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Is Open Source A Business Model? Settling The Debate 


Guest: Dirk Hohndel (LinkedIn, Twitter)
Show: Dirk & Swap: Conversations on open source

There is a never-ending debate about whether open source is a business model or not. We tried to settle this debate for once and all but looking at almost all the aspects of open source and businesses.

“Whenever I see people saying they have an open source business model, I really worry about them because open source in and of itself doesn’t have a monetary aspect,” said Hohndel. “A business model requires a customer, it requires a revenue stream and it requires the ability to be profitable.”

Highlights of the show:

  • Is open source a business model or a development methodology?
  • Defining a business model
  • How to maintain a balance between what your community needs versus what your business needs are?
  • If there are new companies who want to build their business, why should they build it on top of open source?

About Dirk Hohndel: A world leader covering the intersection of business and open source software. Thirty years as developer, maintainer, business leader and community influencer. Highly respected public speaker who can connect to a wide variety of audiences.

  • Swapnil Bhartiya: Hi, this is your host Swapnil Bhartiya and welcome to another episode of Dirk & Swap Conversation on open source. And today we have with us, once again, Dirk Hohndel, former VP and chief open source officer at VMware. And today we are going to talk about open source. Is it a business model or is it a development methodology? So Dirk, we have seen this discussion so many times you’ll see on Twitter and everybody else say, “Hey, you should change your business model from open source.” But if I ask you once again, we have to go to all the previous discussions about why we do open source to start with. How do you look at open source?

Dirk Hohndel: So this is a question I’m asked so many times, so I love this topic, thank you for bringing it because my answer is always how about a third? Because I think open source first and foremost is actually a social experiment. The idea behind open source is all about people. It’s about these social relationships, about the ability to trust the people that you don’t know that might be your competitors to work across countries, across cultures, across time zones, across everything. So first and foremost, open source is all about social relationships. But then once you accept that, that you have this undercurrent of people that build what you do then of course, the question is, is the next layer about how you develop software or how you build a business? And it’s a little bit of both but it’s far more about software development than it is about business because business always needs to sit on top of this.

Whenever I see people saying they have an open source business model, I really worry about them because open source in and of itself doesn’t have a monetary aspect. So you need to figure out once I understand the social aspects of building a community. Once I understand the cultural aspect, the methodology aspect of how we work together and create software, how do I layer on top of this an opportunity to make money? And really there is very often the crux because we fall into this trap of confusing growing your project and growing your business.

  • Swapnil Bhartiya: There are so many things to talk about. I’ll start with, as you said in the beginning, it’s a social experiment, it’s more about people and that’s where there can be a lot of conflict that we have seen. Sometimes we talk about mediocracy, we talk about focusing more on the quality of code and less about who’s writing the code. But if you’re switching focus more on people, and you also talked about people spread across the globe, then we have to also take into consideration a lot of political correctness as well, which at times we have seen a lot of projects.

They are now less about the code, they have become more about that political movement and they are no longer a project anymore, no they are not about software anymore. But when we are talking about open source here, we are also talking about companies who will build a business on top of that because in the end, as much as we try to do, we are not writing code for the sake of writing code, it is helping somebody run a business or whatever operations they are. So how do you look at the conflict there?

Dirk Hohndel: I think you put this very well because when you have a business that is built on top of an open source project, the nature changes, it’s not writing code for the purpose of writing code. When it’s a hobby, when it’s something that you do for fun, then it’s all about the social relationship, writing the code, making progress, feeling productive, feeling like you’re helping somebody. But when it’s about a business, you have to rationalize your investment. You have to rationalize, what do I focus on? How do I move this forward? And this is where this conflict comes in because in a hobby project, in something that is just about you writing code, having fun, creating something, your number one goal very often is to get more people excited about it, to get more people to join in, to grow the project, to grow its footprint.

