In this post, we'll dive into the enormously distinct differences between creating and capturing OSS value.

It’s fairly obvious that I’m a huge fan of M.C. Escher’s math-inspired  drawings and art in general. In this surprisingly not-so-famous  lithograph, we see order amidst chaos.  This juxtaposition is a perfect analogy for what we’ll be digging into  here in Part II of “Creating OSS Value != Capturing OSS Value”:

How is value created via OSS?

• Creating OSS value is fairly straightforward to understand and in the “order”  category: Simply design, develop, build and open source a software  project for the world and if it solves a real enough problem/pain point  for enough users, anyone on the internet can frictionlessly download it,  use it for free and derive unbounded value. Idealistic, maybe, but this  is the general idea.
• Creating  value is a function of a) how effectively a given problem is solved, b)  how much a given workflow/process is improved along various dimensions,  c) how powerfully the project unlocks never-before-possible  capabilities or d) all of a, b & c simultaneously or any combo++.
• Value  creation allows humans to do things they could never do before — harkening back Steve Job’s famous quote: “Computers are like a bicycle  for our minds”. OSS is similarly powerful: It is an amplifying,  democratizing technology lever that allows us to magnify our abilities  in novel ways.

New Category Creation or Commoditization/Democratization?

• One  major consideration when releasing a new OSS project is to understand  and be intentional about whether it falls into one of two broad  categories:
• Are you A) Creating a new kind of software category or B) Democratizing previously expensive, unattainable-to-the-masses tech?
• The implications of these two paths are quite significant and I’ve written  previously about this at a high level in response to an a16z podcast  between Martin Casado (a16z GP and founder/CTO of Nicira — creators of  the wildly successful Open vSwitch project) and James Watters (Pivotal SVP Strategy, the Cloud Foundry company).
• **New category creation: **Creating  an entire new category often means either combining previously distinct  layers in the stack (bundling) or disaggregating vertically integrated  products/services (unbundling). This follows Jim Barksdale’s ethos, former Netscape CEO.
• Examples  of “new” category creation: Nicira (major OSS creators of Open vSwitch  and associated products) driving the SDN space, GitHub driving Git with a  new kind of social network for code, Docker driving the  “containerization” movement/category. Examples here can certainly span  both categories (new cat. + commoditization/democ.).
• Commoditization and/or Democratization: This is the far more common path that many OSS projects take. It  essentially boils down to disrupting incumbents. Talend did this to  Informatica/Ab Initio, etc. Cloudera/HortonWorks/MapR did this to legacy  data warehouse vendors and proprietary data storage systems like  Teradata (arguably they also created a new kind of category), MuleSoft  did this to TIBCO, etc.

Creating Value via OSS: Directly and Indirectly

• Value can be created directly and indirectly:
• Direct value creation: There are many “direct” recipients to the value that OSS provides:
• Developers have immediate access to libraries/frameworks/tools without needing to go through procurement processes.
• End user companies can access new technology without signing a contract with a vendor.
• Indirect value creation: Indirect recipients to the value OSS provides also abound:
• Product  builders can accelerate their roadmaps by picking up OSS code and  integrating/applying it without re-inventing the wheel, testing cycles  and R&D contributions can be “crowdsourced”, feedback cycles  immediately “access” the whole of the internet vs. a small employed  group of developers in a single company, etc.
• Governments and organizations of all kinds also benefit from many of the same things as product builders.

What about capturing OSS value?

• Capturing OSS value is a completely different matter. This is definitely in the  “chaotic” stone/bread (we’ll never know) circular background of the  Escher lithograph. 😄

@derekcollison OSS creates more value than all proprietary software ever written; issue is that it captures a tiny fraction that value
— Joseph Jacks (@asynchio) January 28, 2016

• I  have a theory that it may be possible to model a mathematical constant  that represents the amount of value OSS creates relative to the value it  is possible to capture. In conversations with large commercial OSS  company/project founders, it seems clear that if there are 10,000 users  of a given OSS project, the potential to “convert” those users to paying  customers of some kind inside a company is usually capped at 3–5% (on  the high end) or .01–1% (on the low end). This model is highly prone to  entropy given how challenging it is to even know how many users of an  OSS project there are to begin with!
• If  we consider a corollary example, fully proprietary software likely  captures 10X+ (conservatively) of the value that it creates. I’ll write  more on this in future posts.

How to assess what path is best for attempting to capture some of the value OSS creates?

• Many questions arise here that must be contextually assessed on a case by case basis:
• Do you charge for support?
• What about training services?
• When and how does it make sense to offer those things?
• Can a product be built around the OSS project to commercialize it somehow with a closed/proprietary license? (open core)
• What  about donations/Patreon? Is that scalable? A tip-hat approach isn’t  exactly a fair way of aligning the value an OSS project creates relative  to the project creators inherent contributions.

At the recent OSS leadership summit earlier this year, I presented a version ($25B+ in value has been added since then) of COSSI and various thoughts here on creating and  capturing value with OSS. There are many blogs to be written from this highly dense deck.

Capturing OSS Value Directly and Indirectly

• Capturing value with OSS also happens directly and indirectly.
• Approaches for directly capturing value:
• We’ve previously investigated the many business models that work quite well. These are  all valid ways to “directly” capture OSS value. By directly, I mean that  the OSS project is the predominant emphasis underlying the value  proposition, UX and product building block of the company/entity selling  IP to customers.
• Approaches for indirectly capturing value:
• If COSSI shows that the top open source companies have directly captured $100B+ in value (if I were to loosen my $100M revenue criteria slightly, easily excluding Red Hat), then companies indirectly capturing value span many hundred-billion / trillion-dollar categories. The opportunity is simply much, much larger here.
• Categories: SaaS ($300B+), Cloud Computing Platforms ($500B-$1T+), Banking/Finance ($10T+)…+ more.
• In the indirect category, here are two interesting examples:
• Cloud  providers: i.e. AWS EC2. Without the OSS Xen hypervisor, would it have  been possible to build and launch EC2? Sure. Would the cloud computing  category have materialized as fast? Maybe. Maybe not! No one knows, but  what is true: Xen powers EC2 and is an OSS project. EC2 has “indirectly”  captured an enormous amount of value (many tens of billions, far above  Red Hat’s valuation alone).
• SaaS:  All these vendors heavily use OSS to build their proprietary products.  While this $300B+ industry is growing, here’s a prediction — I believe  commercial OSS (direct value capture dynamics) will exceed SaaS by 2X  within the next 15 years.
• What  kind of properties are involved in building products that use OSS but do not expose it or emphasize it as part of the value proposition? This is a topic for a future post, to be sure.

Scratching the surface

This post just scratches the surface of many of these deeply nuanced and  complex ideas and concepts. However, hopefully this serves as as  starting point basis for thinking about how OSS value can be best  delineated. 🙏