IBM Acquires Red Hat Part II — And The Difference Between an Open Source Company and Project

Last week the industry was stunned with the news that IBM was acquiring Red Hat in a deal worth $34 billion and nearly 1/3 of IBM’s market capitalization.

The media, open source community, and open source businesses, such as WSO2, were left to assess the potential impact that this transaction could have on open source. My first blog discussed fears that IBM’s commercial and business approach will eventually erode the qualities that made Red Hat’s business special by eroding the community potency of its employees. The concept hit a nerve — receiving more than a dozen media invites, emails from old friends currently at both Red Hat and IBM, and stern condescension from IBM executives.

Time will tell what the true impact to open source this acquisition will have. The only thing we can be sure of is that IBM’s impact on open source will be a lasting one.

In the many responses received from IBM and their executives, they feel that their commitment to open source is well established and they provide evidence tied to the number of employees contributing to open source projects.

But I would suggest that many people (and companies) misunderstand the difference between having a commitment to open source and being an open source company. The largest infrastructure vendors have an escalating economic benefit from consuming open source. Supporting key projects through employee contribution is cheaper than building or purchasing proprietary solutions. But, open source is about something much bigger than a cheaper sourcing alternative.

What Makes a Project Open Source

The world is increasingly aware of what makes an open source project:

• License: A project that creates software or content that is licensed with an open source license, usually chosen from a list of widely-accepted licenses. These licenses define how people can inspect, run, modify, and distribute the intellectual property.
• Adoption: The project is entertaining this approach to licensing in order to embrace a philosophy that open source lowers the barriers to adoption with a hope that their ideas will spread quickly and broadly.
• Community: People who are project outsiders are permitted to become project insiders by joining the project by their own will. Projects can accept changes from anyone in the world, organize these contributions through nurturing their “community”. A project’s community is made up of its contributors and users who bond together through a shared belief and value system as originally defined by the goals and intentions of the project.
• Transparency: Anyone can inspect the projects’ contents to learn, identify inconsistencies, or errors. This transparency helps create a stronger global sense of security and safety through a belief that this form of mob-scrutiny is safer than closed-circuit analysis. Transparency matters to governments like Bulgaria or the United States, regulated industries like banking or healthcare, and security software like Let’s Encrypt (from Starting an Open Source project). Transparency also powers the philosophical and political desires of the Free and Open Source Software (FOSS) advocates, which believe that open source counters neoliberalism and privatization.

What Makes a Business (not) Open Source

A business has investors who provide capital or sweat equity in order to create value added products and services that are monetized with customers who purchase. Intellectual property is granted global protections from governments and businesses extract profits by taking royalties from the licensing their protected intellectual property. In other words, investors pay a business to hire talented employees who create software products that can be sold to customers for a profit.

This classic approach to building a software company has created an “economic value line” that defines when a company can anticipate at what point it will generate profit that can be used to provide a rate of return to investors who took risk to fund the business in advance of the royalties appearing. With closed and proprietary software companies, like Oracle and IBM, most of the intellectual property has limited use and access licenses for the open world. Customers make purchases to gain access to the software, not just to run it, but even in the classic sense to evaluate the software as well. This model creates levels of inequities between vendor and customer forcing the customer to pay royalties in advance of knowing whether the software will provide a value worth the royalties paid. Now, many vendors offer free trials or evaluations but these forms of enticements are rarely without “strings attached” as vendors can (and will) lobby implied expectations that a customer has a good faith intention of making a future purchase in exchange for receiving a free of charge evaluation license.

Ultimately, this closed form of business limits the available distribution of the intellectual property in exchange for the vendor extracting royalties from customers that are larger and earlier in the selling cycle. This makes sense — if your software will only reach a limited audience then you must charge earlier and much higher to compensate for the reduced addressable market.

SaaS businesses have benefited tremendously from the rise of open source. They provide a service that extracts fees instead of receiving a royalty for the sale of software. Software services require a platform backbone that allows the service to rapidly create increasing forms of value that allow the vendor to charge larger and different sums for the services. Open source is the predominant technology that allows SaaS vendors to build rich and robust backbones at a cost that allows them to maintain a reasonable net margin. By latest count, there are nearly 300,000 SaaS offerings globally, almost all of which are built upon some form of open source construction.

Many (actually all) of the word’s biggest SaaS and mega cloud vendors are dependent upon extracting value from open source to let them build differentiated advantages around their offerings. Doing this at scale and volume doesn’t make these vendors an open source business. However, open business vendors realize that to become a giant in software you must first stand on the shoulders of other giants; and it is these vendors that commit so many of their employees to giving back to open source projects that they take from.

What Makes a Business Open Source

An open source business is a commitment to shift the line of economic value.

Open source businesses are those where the majority of shareholder value is extrapolated from the development, royalties and value-added services derived directly from open source software and content. Vendors that depend upon, but can survive without being dependent upon open source, are part of an important open source ecosystem, but not an open source business.

Red Hat, WSO2, Hortonworks, Suse, and MongoDB are all businesses that could not exist without successful, thriving open source projects. If the projects did not exist, their businesses would disappear. They are open source businesses. These purely dependent businesses number in the dozens.

