Open Core Licensing: Arguments and Applications

Open core licensing, also known as commercial extensions, is a licensing regime that offers core components for free, but charges licensees for additional premium products.  The approach is a twist on the dual licensing approach where the vendor, as copyright holder, makes the source code freely available, but also offers the same code under a commercial license for consumers who want to avoid open source licenses.  Recently, companies such as Jaspersoft have had great commercial success using open core licensing, offering software for free, while selling software guides, documentation packs, training services and customer support.  This post outlines arguments for and against open core licensing and discusses the concept as a more general business model.

Proponents of open core licensing argue that the model is viable in the long term due to the advantages it provides to consumers. They argue that customers obtain the added security of the open source license – if the vendor goes bankrupt, the customer will have the benefit of having access to the source code.  While the consumer may not be able to put the source code to use directly, there will likely be many other consumers in the same situation who can.  Thus, the real security lies in the fact that the open source nature of the software is likely to produce a community of developers that can offer support in the event the vendor cannot.

In addition, proponents of open core licensing argue that it provides vendors with an effective way to monetize large open source communities by charging for extra features, product guides and training services.  It is argued that if the extra features are useful, and provided at a reasonable price, customers will pay for them.

However, opponents argue that open core licensing is merely a fad.  First, they argue that the open source community will not accept products released under the open core licensing regime.  Members of the open source community may become upset because they believe that commercial companies are branding their commercial products as open source for marketing purposes.  At the same time, other opponents argue that the success of software released with open core licenses will not last.  They believe that pure open source software will eventually catch up, and consumers will have the option of obtaining the commercially offered extra features free of charge from the open source community, eliminating any incentive to obtain the extra features from the vendor.

Interestingly, the concept behind open core licensing has been applied in industries other than software.  In the music industry, the band Radiohead made headlines when it released its 2007 album, In Rainbows, for free.  However, at the same time, the band provided consumers with the option to buy a special limited edition package of the album with bonus tracks, artwork and other special features.  Another prominent artist, Trent Reznor, believes that by using Radiohead’s strategy, artists can still earn a profit in an industry that has suffered losses in revenue and is dominated by online piracy; Reznor writes: 

“[W]hat you NEED to do is this–give your music away as high-quality DRM-free MP3s. Collect people’s e-mail info in exchange (which means having the infrastructure to do so) and start building your database of potential customers. Then, offer a variety of premium packages for sale and make them limited editions/scarce goods. Base the price and amount available on what you think you can sell. Make the packages special–make them by hand, sign them, make them unique, make them something YOU would want to have as a fan. Make a premium download available that includes high-resolution versions (for sale at a reasonable price) and include the download as something immediately available with any physical purchase. Sell T-shirts. Sell buttons, posters…whatever.”

If Reznor is correct, other industries may also want to heed his advice.

One Comment
  1. Open source software has definitely been great for sharing ideas. Applications like Python, as well as open source code that derives from base programs such as LabVIEW, continue to help those in the research community from grad students to industry techs. But a purely open source application does come at the cost of not being able to bring in as much revenue for the developer. Open core products seem to be a viable middle ground to me. Though as Michael mentioned, a major argument against such software is the possibility that eventually there will be free open source alternatives to commercially offered extra features, the developers may still be able generate revenue during the times they remain ahead. Every time the open source community catches up, the developers could move on to releasing newer and better features (especially since they would presumably have greater expertise with the programs), and there would be competition between the two camps until it is no longer economically feasible for the developers to continue. This way there is a greater incentive to get a new product into the market, even though it may not perpetually rake in profits.

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