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It's becoming hard to distinguish open source from SaaS

Open source and SaaS business models look more alike than ever, now that their revenue models have largely converged.

I had a fascinating conversation with a Silicon Valley VC this morning. He has successfully invested in a range of open-source and software-as-a-service companies, and made a somewhat startling comment:

It's becoming harder and harder to discern between open-source and SaaS companies. Their revenue looks increasingly similar, as do their business models. It's becoming hard to tell, for example, whether SugarCRM is a SaaS company or an open-source company. In reality, it's both, and it's hard to tell where one begins and the other ends.

He is absolutely right, at least about the blending of SaaS and open source. As I noted in a previous post on SaaS business models, both open source and SaaS have increasingly turned to "freemium" models. Both are all about getting software in the hands of prospective customers as fast as possible, and looking to monetize that adoption downstream rather than upfront. Both provide a lower cost of entry and (often) a long-term cost savings, with a subscription-based revenue model.

Intriguingly, he told me that SaaS vendors have discovered that there is very little cost to supporting a customer, and little risk of churn once the customer is actively using the product. So more SaaS companies are finding ways to give away free versions of their service (which costs them little), monitoring actual usage, and sending in the sales team once adoption starts to increase. Sounds like open source, right?

Absolutely. Open-source vendors provide free-to-evaluate and deploy open-source software. Many companies use a marketing-automation package like Loopfuse to track traffic from prospects on their forums, documentation sites, etc., and then send in the sales troops once activity rises to a significant level. The goal is adoption, first, then payment, later. What can open source learn from SaaS? Better ways to make renewals "sticky" by providing value that can't easily be had for free.

Still, both SaaS and open source provide a low-cost way to distribute and monetize software. It's perhaps not surprising, therefore, that both are doing very well.

My friend asked about why, therefore, venture funding in open source appears to be going down, as reported by The 451 Group. The answer? It's not.

It's just that "open-source investment" doesn't mean as much as it once did, since all the obvious categories (ECM, ERP, CRM, etc.) have been invested in. Now we're getting things like Cloudera (Hadoop) and other "niche" applications that have broad applicability but not broad market categories already set up and waiting for investment.

We're also seeing SaaS or cloud vendors that fundamentally depend upon open-source software, but aren't open-source companies, per se.

In sum, open source has had a profound impact on the types of companies that are possible in the 21st century, particularly SaaS vendors, and on what the revenue models of those companies look like. Does this mean that open source has already won? That depends on how you define the battle. But in many ways, it looks like the answer is "yes."