The software is free, the company is worth billions of dollars…
On Friday, October 5th, 2018, Elastic, which develops an enterprise search engine, went public on the New York Stock Exchange and on the first day of trading jumped 94% to a price reflecting a company value of nearly $ 5 billion. A few days earlier, Cloudera and Hortonworks, which also develop systems to manage big data in the organization, announced a merger for a company value of over $ 5 billion. These two events are part of a global trend of adopting free software that can be used free of charge. Recent acquisitions by companies such as GitLab and Jfrog indicate that we expect to see a continuation of this trend.
These events are exciting because these are open-source software vendors. In simple words, an open-source license allows you to use the product freely without charge. The user (or the organization) can customize and modify the software to its needs. For example, we all know Android, from Google, which is the most popular operating system for smartphones. Android is an open-source software system that can be downloaded and used free of charge. Smartphone vendors such as Samsung and LG provide customized versions of Android.
Open source has come a long way in recent years. In the beginning, open source was created by idealists who aspired to a more just world and was adopted by developers, research institutions, and organizations that sought a cheaper alternative because they could not afford the real thing. Today the open-source is funded by large capital funds and investors and is in use from start-ups to most of the world’s leading organizations. Some of the leading open-source projects in the fields of software infrastructure, information management, databases, and more are considered more innovative and more secure. For example, much of the cloud computing infrastructure relies on open source.
One of the benefits of open source software over proprietary software is the ability to distribute software to potential users, from all over the world, without the need to lead a sales process, which may produce resistance. The adoption of an open-source system is an independent, internal decision in the organization. A staff member, usually from the IT field, encountered software, reads information, examined, experiments and, if satisfied, offers it on its initiative to the organization. No money is involved in the process, so there is no sales process. This way, small or large software manufacturers can reach many potential customers without sending a single salesperson. Another benefit of using free software is that the customer feels that he is not a captive customer. Especially in infrastructure software over time, the possibility to replace the system is complicated. When the code is open, the client has independence which he did not have with a proprietary system.
The software licensing model as we have known from companies such as Microsoft (the customer has paid for the right to use the software, and installed it on its servers and computers ) cannot exist anymore when the software license allows anyone to use it free of charge. Also, the software updates payment model that is a significant part of software manufacturer revenue cannot exist in open-source software since the upgrades are free. Also, Software as a Service (SAAS) model — in which the customer pays monthly (or annual) fees and access to the software without the need for installations, server maintenance, or updates, such as Sales-force, and Wix, must change when every cloud company can offer the same. The question arises, how can you offer free enterprise software while showing huge revenues and market value of billions of dollars?
There are several popular business models. The following is a partial list:
Enterprise or Premium version: Many companies offer open-source software with add-ons or parts that are not under open source licensing. Usually, software parts are intended for large customers or those who make extensive use of the software. For example, MongoDB, a popular database valued this period at $ 4 billion, provides an enterprise version that includes additional features such as analytics, security, and more. If we go back to Android, Google’s free operating system offers premium features. For example, the Google Maps service is not free and requires licensing. Can you imagine a Samsung phone without a maps function?
Software As a Service (SAAS)/cloud solutions: This usually includes features and advanced customer experience which is not part of the open-source version. These plug-ins, which are not part of the free code, provide a significant advantage in front of cloud companies that offer a hosted service of the open-source software. As an example, Redis labs use this business model.
Support plans: usually include support, maintenance, and consulting. Organizations that use the software as a critical system would prefer to purchase an upgraded version and support program with well-defined service level agreements. How many managers that you know would agree to take the risk that in a case of a critical failure, they will not have professional support? Redhat, for example, uses this model.
Trademark: Although the software is free, the software vendor can register a trademark. Cloud service providers who would like to offer the software as part of their solutions and to use or display the name and the logo of the software would need to get a right from the trademark owner. For example, Canonical, which is behind the widespread distribution of Linux, Ubuntu, requires
I do not doubt that we will continue to see more and more successes of companies that follow the economic models of open source. At the same time, large software companies, if not yet adopted the economic models of open-source, such as Microsoft, will join in the next future, direct or through mergers and acquisitions.