How Open Source Companies Work and Make Money

What Are Open Source Companies?

Open source companies are entities that develop and distribute software with openly available source code, allowing anyone to use, modify, and distribute the software freely. Unlike traditional software companies that generate revenue through license sales, open source companies rely on innovative strategies to monetize their products while maintaining the principles of transparency and community collaboration.

Examples of Open Source Companies

• Red Hat: A leader in the open source software space, Red Hat specializes in cloud computing tools and offers a variety of Linux and Kubernetes technologies. All of Red Hat’s products are open source, and the company is known for its contributions to key projects and extensive support services.
• Apache Software Foundation (ASF): As the world’s largest open source foundation, ASF is responsible for more than 350 open source projects. Notable projects include Apache Spark, Hadoop, Kafka, and CloudStack, which are widely used in data science, machine learning, and big data applications.
• Cloud Native Computing Foundation (CNCF): Part of the Linux Foundation, CNCF fosters the development and adoption of cloud-native technologies. It oversees projects like Kubernetes, Envoy, and Prometheus, and has seen significant contributions from over 219,000 contributors across 190 countries.

Why Do People Start Open Source Projects?

Open source projects often originate from personal, professional, or community-driven motivations rather than financial goals.

Common Motivations

• Solving Real-World Problems: Developers create tools to address challenges they or their communities face. For example, the Kubernetes project was initiated to manage and orchestrate containerized applications in cloud environments, filling a significant gap in container management.
• Learning Opportunities: Working on open source projects allows developers to improve their skills, learn from peers, and gain recognition in the tech community. For instance, contributing to projects like Apache Spark or TensorFlow can enhance a developer’s expertise in data science and machine learning.
• Giving Back to the Community: Many developers contribute to open source as a way to give back to the community. The Apache Software Foundation, for example, is a non-profit organization with over 1,000 members who work on various open source projects to benefit the broader tech community.
• Experimentation and Innovation: Open source provides a platform for trying out bold ideas. Projects like Databricks’ support for Apache Spark or HashiCorp’s suite of DevOps tools (including Terraform, Vault, and Consul) have evolved from innovative experiments into essential tools for industries.

Why Is It Challenging to Monetize Open Source?

Monetizing open source software is complex due to several inherent challenges.

Key Challenges

• Balancing Free and Paid Offerings: Companies must carefully decide which features to keep free and which to charge for without alienating users. For example, GitLab offers a free community edition alongside premium tiers for businesses, ensuring that both individual developers and enterprises are served.
• Community Perception: Charging for certain features or services can lead to accusations of “selling out” or exploiting the community. Companies like Red Hat and the Apache Software Foundation must maintain transparency and community trust to avoid such perceptions.
• Adding Unique Value: Since the core software is free, companies need to offer additional benefits like convenience, support, or advanced features to justify paid services. AWS, for instance, offers managed versions of open source software, providing users with the convenience of hosted solutions.
• Understanding User Needs: Identifying who is willing to pay and why is crucial for a successful monetization strategy. Companies like Databricks and Elastic have successfully monetized by understanding the needs of their enterprise users and offering tailored solutions.

Proven Monetization Models for Open Source Companies

Despite the challenges, many open source companies have developed successful monetization strategies.

1. Donations

• How It Works: Developers ask for financial support from users who appreciate their work. Platforms like Patreon, Open Collective, and GitHub Sponsors facilitate these donations.
• Best For: Smaller projects or independent developers seeking supplemental income.
• Example: Many small open source projects, such as those on GitHub, use GitHub Sponsors to sustain their development[1].

2. Hosted Product Versions

• How It Works: Companies offer free, self-hosted software while charging for managed, cloud-hosted versions.
• Value Proposition: Users save time and resources by letting the company handle hosting, updates, and maintenance.
• Example: MongoDB Atlas offers a managed database service built on the popularity of MongoDB’s open source software. Similarly, AWS offers managed versions of various open source projects, such as Bottlerocket and Firecracker.

3. Paid Support and Training

• How It Works: Companies provide professional support, troubleshooting, and training for their software.
• Why It’s Effective: Users trust the creators of the software to provide the best guidance, especially for critical business operations.
• Example: Red Hat has built a business empire by offering enterprise-grade support and training for its Linux distributions. Databricks also provides commercial support for Apache Spark, which has a significant open source community.

4. Open Core Model

• How It Works: The core software is free, but companies charge for advanced features or tools that appeal to businesses.
• Why It Works: This model allows companies to serve both individual developers and large enterprises with tailored offerings.
• Example: GitLab offers free community editions alongside premium tiers for businesses. Another example is Elastic, which offers a complete stack of products around its open source Elasticsearch project[3][4].

5. Dual Licensing

• How It Works: The software is free for non-commercial use but requires a paid license for commercial applications.
• Example: Qt Framework offers both free and paid licensing options, catering to hobbyists and businesses. This approach provides legal clarity for companies while allowing free use for individuals or educational purposes.

6. Selling Complementary Products

• How It Works: Companies develop and sell additional tools, plugins, or services that enhance their open source software.
• Why It’s Effective: This approach creates a complete ecosystem, driving both user satisfaction and revenue.
• Example: Automattic, the creator of WordPress, monetizes through premium themes, plugins, and hosting services. Hugging Face offers tools for building and deploying machine-learning models, complementing its open source platform.

Key Lessons from Successful Open Source Companies

1. Combine Strategies: Many companies use multiple monetization models to diversify income and reduce risk. For example, Red Hat uses a combination of support, training, and hosting services to generate revenue.
2. Understand User Segments: Free users, hobbyists, and enterprises have different needs and willingness to pay. Companies like GitLab and Elastic segment their offerings to cater to these different user groups.
3. Communicate Value Clearly: Focus on the benefits of paid options, like convenience, security, or support, rather than just the features. AWS, for instance, emphasizes the convenience and reliability of its managed services.
4. Foster Community Trust: Transparent communication and a genuine commitment to open source values build lasting user loyalty. The Apache Software Foundation and the Cloud Native Computing Foundation are examples of organizations that maintain strong community trust through their open and collaborative approaches.

Real-Life Examples of Open Source Success

• Automattic: Monetizes WordPress with premium themes, hosting, and additional tools. Automattic’s business model is built around providing value-added services that enhance the free WordPress software.
• Red Hat: Charges for expert support, training, and certifications around its Linux products. Red Hat’s approach has made it a leader in the open source software space, with a strong focus on community involvement and support.
• Databricks: Offers commercial support for Apache Spark, leveraging the large open source community around the project. Databricks’ clients include NBCUniversal, HP, and Shell, among others.
• HashiCorp: Develops several open source tools related to cloud infrastructure automation, including Terraform, Vault, and Consul. HashiCorp’s products are widely used in DevOps and cloud management scenarios.
• Elastic: Provides a complete stack of products around its open source Elasticsearch project, including Kibana, Beats, and Logstash. Elastic’s monetization strategy includes offering enterprise-grade support and additional features for businesses.

Conclusion

Open source companies demonstrate that it is possible to create free, community-driven software while building sustainable businesses. Success in this space lies in creating value that goes beyond the code — whether through convenience, premium features, or expert support.

By understanding their audience, combining monetization strategies, and maintaining community trust, open source companies can thrive and contribute significantly to the tech ecosystem.