This piece is co-written by myself and Julian Lim. It is first published on E27.
Open Source is a very simple concept. However, most people have the misconception that “free” things cannot be profitable.
These days, when we think about open source, we generally mean open source software. With software, open source allows anyone to inspect, modify and enhance it.
Linux and Android are two of the biggest examples of open source software. As competitors to Microsoft’s Windows and Apple’s iOS, Linux and Android have proven that open source solutions can be as profitable as their proprietary cousins.
Free does not necessarily mean unprofitable. Microsoft, in particular, makes money every time you buy a software license for Windows. On the surface, Android has no way to generate money. Yet, it, and other open source solutions, make literally billions of dollars. So how does open source solutions make a profit?
According to the Free Software Foundation and Richard Stallman, there is a need to distinguish between the two types of “Free”: “Libre” (Freedom) Vs “Gratis” (Free Beer).
And we quote–
“Free software” means software that respects users’ freedom and community. Roughly, it means that the users have the freedom to run, copy, distribute, study, change and improve the software. Thus, “free software” is a matter of liberty, not price. To understand the concept, you should think of “free” as in “free speech,” not as in “free beer”. We sometimes call it “libre software,” borrowing the French or Spanish word for “free” as in freedom, to show we do not mean the software is gratis.”
Indeed, ask any open-source software developer and you will realise that freedom is very important to them. The spirit and power of open source lies in freedom, and not “free” beer.
Imagine that you’re a new software developer looking for investors. Mention to them that the product you’re developing is going to be given away for free makes no business sense. Mention that your product is free up to a limit before consumers have to pay, and you’ve created a model for (potential) success.
This model is known as the Freemium model, a portmanteau of “free” and “premium”. As its name suggests, in this model, basic services are provided free of charge and additional features are offered at a premium. This model is popular with many software and game companies. For example, AVG, a software security company, and Riot Games, makers of League of Legends. AVG provides its base anti-virus product for free with the option of adding enhanced protection for a fee. League of Legends is free to play but players can purchase optional cosmetics that do not affect the game.
AVG and Riot Games show that the freemium model can work. There will be many who would only use the base product but there are just as many who are willing to pay for the extras. However, both companies keep their proprietary source code closed to outsiders. They are not open source software companies.
For an example of a profitable open source company, look no further than Red Hat. Red Hat provides open source software products to businesses.
Unlike AVG and Riot Games, the base source code of Red Hat is open source. Like AVG and Riot Games, profitability comes in the additional extras that are provided. For Red Hat, custom features, software support and services and software certifications are the chargeable extras. The revenue that Red Hat earned from additional features and subscriptions were profitable enough that IBM acquired the company in 2018.
Companies like Red Hat, AVG and Riot Games show that it is possible to have a profitable model where the base product is free but the additional services are paid for. Yet, this isn’t the full story of why taking the open source route can be profitable. After all, will anyone pay for the extras if no one knows it exists? Even worse, what if the extras don’t improve the base product by much?
Software solutions live and die by their ability to be used by as wide a group as possible. The most useful software solutions are often those that are free.
If a popular product is proprietary, then far fewer people will use it compared to if it was free. Consider the portable memory war – SD Cards versus Memory Stick. Memory Sticks were proprietary Sony technology. The SD card standard was developed and distributed for free. SD cards and their cousins can now be found in everything from smartphones to digital cameras.
Guess which format is still used today?
Beyond hardware, the best example of how open source enhances profitability and proliferation is the battle between the smartphone operating systems – Apple’s iOS versus Google’s Android. Currently, Android enjoys a market share of about 88% compared to iOS’ 11.9%. In 2016, there were an estimated 2.9 billion smartphones. There will be about 5 billion smartphones by the end of 2019. With an 88% market share, that adds up to over 4.4 billion Android-powered devices.
How Android managed to gain such a commanding position in the market compared to the next major operating system is simply due to the open source nature of Android OS. While iOS is available only on Apple’s iPhone and iPad series, Android is available on over 1,300 brands and 24,000 device models. From Sony to Samsung, Huawei to HTC, the open source nature of Android allows it to be customised and adapted to each company’s needs.
As the battles between the memory stick formats and mobile operating systems show, an open source format lowers the barriers to entry and encourages technology adoption. In India, an iPhone is roughly US$1,600. The average Android phone is almost a
Yet, a freemium model and access to technology are not the only reasons open source can result in profitability. The final piece of the puzzle has to do with the consequence of large market shares and easy access to software – a wide customer base.
As the saying goes, if a tree falls in the forest and no one hears it, does it make a sound? It’s the same with open source software. It’s all well and good to create a software and make it free to use but if a community doesn’t regularly use the software, then who is paying for it?
In the open source world where anyone can inspect and suggest improvements to the source code, the community is what helps to maintain the software. In return, this creates a customer base locked into using the software that is created.
Consider the case of GitHub. GitHub is a place for programmers to keep track of their work but also allow (in the case of public repositories) others to view their work, suggest changes and make improvements. Many programmers in major technological companies use GitHub as a way to showcase and crowdsource suggestions for their work. What started off as a place for hobbyists and individual programmers to connect has now turned into a platform which major companies are getting in on. Microsoft tried to create a competitor to GitHub in the form of CodePlex. With Microsoft’s own engineers eschewing CodePlex for GitHub, Microsoft did what any historical dictator would do when their plans fail – it bought GitHub.
The value of GitHub wasn’t in the products it created. Rather, it was in the community that was using it. Any self-respecting programmer used GitHub to track their work. Any student learning how to code used GitHub to improve. Red Hat, Android, and even the investment bank Goldman Sachs has a GitHub repo. With constant community interaction, these communities allow for the constant engagement of the userbase.
Freedom, the Freemium Model, open source access to technology and the creation and sustainment of a community are the secret ingredients to which allow the concept of open source to be profitable.
From Android to Red Hat, there are countless examples of the ability of an open source model to be a highly profitable. Far from being an oxymoron, open source does not mean unprofitable.
After all, how else would Microsoft be willing to acquire Github for US$7.5 billion in Microsoft stock?