But the moment there is a business built around it. The moment there is a commercial interest involved, your priorities have to change because you need to, at some level, at least with your employees that are part of the team building this project, you need to focus on the business outcome. You need to figure out how can I align the work that I put in the project with the business outcome that I get. And then that’s why so often the people who say open source is a business model scare me because most open source licenses, well, if you use the OSI definition, all open source licenses, don’t have a restriction to purpose of use, which means any other business can also use your software. And so we see quite a few instances where people start with excitement, building a community, getting more and more people involved, growing the footprint of their project.

And then they want to change the rules, they want to change the license. We actually did a segment about this a while ago, talking about this challenge with licensing changes after the fact but they are an indication that as the business was started, there was maybe a slightly naive set of assumptions built into open source being a business model. So what I like to talk about to people is, if you assume that your project is wildly successful, a lot of people want to use it. Companies are betting their business on it. Other companies, the hyperscalers, everyone wants to have a part of the pie. How does your business model work? If your business model is one that assumes you are the only company engaged in this project, then you are likely on very thin ice because that is incredibly hard to do with open source.

However, if your business model is based on your expertise in an open source project, your leadership, your ability to extend the project and create layers of value around the project. Now you have an opportunity to create sustainable value for your customers and therefore a sustainable business model for yourself. But open source itself as a business model is really, really challenging. You can however, create a business model around your expertise in open source. However, that is not a scalable business model, which is what every VC wants, which was every billion dollar exit dream relies on the ability to scale beyond your people. It’s a very healthy business model around expertise, around support, around services, around being the best people at doing something, doing either this project or doing open source more in general. So open source totally can be a business model but very often the people talking about an open source business model have ideas that aren’t compatible with the licenses that they chose.

  • Swapnil Bhartiya: As you rightly said, we talked about the whole segment. And sometimes I feel that when we talk about licenses, a lot of time companies look at them as terms and conditions, how you can use my, so those terms and conditions licenses been used as a product. So this is once again, totally different topic. But if I ask you that when we do talk about open source as a business model, let’s go away from what is a business model? How would you define, like Tesla has a different map business model, Apple has a different… So first of all, let’s talk about how we define a business model itself?

Dirk Hohndel: So, this model is fundamentally the way, how do you create revenue and then hopefully earnings out of your interaction with a set of customers? A business model requires a customer, it requires a revenue stream and it requires the ability to be profitable. So have your cost and that revenue stream be in a reasonable relationship to each other, costs being lower than your revenues, obviously. And that really is the challenge here. When you introduce the customer and when you assume the ability to create a significant revenue stream from that customer because if you are building on open source on an open source license, then typically any other company can do the same thing. It can take your open source project and create a similar business around it. And this is really where open source as a business model creates the challenge for you.

  • Swapnil Bhartiya: I cook a lot and I never cease to compare it with cooking. Everybody knows how to make a burger. Everybody knows how to make Indian curries. And there are a lot of businesses who do the same thing but they are super popular. So when I look at open source, there’s no difference, the recipes are there. So it is the process of how you create that cooking. That cannot be… So I cannot say that cooking is my business model. My business model is whether I’m delivering food to people’s houses or whether I’m delivering it in my venue, how I’m serving. So, that’s where I personally feel a conflict between when you say open source as a business model, as you initially, it’s more or less like an experiment. So that’s why I want to drive that we need to understand what a business model is then to establish it.

Now, I think in most cases what happens is that companies, they don’t understand open source themselves, that’s why they call it a business model. But in a nutshell, it is a process of how you create software. Now you can engage with outside parties or you cannot engage without outside party. So if I asked you as a veteran of open source for such a long time, should we stop using the term that open source is a business model and just put an end to that because it is not. Or you think no, as you earlier explained that there are some grays where you can still call it a business model.

Dirk Hohndel: I think we should stop using that term. I think it is typically misleading. You are absolutely correct by the way, in this comparison with cooking because it’s a very nice way to think about you publish your recipe so somebody else can cook the same dish. How do you differentiate? How do you create a value proposition? And it’s very much typically around the services that you provide, home delivery or the hygiene in the process in which it is made or the assurances that you can give with the food, oh, it truly is gluten free for those of us who can’t have gluten. So there is a lot of surrounding value that you can provide when you cook. And the same is true in the software development environment. I very typically try to explain to people that almost no customer wants to actually create the binaries, create the thing that they’re running themselves.