Open core vendors, such as Mulesoft, start with an open source core and later develop a significant proprietary layer, which enables them to ween their commercial dependence upon open source. The underlying project’s popularity helps with awareness and distribution, but as dependence wanes they transition from being an open source business to an open source champion. Open core businesses number in the 100s and have received the lion’s share of venture capital investment, perhaps because the economics of user acquisition are so low that it’s cheaper to build a classic proprietary software business when there is a mass-market open source core to siphon leads from.

Open source businesses:

• Shift The Line of Value: Demonstrate a commitment to altering the economic line of value. A business that open sources all of its intellectual property with a friendly right-of-access license is making an implied exchange with the world. Users and potential customers can now access and use the technology without first engaging with the vendor. This removes some control and protections that shareholders had provided capital for. In exchange for this, investors expect that the software has a much higher form of distribution, probably on the orders of magnitude higher. Through higher adoption leads to a richer field to nurture potential customer opportunities.
• Lower the Cost of Sale: Provide all their IP in an open source license can expect a lower cost of sale. There is some implied expectation that since the IP is free-for-use access, that prospective customers can (and they do) take extra efforts on their own without the aid of a vendor in the evaluation and selection process. This sometimes materializes in the form of budget-conscious consumers that avoid engaging with the vendor on low probability deals and also in the form of advanced prospects who have been adopting the IP for an extended period without the permission or the support of the vendor. In these latter scenarios, many customers appear on the vendor’s door ready to purchase, subsequently lowering the overall cost of sale.
• Survivability: Cannot exist without the ongoing improvement and wide adoption of open source IP and content. The underlying royalties and services could not exist if the open source projects for which they are derived were to disappear.

How WSO2 Is Evolving Our Commitment to Open Source

WSO2 is one of the largest open source businesses globally and the largest open source integration vendor.

We are fully committed to the open source ethos and to being an open source business. We attribute this unique business model as a key quality to our success. We’ve gained customers in 63 different countries, most of which discover us through their own research and independent analysis. These customers would not be possible if we did not have a flexible use license to the software we built.

Having said that, there are many qualities about our business that do not live up to the standards that have been set by Red Hat. Community and a commitment to openness are key elements of our 2019 business plan. Interim, I’ve made and will continue to make a stronger “Call to Arms” to WSO2’s employees and partners to rise up to this higher level of open source business.

• Open-First Mindset: While we practice many qualities of open source projects, we do not have always have an open-first mindset for our business and operations practices. Businesses that open their practices to outsider participation build lasting value through deeper and stickier relationships. As is common, WSO2 has kept many of its marketing, sales and operations processes closed or restricted to limited partners. We have already started to change this and we’re looking forward to a much more open-first model with our partners.
• Design in the Open: Due to security restrictions, many of our internal systems are not visible to the community for participation. This, most notably, includes Google Docs. The collaboration and productivity gains from shared editing are so significant that virtually all of our product and system designs happen within these documents. This is a mistake and we have closed off an important avenue necessary to building a non-WSO2 ecosystem to many of our products. WSO2 must strive to have much of our open source kernels developed in collaboration with others from our partners and customers. All of our product development must be completely transparent and online so that the tendency of the water cooler conversation does not give some contributors knowledge not available to others.
• Commitment to Community: We stand on the shoulders of giants. Open source companies and projects are both creating a community of their own and pulling from other communities. WSO2 is a strong advocate of building community around our technology, but have under delivered in helping others build their communities. These others are communities of important open source projects like Kubernetes or the ecosystem of partners that support other open source projects. WSO2 should develop and promote policies that either require or commit resources across all of our divisions to supporting and contributing to outside communities that have their own goals, direction and objectives.
• Conflict of Interest Policy: WSO2 should adopt an employee conflict of interest policy that makes it clear that any employee who contributes to an open source project during their off hours does not need a conflict of interest waiver from the company, even if that project is not in WSO2’s commercial interests. Our commitment to being an open source business must outweigh our corporate interests that would normally have us restrict, close off, and keep all the contributions of our talented individuals to ourselves.
• Open Source Recruitment: We have not made it a strong incentive, nor a mandate, to recruit those that have previous open source project and business experience. Whether you are in sales, product, or in marketing — your resume of experiences needs to be increasingly documented by your employers and your GitHub account. And if you are just getting started, we’ll commit to making your open source journey a learning experience while you commit to working within the open source ethos.

More Validation for WSO2 and Open Source

There is nothing more exciting than working at WSO2 and within open source integration. We are sitting in the middle of $75B of market activity driven by open source software. And now that integration is going to be 50% of all software development by 2020, open source integration is turning into the heart of all open source.

With WSO2 now the only pure open source integration vendor, we expect big things for the WSO2 Integration Agile platform and the growth of our community. We are hiring 50 positions right now across all of our functions, and if you are interested, please send me a note at tyler@wso2.com. Also, for those seeking community and commercial partnerships around open source, please check out our partner programs which span technology, delivery, and reselling. We’ve signed up more than 20 partners in the past quarter and ready to engage in many more.