Why the best open source companies welcome upstream competition

Commentary: An interview with Chef cofounder Adam Jacob reveals a key way to build an open source business.

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We're decades into companies trying to make money from open source, but we're still dealing with the same fundamental question: If I open source my software, how will I make enough money to cover my rent, pay back my investors (if any), and be able to afford further development? It's the question Dave Neary asks in a new interview series, Open Source in Business. But for Adam Jacob, cofounder and former CEO of Chef and now the founder and CEO of System Initiative, it may be the wrong question.

Why? If you start adding up the revenue you might make from would-be customers who get your open source code directly from you, you're overlooking the many others who may access that software elsewhere. In sales we think of the "top of funnel" (the universe of potential customers who know about your product) and the "bottom of funnel" (those who end up buying from you). 

According to Jacob, an open source "funnel gets big and it gets big without you" if you do it right. Here's why.

Let that funnel grow

The biggest challenge for any business is not conversion of leads. No, the biggest challenge is making your product known, such that would-be customers even have a chance to pay for your product. "In most proprietary software businesses," Jacob explained, "you have to manage the top of the funnel and you manage the bottom. You have to go dig for customers...and then you have to try to get them to become customers."

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It's a lot of work, filling that top of the funnel and then going through all the effort to guide prospects toward a purchase. In a proprietary software business, or in a proprietary open source business (where one vendor controls the code through licensing or governance), the costs are completely borne by the vendor. Yes, they earn all the revenues, too, but they spend an incredible amount of money to get there, and most such businesses will fail long before they realize any profit.

Open source, however, is different.

In the open source world, said Jacob, "every single [user of your software] is a possible customer of your product." While it might seem scary to have other vendors contributing to the upstream "funnel" of your potential customer universe, this is precisely how "the funnel gets big, and it gets big without you, which is what makes it magical," declared Jacob. "If you have a functioning open source project, that flywheel happens on its own."

A good example is Kubernetes. It's a huge, industry-defining presence today, but it never would have reached such influence had it been kept as a Google-only project. No way. Scott McCarty, a Red Hat product manager, said as much during this same Jacob interview. At one time Red Hat's OpenShift was "essentially a single vendor upstream project," funded exclusively by Red Hat. When Google released Kubernetes, Red Hat "jumped on it because it was a no brainer. If Google is going to spend half the money investing in this and we're going to spend half the money, now we get two dollars [of investment] for every dollar we spend."

SEE: COVID-19 isn't slowing open source—watch for developer burnout (TechRepublic)

Bigger funnel, more money

But what about those people who take "your" software and contribute nothing back? It turns out they are contributing back, noted Jacob:

When you think about somebody building and taking your software and trying to build another product to compete with you on it, what they're actually doing is building the top of your funnel. They're making the funnel at the top bigger. And since that impact is so outsized, the number of opportunities they create for you is bigger than the amount you lose at the bottom in competition every now and again. 

Which brings us to companies that have made the decision to license software in ways that block other vendors from offering a competing service. By Jacob's estimation, such licensing efforts don't really hurt would-be competitors because they simply build competing services that don't help to grow the pie/top of funnel for the open source originator

No, in Jacob's view, it's only the open source vendor who loses out. Because if they chose an open source license for their product, "there's more top of funnel impact [which also means] there's more availability of money at the bottom." Or, summarized, "You gain more value by making the top bigger than you do by excluding [competitors at the bottom of the funnel]." 

It's not complicated. It's math. Or pie. Do you want all of a small pie or less of a big pie? The latter approach is likely to result in much better outcomes for customers, employees, and investors.

Disclosure: I work for AWS, but the opinions expressed herein are mine. 

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