Even if they can download the sources, even if they can build them themselves, they would like somebody else to do that for them because to them, that is an additional cost on building the internal expertise, the knowledge, the resources, having someone else do this is convenient. So this of course is where a hyperscaler has a phenomenal opportunity to create super low incremental value, just a very simple, straightforward distribution. And if that is your business model, if your business model is just the distribution of your project, it is incredibly hard to compete with the hyperscalers because they have the ideal marketing platform for their services. They can make it super easy for their millions of customers to use the project. So there you’re building yourself a dead end. But the moment you think of extensions of what this open source project does that create value for your customers and you specialize, you focus on these extensions, you focus on scalability, you focus on the ability to do this cross networks, cross data centers, cross hyperscalers.

There are so many adjacencies but I think always that it’s the adjacencies to open source that have to be your business model. And so in that sense, I don’t want people to talk about open source as a business model but I want them to talk about the thing that they’re doing with, around, through that open source project and how that is their business model. There is the traditional, the first generation open source business models, open source related business models. You provide the binaries, you provide services and support. I mean, this is how Redhead and Susan, all of them got started. But more and more, you have to provide something that goes beyond just encapsulating, distributing the binaries.

And that is where the new business models come in, where you see the companies that say, we take something like Prometheus, we take something like a relatively simple, well, that’s wrong, a relatively straightforward open source projects but we create value for our customers in the way we are able to configure this. We are able to offer this as a software, as a service in a way we can integrate this into other solutions but in my work choices, you see that it’s always that extension, it’s always that integration, it’s always that connection to something else that creates the value. It’s not the open source project itself. That is my business model.

  • Swapnil Bhartiya: Can you just quickly talk about maintaining a balance between what your community needs versus what your business needs are?

Dirk Hohndel: Yeah, so this is very much about the question, how are you finding your business value and how are you creating a level playing field for others to collaborate with you? One of my personal challenges with the ideas behind open core is that open core says the company is allowed to carve out sectors of this project that only they are able to create value in. And so that creates a non level playing field that, that breaks this fundamental trust that to me, is part of an open source community. So we go back to the very first answer that I gave you, to the social experiment. If you want to have a successful community, if you want to create this social experiment where everyone feels like they’re getting value out of it and they’re not getting cheated, you need to create the ability for everyone to extend this open source project.

And your business model is about being better at extending this project or having a more convenient way to deliver this to the customer or having a better integration with another solution that is important to your customers. And it’s always that integration versus fences and boundaries that you put in place through your licensing because fences and boundaries are something that people run against and that create conflict in your community and a healthy community is always the cornerstone of a healthy open source related, as you said so nicely, open source related business model.

  • Swapnil Bhartiya: Even if we do not want to call open source a business model but you can build a business on top of open source and I think that’s where the world is heading. And you have been doing a lot of work in this space. So if I ask you and if there are new companies who want to build their new business, why should they build it on top of open source? How should they look at open source? Not as a business model but open source based or open source related business.

Dirk Hohndel: I think open source is really at the core of most innovation that is happening today. And to me, this is incredibly exciting. You can experiment, you can innovate, you can very quickly go through revisions of your ideas, you can very quickly test ideas with customers. The opportunities that open source as a licensing model gives you are huge. And I think that’s why we are seeing so many companies being built around open source. The challenge, the opportunity, the thing that’s fascinating is in creating these additional ideas that create a revenue stream, that create a customer relationship, that create the innovation, not just on the technology side but on the business side to go along with it. So to me, businesses build on open source are very much the future in this industry but it has to be an innovative idea that takes the core idea of an open source project and then creates extensions value around it that create the business relationship with the customer that creates the success. And that’s where the excitement for me really is.

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