OSS developers and cloud vendors offering OSS as a service without extra cost to the customer. This competition has resulted in some OSS providers including limitations in their licenses to prevent selling their software as a service without paying royalties.
Support and Consulting
OSS creators may utilize their expertise and offer customers paid support in relation to OSS deployment, configuration, integration, training, or troubleshooting. There are different views as to whether this is a sustainable operational model long term, as many would claim that OSS should improve over time, and customers will not be inclined to continue paying after the initial deployment stage. As a result, some providers choose to use this feature together with proprietary features compatible with OSS or with open core.
In addition to the above, there are more ways to raise money, such as certification fees, crowdsourcing, branded distribution, or hybrid licensing, e.g., a so-called franchising model where the OSS owner certifies selected partners to become “authorized” vendors of the OSS and they utilize one of the commercialization strategies and pay a fee to the OSS owner.