Open core is a misunderstood business model

Published: Jul 14, 2023
By: Sid Sijbrandij

The open core business model has been around for a couple of decades but still people are skeptical about it.

“Not really open source”

According to Olivier Lambert, open core is not really open source because users don’t have all the freedoms to do whatever they want with the software:

“Open Core isn’t really Open Source/free software, because users don’t have all the freedoms to do whatever they want with the software. Only the ‘core’ is open, and the definition of ‘core’ can be abused. In some cases, almost all important features are not in the core, making the entire software nearly useless without paying for the rest.”

From Lambert’s perspective, mixing open source and proprietary code diminishes the value of open source and creates “open source washing.”

The criticism that open core “is not really open source” because it mixes open source and proprietary licenses is misleading. The generally accepted definition of open source can be boiled down to licensing: does the software carry an approved open source license or not? If yes, it’s open source. If no, it’s not. Open core creates software that falls under both categories. It’s true that the entire codebase isn’t open source but that doesn’t make the open source version any less open.

Open core companies are a vital part of the open source community. Unlike typical proprietary software companies that may contribute to open source in some capacity, open core companies are purpose-built around open source projects. Maintaining and stewarding a stable open source core is a key part of the model. However, open core companies should be careful how they use the term open source. Companies that release both open source and proprietary software should use the term “open core” and not “open source” when speaking about the company as a whole. Using the term “open core” is a transparent way of communicating the company does both.

According to Lambert, open core creates a gradual shift toward proprietary products which will have the effect of “slowly but surely killing free software.” Open core isn’t a replacement for open source or trying to kill open source. I expect it to replace proprietary software as the default. There are many advantages of creating open core software, even the source-available code (code is available to inspect, modify, and contribute to) has more trust, security, and R&D velocity than closed-source, proprietary software.

The shift to open core isn’t a ploy to abuse open source, it’s a shift to move more software in that direction. And while it’s possible for a company to release an unusable core, the idea that an open core business could get very far without a viable open source version is a hard sell. An open core product is unlikely to gain traction without a passionate, engaged community of open source users. Making a great open source product is how it initially gets shared, adopted, and eventually bought by corporations.

It’s unlikely that proponents of the free software movement will ever be fans of the open core model since it goes against their principles of all software remaining free to run, study, modify, and share. This is a specific philosophical movement that not all open source proponents subscribe to. I don’t expect to convince the free software movement to embrace open core.

Misaligned incentives

A common fear associated with the open core model is that the company will spend all its time creating proprietary software and the open source version will become unusable, forcing users to upgrade and pay for the proprietary version. In the article, “The Incompatibility of Open Core and Profit Incentives,” author Blake Burch claims:

“Open core businesses have more of an uphill battle to convert users because they started by giving fully featured access which they then have to limit by omission. That gives open core products two main selling points to convince users to convert to their paid product: additional features and reduced friction.”

According to the argument, the incentive to continue improving the open source product becomes misaligned and the original open source project becomes stagnant: “It’s simply not economically viable to continue adding functionality to a product that does not generate any revenue.” In addition to claiming there is no economic value in supporting open source, Burch claims that the misaligned incentives “stem from the order in which monetization is achieved. It’s always the last step that will get figured out eventually,” and eventually the goal will be to upsell to everyone.

The claim that there is no economic incentive to provide a free product might seem true to someone who isn’t familiar with open source but it completely overlooks the proven value of open source. A recent Linux Foundation study found that the vast majority believe the benefits of using or contributing to open source outweigh the costs. If the benefits didn’t outweigh the costs, tech giants like Google, Amazon, and Microsoft wouldn’t have entire departments dedicated to making open source contributions. If there was no economic incentive to maintain a viable open source version, open core would not exist as a business model.

Open core isn’t a brand new model and there are existing frameworks for monetization and feature placement that companies use from day one. The buyer-based open core (BBOC) framework is one method for determining where new features are placed and ensuring the core is consistently improved. The BBOC method places features into tiers based on the most likely user. There are typically three tiers, and the order of increasing cost and tiers is based on the buyer. Features that appeal most to an individual contributor are open source and free. Features that appeal most to management or an executive are proprietary and require a subscription. It’s no longer about “Where is that feature technically?” Or “How much more work was it to make?” Or “Where in the repo does it live?” It’s about the end-user.

Frameworks like buyer-based open core provide guidelines to new companies and help them achieve alignment between sustaining the open source core and generating revenue for the business. Most open core companies aren’t trying to make money off of individual users. Paid features are targeted toward enterprise businesses. A thriving user base of individual contributors who pay nothing makes it easier to sell to the companies they work for and that’s how the business makes money.

“Marketing gimmick”

Burch also makes the claim that open core is nothing more than a marketing gimmick:

“There are a lot of benefits that come along with a gravitational shift towards open core companies. Transparency. Flexibility. Portability. However, it’s important to take a closer look at driving forces behind this business model. These businesses are playing into marketing gimmicks that trick developers into adoption, with a long-term playbook that hardly represents the product developers initially fell in love with. For a business model built on transparency, the motives of these companies feel anything but transparent.”

As a venture capital firm that starts open core companies, Open Core Ventures recognizes the bait-and-switch risk. This is why we created the OCV Public Benefit Company charter (OPC) and give companies the option to incorporate as an OPC company versus a traditional C-corp. As a public benefit company, improving the open source code is a legal obligation. The charter states that the company has a legal responsibility to:

  1. Protect community contributions by not allowing the removal of any software products that were previously open source.
  2. Open source all testing frameworks used for open source features.
  3. Not create constraints or limitations such as user or performance limits, size, or the number of repositories to projects the company has made available under an open source license.
  4. Ensure the majority of new features added in a calendar year are made available under an open source license.
  5. Explicitly communicating which code is open source and which is proprietary.
  6. Not withhold or intentionally delaying the release of security fixes for open source features.

An open core company doesn’t have to incorporate as an OPC to ensure it continues to be a good steward of the open source project. Most open core companies are built around already thriving communities and their contributions and usage is a boon to the overall business. It makes business sense for the company to continue to support the open source project, merge contributions, and improve the overall open source product.

Doing open core right

When open core is done right, the open source version is maintained as a viable and stable option. Like the paid version, the open source version should receive regular updates, improvements, and new features. For open core to work, the open source “core” needs to be core to the overall business. This includes supporting and encouraging the open source community of users and contributors and making a really good open source product.

When done right, open core companies follow some basic principles:

  1. Make the open source version really good.
  2. Don’t withhold bug fixes and security updates from the open source version.
  3. Follow the buyer-based open core model or another predictable model for feature placement.
  4. Don’t move free features into paid tiers. Paid features can be moved into free tiers.
  5. Consider creating the company under a public benefit company structure such as adopting OCV’s public benefit company charter.

Contrary to what some may believe, open core is a way to monetize open source software and sustain it in the long run. The more open core companies follow these basic principles, the sooner we can overcome common (mis)conceptions about the model and make more software more open.