How open source is like Yelp--but not really

Writing in Venture Beat about Yelp, Chris O’Brien notes:

The problem with this era of companies is that they emerged out of a faulty rationale that gripped the valley for many years. The thinking was, if you just attracted a massive audience first, advertising revenues would inevitably follow.

It worked for Google’s search juggernaut, and eventually it has worked for Facebook. LinkedIn has thrived, for the most part, because it also has a paid pro subscription that means it’s less dependent on advertising. For just about everyone else, though, the notion that if you build it then the business model will come has not panned out.

I generally agree with this analysis. It’s a bit sobering how many household-name social and related companies with tons of users have never really been able to put together a stable, profitable business. And these aren’t flavor of the week companies. Many, like Twitter, own their categories. It would be hard to imagine a web without YouTube which, although it’s been able to monetize some of its content with advertising, is still apparently not profitable. Yet it might not exist had someone like Google not purchased it.

It sometimes seems as if there’s a similar dynamic in open source software—as Dan Woods wrote about last month in “Will there ever be another Red Hat?” VC Peter Levine made related points in 2014 when he wrote that the charging for support on open source bits [1]

model doesn’t work, but its key point of failure is that the business model simply does not enable adequate funding of ongoing investments. The consequence of the model is minimal product differentiation resulting in limited pricing power and corresponding lack of revenue. As shown below, the open source support model generates a fraction of the revenue of other licensing models. For that reason it’s nearly impossible to properly invest in product development, support, or sales the way that companies like Microsoft or Oracle or Amazon can.

This while open source software has become increasingly pervasive. Or, as Simon Phipps writes, the default.

The results from the annual Future Of Open Source survey are in, and they confirm everything we already knew: Open source is now the default.

The survey reports that 78 percent of its respondents are now running their businesses with open source software, and two-thirds are building software for their customers that’s based on open source software. More significant, the percentage of respondents actually participating in open source projects has increased from 50 percent to 64 percent, and 88 percent say they expect to contribute to projects within the next three years.

Making money with open source can indeed be challenging. My employer has arguably had unique success as an organization delivering 100 percent open source products. But, while open source was and is very much about user freedom and enablement, open source has also delivered many benefits to companies creating it even when the it’s not immediately evident as a direct revenue stream. (Leave aside, for our purposes here, companies using open source as part of an open core or Software-as-a-Service approach. That’s a separate long discussion.) 

Consider how open source has vastly decreased the friction around collaborating on software projects between organizations. With development in the open, it’s far easier to work cooperatively without putting a lot of formal processes in place. Open source software also provides a template for contributing and cooperating across silos within organizations as well. Look at some of the key IT trends happening today such as DevOps and the Internet-of-Things. Both require cultures that explicitly value transparency and working across functional boundaries. 

And that’s why open source isn’t ultimately all that much like Yelp and other social sites that have trouble turning a profit. Even those organizations that aren’t “doing open source” increasingly are doing it in fact. Maybe not explicitly, but in the manner that they develop, interact with customers and partners, and operate internally. It’s not just open source software that’s increasingly the default but open source culture.

[1] Peter actually described it as the “Red Hat model” but that’s a significant oversimplification of what the Red Hat subscription model actually means for customers, so I’ve changed the wording for the purposes of this piece.