Open-Source Companies Turn to Proprietary Code for Profits

Open-source projects and operating systems are in offerings from Facebook, Twitter, Uber Technologies and operating systems such as Linux at the foundation of servers, financial trading platforms and Android phones. But businesses based on open-source code find it hard to make a profit, and sell tech support and consulting services for revenue. Even those that spin off companies from open-source projects don’t make big profits. The solution, some are finding, is to create proprietary code to support the free tools.

The Wall Street Journal quotes Gartner Research analyst Nick Heudecker as saying that, “the risk of open source is that you have no intellectual property.” In fact, only two open-source companies — Red Hat and Hortonworks — have gone public. Red Hat’s market capitalization is less than $14 billion and Hortonworks is less than $1 billion, not very impressive compared with Microsoft’s $407 billion.

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“Historically, every open-source company has paled in comparison to their proprietary counterpart,” said Andreessen Horowitz general partner Peter Levine.

Although existing open-source companies aren’t making substantial profits, a lot of venture capital is flowing to open-source startups. Last year, at least 110 open-source based companies raised more than $7 billion, says Accel Partners, more than double the figure from 2013. In comparison, in 2004, a mere nine firms aiming to commercialize open-source software got venture funding.

Venture capitalists are investing because, says WSJ, they say there’s “a huge market in spreading the innovations that have helped companies such as Facebook serve massive numbers of customers with unprecedented efficiency to businesses beyond Silicon Valley.” A group of LinkedIn engineers were motivated enough to leave the company and found Confluent, to commercialize Apache Kafka, the open-source big data software they’d created.

Open-source startups are initiating a new way to make profits: proprietary add-on software to make the open-source product more secure or manageable. These products can bring in big monthly fees. Cloudera, a company that competes with Hortonworks, says it makes 75 percent of its revenue from licenses to add-on software such as its proprietary Enterprise Data Hub that sells for a minimum of $5,500 a month. Hortonworks is also at work on open source cybersecurity software.

Startup open-source company NodeSource has also released its first commercial product; within four months, that product’s profits are equal the money it makes from tech support. NodeSource chief executive Joe McCann reports he wants to push that ratio to 65 percent proprietary software this year.

The downside, says WSJ, is that by building and commercializing proprietary software, these companies “risk alienating the community of programmers that builds, maintains and improves the open-source project.”