Where is the money? Options for Technology Commercialization, Part 1: Open Source Software | Morgan Lewis – Technology and Procurement
When the topic of technology commercialization strategies is discussed, the most common options usually mentioned include selling a technology or building a business around the technology by selling products or providing licenses or subscriptions to technological solutions.
In this series, we’ll look at technology commercialization options that are less often discussed. In Part 1, we discuss how businesses can use open source software (OSS) as a go-to-market strategy. In an upcoming Part 2, we will focus on the option of “white label” technology as a go-to-market strategy.
WHY OPEN SOURCE?
We’ve highlighted OSS issues in a number of blog posts: we’ve talked about trends in OSS usage, as well as issues to consider in the context of declarations and guarantees in mergers and acquisitions transactions. Our colleagues also discussed the business risks associated with the use of free software.
In this article, however, we focus on why a company might choose to pursue an open source strategy and how companies can still derive business benefits from OSS. The central idea of OSS is to leverage the breadth and depth of the developer community, which helps identify and eliminate bugs and security issues, as well as improve software functionality and user experience based on user feedback.
This remains the main advantage of OSS-based enterprises: as demonstrated by a RedHat report on the state of enterprise open source, 89% of respondents consider enterprise open source to be more secure or as secure than proprietary software. However, open source companies have also proven that they can be profitable businesses, and a few recent IPOs in the industry prove it.
OSS MARKETING OPTIONS
Before looking at how OSS owners can make money, it should be mentioned that the commercial success of OSS is mainly attributable to (i) the extent of interest in the product from the developer and customer community to utilize the key benefit of open source as outlined above; and (ii) the credibility and reputation of the OSS owner, as cybersecurity issues are often the top priority for customers. Now let’s move on to options.
Open but not free
While OSS is often perceived as free software, this is not necessarily the case. The creator may release the source code under a license that would limit the rights of use and modification or impose a revenue-sharing obligation on the licensee if a product incorporating the software is commercialized, thereby inducing potential commercial users to enter into a license separate business with the creator.
This option is also called restrictive licensing and has been criticized by the open source community as a departure from the original intent of the OSS. Note that converting to a Restricted License after a product is first released without any restrictions may not be welcomed by users (see our Dungeons & Dragons case coverage earlier this year).
Free or paid versions
This option is sometimes referred to as dual licensing, because the software owner may allow free use of the software with basic options, but will charge for versions that include additional features or are specifically intended for enterprise use. This pricing strategy is sometimes referred to as “freemium”.
A variant of the dual license model is known as the “open core” model. In the open-core model, the developer opens up the majority of the code and allows it to grow like regular OSS, but retains some proprietary features and functionality available for commercial licensing.
For example, imagine 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 costs.
Since not all companies have the capability to deploy and run OSS, some vendors may choose to offer a remote server to run OSS with additional features such as backups and system upgrades. ‘OSS.
However, since remote servers are usually the territory of cloud providers, there can be competition between OSS developers and cloud providers offering OSS as a service at no additional cost to the customer. This competition has led some OSS vendors to include limitations in their licenses to prevent their software from being sold as a service without paying royalties.
Support and advice
OSS creators can use their expertise and offer customers fee-based assistance with OSS deployment, configuration, integration, training, or troubleshooting. There are different views as to whether this is a sustainable operating model in the long term, as many argue that OSS should improve over time, and customers will not be inclined to continue payable after the initial deployment phase. Therefore, some vendors choose to use this feature with proprietary OSS-compatible functionality or with an open kernel.
In addition to the above, there are other ways to raise funds, such as certification fees, crowdsourcing, brand distribution or hybrid licensing, for example, a so-called franchise model where the owner of the OSS certifies selected partners to become ‘authorized’ OSS vendors and they use one of the marketing strategies and pay a fee to the OSS owner.