The Question with Commercial Open Source

Grappling with the pros and cons of various open source business models.

 · 3 min read

A fascinating discussion is taking place in the community of a popular Open Source product, Odoo that has decided to go "Open Core". This means that there will be two versions of the product, one free and open source and another closed source with "premium features".

This model has been adopted by many open source projects, specially those targeting organizations, like SugarCRM, Alfresco, Magento and the likes (ERPNext is pure open source and does not have dual versions).

The community is a bit disturbed as it now feels it has to compete with the core developer for business. The publisher, who is looking for aggressive growth, sees the community as a speed-breaker, that eats up bulk of the revenue without contributing much back to the product.

Balancing Act

We know both these point of views are extreme and this scenario has been played again and again. Jorg Janke of Compiere dissected the rise and fall of Compiere, one of the pioneering open source ERP solutions.

His primary conclusion for this tension holds true even today: "The partner community gets lesser opportunities of monetizing their efforts and hence less incentive to contribute back to the product." There is another side to this too.

Building one-off extensions is very different from building a product. One-off extensions take care of the use-cases of one particular customer. But as we have seen again and again, for a moderately complex feature, there can be N number of use cases that cannot be captured by one set of users.

So, does it even make sense to contribute such extensions in the product? This tension between the ecosystem and the publisher is even more when the end-user is not a technical user, which is the case with enterprise or B2B open source products.

Entry of Venture Funding

The start of this tension, in each of the past "successful" open source ERP products, has been the entry of venture funding.

The entry of venture funding has been not been great for Compiere and OpenBravo. Both have seen declines in their adoptions as the pressure to monetize leads to a turf war with the ecosystem and a loss of integrity.

On the other side, companies like Wordpress have avoided such turf wars. Wordpress monetizes via its hosting service which is priced very aggressively for the end user. It also helps that Wordpress is operating in a much larger market (CMS) and hence there is enough revenue for everyone.

This brings us to the question of whether venture funding and aggressive growth are sustainable for enterprise / B2B open source? Jorg Janke clearly said that there is "no hockey stick" growth in open source that venture capitalists look for.

How Large is the Pie?

My view is that the fundamentals of the market matter. Particularly, market size and cost of switching. The publisher should look for venture funding / aggressive growth only when there is a proven market that is large enough and ready to be harvested for both the ecosystem and the publisher to survive.

If the product depends on the open source community for its marketing, then it cannot walk back on it. It would mean it has to compete with the mainstream products. ERPs have been notoriously bad in this regard and have extremely long business cycles.

Companies do not switch ERPs quickly and hence there will always be a question about how fast can an ERP product acquire new customers. I think a enterprise / B2B open source company has to wait much longer to build trust before it can grow aggressively. Has Odoo timed this well? Only time can tell.

Our Take

Firstly, what matters is traction and the number of end users (much more than the business model). To increase the number of end-users, one needs to have a laser focus on making the product easy to use, beautiful and reliable.

Second, any change of business model, specially for an open source product sends a very strong signal to the community. Any business plan that makes a switch to "license" revenue is a defensive move and will never give confidence to the community.

Third, cloud / hosting is a great opportunity for publishers to monetize their efforts in a way that does not go against its open source roots and does not depend on secondary revenue from the ecosystem.


Rushabh Mehta

Rushabh is a software developer and founder of ERPNext. He usually writes about the startup experience, open source and the technologies he is working on.

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