Despite the looming threat of Amazon’s cloud, some software companies are going all in on free software. Others are fighting back (AMZN)

REUTERS/Clodagh Kilcoyne

Companies like Confluent, Redis Labs, and Elastic offer open source software that’s free to use.
But after Amazon Web Services started competing with them by selling their software as a cloud service, they changed their licenses to restrict how their software is used. They banned selling their software as a service.
Now a bunch of software companies are going the other direction. This year, Chef, Cloudera, and Gigabyte are making their software more open and modeling their business after Red Hat.
Experts say in general, startups may still be worried about the threat of cloud providers and will continue experimenting with their business models.
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Increasingly, companies that built their business around free software are facing competitive pressure from Amazon.

These companies, like MongoDB, Redis Labs, Confluent, and Elastic, have built their business around open source software — or software that’s free for anyone to use and modify. They give the basic software away for free and make their money by either offering extra enterprise features and/or offering support and services to paying customers.

Giving their software away for free helps them with development. Their community of users create new features and fix bugs.

But cloud providers like Amazon and Alibaba often take those free versions and sell them as a cloud service, competing directly with the software vendors. The big cloud players are also often accused of not contributing much back to the free software versions, not sharing their tweaks and upgrades with the whole community.

While this is completely legal, competing with Amazon is a hard position for smaller, open source software companies. In response, some of them added restrictions to how their software can be used, basically forbidding users of the free versions to sell the software as a service.

This year, three companies went the opposite direction, announcing they would make their software more open. The Seattle-based automation software startup Chef announced in April that it would make all of its software completely available as open source.

Likewise, Cloudera, who’s stock has cratered this summer, announced in July that it will move all its software under open source licenses by February 2020. The database startup YugaByte made a similar announcement that month saying it would make its database completely available as open source.

As IBM just closed its $34 billion deal to acquire Red Hat, open source licensing lawyer Heather Meeker says that it’s possible that companies saw how successful Red Hat was and are taking steps to become more like it.

"I think it’s part of a natural pendulum swing a little bit back and forth," Meeker told Business Insider. "We saw people going to limited licenses, and we’re now seeing more people swinging back to open source model."

"Become ubiquitous first"

Now that their software is under open source licenses, Chef, Cloudera, and YugaByte found alternative ways to make money. Chef will package up its software for subscribing customers and provide them with customer service, support, and software updates.

Cloudera’s products require a subscription agreement to access compiled Cloudera software, and the company will focus on providing support, consulting, training, and updates to subscribing customers. As for YugaByte, it packages up its database for paying customers into a version that’s easy to run on the cloud. It will also provide maintenance, monitoring, and customer support.

Generally, if a company wants to go completely open source, its business will rely on support and services — like Red Hat. Currently, many companies follow an "open core" model, which means its core project is free and open source, but it develops paid enterprise features that are not freely shared.

Although Cloudera and YugaByte both took steps to make their software more open, they still essentially follow an open core model, says Joseph Jacks, founder of OSS Capital.

"Most of these changes and behaviors and shifts around licensing innovation have been very company specific," Jacks told Business Insider.

With companies taking steps to become more open, Eric Anderson, principal at Scale Venture Partners, says that these companies may be responding to a trend from last year, when companies were adding more restrictions to their software — like Redis Labs, MongoDB, Confluent, and Cockroach Labs.

Anderson also said that becoming more open can help younger companies like YugaByte.

"They need to become ubiquitous first," Anderson said. "It’s in their favor to be very open and attempt to reach ubiquity among developers. Once a project reaches ubiquity like Elastic, it’s fairly straightforward to monetize, even if it’s historically been very open."

Still, whether it’s out of survival or greed, adding restrictions to how software can be used goes against the ethos of open source, says Karthik Ranganathan, founder and CTO of YugaByte.

"We have already seen a lot of database companies change their licenses, but if you boil down to the gist of it, they ended up making their databases less open," Karthik Ranganathan, founder and CTO of YugaByte, told Business Insider. "The database is less open and less community friendly than before."

Ranganathan acknowledges that YugaByte faces the possibility of Amazon selling its software, but in the long run, keeping it open source is better, and customers who want the latest features will go to the original company that created the software, he believes.

"It is not possible to do a 100% value capture on open source," Ranganathan said. "That’s what makes open source so awesome for the end customer. Competition gives the end user the best experience."

"It’s out in the open"

Since April, Chef has been transitioning its software to become more open. Corey Scobie, senior vice president of product and engineering at Chef, says that one of the great things about the change is that employees no longer have to discuss whether a feature should be proprietary or open source.

"We don’t have a big debate about whether that’s monetizable or not monetizable," Scobie told Business Insider. "We’re building our product development process around the fact that our product development is in open source."

Chef CEO Barry Crist even said that Gap came back as a customer after Chef announced its move to being completely open source. He says that Gap cited that change as a reason for becoming a customer again. Although it’s still too early to tell, Chef CMO Brian Goldfarb says that so far, Chef has surpassed its goals for the number of customers it’s gained.

"I’ve heard from many customers that they have a preference in working with companies who follow an open source software development model," Scobie said.

Scobie says that back when Chef first started, all its engineers worked on the open source project. Now, they’re back to doing all open source development again, which means all their code will be out in the public. For some engineers at Chef who were working on the proprietary product before, this was a big change.

"What we’ve done is brought it back full circle is now every engineer is an open source," Scobie said. "It hasn’t changed their job or their function but how they think about how they do software engineering. Now the software engineering they do, it’s out in the open."

"People still feel the threat"

Deepak Jeevankumar, managing director of Dell Technologies Capital, predicts that more companies will become more open and less restrictive this year. This allows their software to spread faster — not only can more people access the software, there’s also access to developers around the world who are willing to contribute to the software.

He says last year, when companies were adding restrictions to their software, it was an "exception to the norm."

"Overall more software is becoming more and more open because of democratized access, but there may be blips here and there," Jeevankumar told Business Insider. "It’s like a stock market. Overall the stock market goes up, but there are ups and downs. I would think similarly of open source licenses to become more and more open and more and more free, but there will be more blips."

But Meeker believes the reverse is true. She still sees more companies following the open core model, which gives them options to add restrictions to their software to prevent freeriding from cloud vendors. She also says that companies that entirely rely on services for their income often don’t scale as well — Red Hat is one of the exceptions. She predicts that startups will continue experimenting with their business models.

"I think open core will continue to be the most popular," Meeker said. "It’s an easier model to execute on from a business perspective. If you’re going more towards full-on open source, you’re going to have to be more creative in how to make money."

Anderson and Jacks agree, saying they believe the open core model, which was controversial a decade ago — criticized as being not true open source — has now become the standard. They think it will stay that way, despite the current wave of full-open source companies this year.

"People still feel the threat from the cloud providers," Anderson said.

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