Open source business model

The open source business model is the way a company earns money from software that anyone can download and use for free. Open-source software is software whose code is published under a licence that lets anyone read, use, change and share it. Linux, Kubernetes, PostgreSQL and Kafka are well-known examples. Because the company cannot charge for the code itself, it charges for what large customers need before they will trust free software with their business.

Here is how it works in general. The code is written in the open, often by the company's own engineers together with outside contributors. Anyone can download it free, and many small teams run it without ever paying. A bank or a large company usually wants more. It wants tested updates and security fixes, someone to call when a server fails at 2 a.m., and a promise that the software is certified to work with its other hardware and software. The company sells these as a yearly subscription. It may also earn in three other ways. In the open core model, the free version is the core, and the features that large companies need, such as single sign-on or audit logs, are sold on top. In a managed service, the company runs the software in the cloud for the customer, who pays for what it uses. And in paid support, experts are called in when the software breaks or slows down.

The model has one weakness. A large cloud provider can take the same free code and sell it as its own managed service, without paying the company that wrote most of it. Some companies have answered by changing their licence, so that rivals may no longer offer the software as a cloud service.

Take, for example, a bank that runs its servers on Linux. It pays for an enterprise Linux subscription, so that a certified version with security fixes is supported for years.

Consider a shopping app whose systems exchange orders and payments as events. The event streaming software is free to download, but many companies pay its makers to run it for them in the cloud.

Say a start-up's PostgreSQL database slows down during a festival sale. It calls in open-source database support instead of hiring a database expert full time.

How is the open source business model different from freemium? In freemium, the free version is a limited product, and its code is kept secret. In the open source model, the full code is free and public, and the company sells services around it. It is also different from digital public goods, which are open too, but are built to serve the public, not to earn a profit. A company that uses open-source code written by others takes on a different kind of risk, described in open-source dependencies.