Finding Trillions In The Clouds: How Open Source Companies Can Win In A World Dominated By Amazon, Microsoft And Google – Forbes

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Open source is no longer just for hackers and hardcore coders. Several open source software companies including MongoDB, Elastic, Databricks, Confluent, and Hashicorp have become multibillion-dollar businesses. Their products are used by millions of in-house developers at large corporations around the world as these engineers race to build the sophisticated applications and infrastructure their companies need to stay competitive in a tech-driven world.

In my last post, I discussed how these successful companies have created viable business models based on the open core and cloud services models. But theres a catch: the big cloud service providersAmazon Web Services (AWS), Microsoft Azure, and Google Cloud Platformare also eager to generate revenue from open source code. They often offer low-cost hosted versions of popular open source software, including MongoDB and Elastic to directly compete with commercial open source companies. For example, Amazon offers a product called DocumentDB (with MongoDB compatibility) priced sharply relative to MongoDBs own cloud-hosted version of its unstructured database, called Atlas. MongoDB and other large open source companies argue their cloud offerings are more robust, have deeper connectivity to third-party applications, and come with expert service and support. All of that may be true, but that hasnt stopped AWS from finding ways to muscle in on the open source gold rush. The cloud vendors also offer the promise of scale, and the performance and availability that theyve become famous for, making them very formidable foes.

For open source founders just now establishing business model roadmaps, its increasingly important to approach co-existence with the big-three cloud providers with finesse. Thats especially true because most commercial open source companies depend on at least one cloud provider, and often all three, for hosting and distribution, so they are both partners and competitors. Getting these relationships right is critical to every open source companys long-term success; after all, billions in revenue are at stake.

There are four main strategies to deal with increased competition from cloud providers and Ill detail each below. These arent mutually exclusive - some companies are pursuing more than one of these strategies simultaneously.

Change your License

Some commercial open source companies have taken a dramatic step: MongoDB, Elastic, Confluent, and others have changed the terms of their license agreements to fight back against the cloud providers. With this bold move, open source companies can ensure the big cloud providers effectively cannot host the open source versions of their software, at least without the cloud vendors impairing their own business models. This has been a controversial decision; open source companies who change their license to make it more restrictive risk alienating current and future community members who might see such an about face as aggressive and protectionarymuch like the tactics of closed-source software companies. MongoDBs trajectory since its license shift shows, however, that such a strategy can work if the process is managed carefully.

MongoDB introduced its Atlas database-as-a-service managed cloud offering in 2016 and it has grown tremendously fast. MongoDB reported in September that Atlas now accounts for 44% of overall revenue, with over 18,800 of its 20,200 customers using Atlas as of July 31, 2020. Clearly, Atlas is a revenue stream worth protecting, so MongoDB needed to do something to ensure AWS didnt start taking significant market share away from Atlas with its lower-cost DocumentDB product. In response, MongoDB created a new server side public license (SSPL) in late 2018 that specifically limited what cloud providers could offer based on its open source software. Specifically, MongoDBs new SSPL required cloud providers to make any product based on MongoDBs open core freely available to the open-source community, thereby limiting a clouds ability to generate revenue from an SSPL-licensed version of MongoDBand further threatening that any integrated technologies offered by a cloud would also be impaired commercially. MongoDBs shift was seen by many as contrary to the very nature of open source, yet the change doesnt seem to have materially damaged MongoDBs reputation, considering how quickly its Atlas revenues have continued to grow.

I believe the reason MongoDB was able to introduce a more restrictive license without alienating its customer base is that it spent many years winning the hearts and minds of developers. MongoDBs fervent, dedicated user base understood why it had to change its license: to protect itself from the all-powerful trifecta of Amazon, Microsoft, and Google. Such cloud protection licenses have been emulated by other open source companies recently, and it will be interesting to see which companies can fend off the clouds without damaging community momentum.

Go Multi-Cloud

The clouds represent the latest in a long line of powerful technology vendors that have sought to lock in their customers, driving favorable long-term economics once such lock-in has taken hold. Companies have become highly sensitive to this ploy and most large enterprises today employ a multi-cloud strategy for just this reason. Native open source cloud services that run, or can run, on multiple clouds represent a very appealing attribute for enterprises. Many of the strongest open source companies have pursued a multi-cloud strategy, affording a huge advantage versus single-platform cloud offerings of their open source versions. The cloud vendors want to lock in enterprises, so selling against that chokehold is very compelling.

Cooperate

Several commercial open source companies have tried a more cooperative approach: if you cant beat em, join em. Instead of trying to fight against the cloud providers, theyve found ways to create mutually beneficial business models. A great example of this strategy is how Databricks works with Microsoft Azure. Databricks users can procure its products directly through their Azure accounts. Essentially, Azure has become a distributor for Databricks products, taking a cut of the revenue. Azure also gets the benefit of selling more computing infrastructure and storage with each new Databricks-on-Azure cluster. Of course, the challenge to this model is having enough leverage to negotiate a fair revenue-sharing agreement. Databricks is a highly successful open source company with a massive, committed community of developers. The company is now valued at over $6B, so it has the market share and clout to negotiate with Microsoft. On the other hand, up-and-coming cloud providers run the risk of being steamrolled, or ignored completely, by the big cloud players.

While cooperating can be risky, its important to remember that the cloud vendors arent monolithic entities; theyre actually loose federations of sometimes diverging competing units. For example, Databricks drives significant compute and storage revenue on Azure, helping these most important businesses thrive. Finding ways to drive value for a cloud partner is critical to developing a successful partnership, but taking care to not become overly dependent on one cloud is of paramount importance as well.

Build an Ecosystem

One of the best ways to ensure the big cloud players dont poach your customers is to make your product far more useful and valuable than theirs ever could be. The ecosystem approach entails fostering an interconnected network of software integrations with your product. When many third-party software companies build extensions to your product, it becomes more valuable, since it can then work seamlessly with many different enterprise applications. A cloud provider may be able to offer a lower-cost version of your product, but if your offering has many connectors to other applications, it will be worth the extra cost for enterprise users. A good example of an open source company that has succeeded with this model is HashiCorp. By working closely with its dedicated community for many years, Hashicorp has supported developers to create over 400 extensions to its Terraform platform. To date, the cloud vendors havent been able to offer successful competing Terraform-based products because its nearly impossible to compete with the real Terraform that has hundreds of integrations to other products.

What all four of these strategies have in common is that they take planning and foresight. You cant just change your license on the fly without having spent years building up goodwill among a huge committed user base, nor can you build out a multi-cloud solution nor create the market share needed to negotiate favorable revenue-sharing deals with 300-pound gorillas overnight. And it takes years of developer support and encouragement to see integrations with your product appear on a wide scale. Thats why its critical for every open source entrepreneur building a company today to think ahead about how to handle the complex relationships with Amazon, Microsoft, and Google.

Note: My firm, GGV Capital, is invested in and I am a board member of HashiCorp.

Thanks toAghi Marietti,Armon Dadgar,Dave Kellogg,Dave McJannet,Erica Schultz,Jay Kreps,Joseph Jacks,Marco PalladinoandReza Shafiifor their kind and patient assistance on this series of posts.

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Finding Trillions In The Clouds: How Open Source Companies Can Win In A World Dominated By Amazon, Microsoft And Google - Forbes