The resurgence in acquisitions, IPOs and financing transactions related to software and technology companies provides a timely reminder of the value in monitoring use of open source materials. Lack of information about open source usage and the applicable licences can significantly reduce commercial potential. However, developers seeking financial and creative partners should not necessarily avoid open source materials. To the contrary - open source software has demonstrated its ability to help create new products and generate revenue, provided that developers monitor the specific sources they utilise, and use materials distributed under the correct types of licence.

Facilitating Innovation

In the three decades since the open source software movement began, its principles of collaboration and information-sharing have driven an enormous amount of innovation. Open source elements provide particular value to the small- and mid-sized companies that make up the backbone of New Zealand's technology industry. By utilising solutions already created by the open source community, developers can focus their attention on the specific aspects of a program or product in which they have particular expertise. Developers can then draw upon the accumulated knowledge of colleagues worldwide to test and improve their work.

The mobile phone game "Angry Birds", which has become a recent symbol of the creative and economic potential of small software developers, provides a recent example. The catapulting birds, collapsing bricks and rolling pigs that form the core of Angry Birds' game play are built upon the Box 2D physics engine, an open source program utilised by many developers on the Android, Apple iOS and other mobile application platforms. Relying on this existing, thoroughly-tested open source program to control the game's physics allowed Rovio, a relatively small developer in Finland, to focus its limited resources on the artwork, game play, storyline and humour that have made Angry Birds a huge success. The successful game allowed Rovio to close US$42 million in Series A venture capital financing in March, a process facilitated by Rovio's use of materials under open source licences that encourage, rather than hinder, commercialisation of proprietary products.

Open source usage extends far beyond small companies and the software industry. A recent Accenture survey of large enterprises in a variety of industries, including manufacturing, financial services, agriculture and healthcare, found that over 50% were "fully committed" to using open source in their business, and another 28% were experimenting with open source materials.

The question is no longer whether or not open source materials have been utilised - instead, the key issue is knowing what specific materials have been used, which licences apply to the various elements, and how each of those licences affect the commercial potential of the finished product.

Legitimate Concerns, And A Few Misconceptions

Developers, potential investors, collaborators and distributors frequently express concerns that the terms of open source licences can adversely impact the ability to commercialise products. Microsoft CEO Steve Ballmer summarised his view of these issues ten years ago, characterising the open source nature of Linux as "a cancer that attaches itself in an intellectual property sense to everything it touches. That's the way that the license works."[1]

Open source licensing practices have evolved since then. Many open source libraries are now distributed under licences that encourage users to create closed proprietary programs derived from the open source elements. However, several licensing concerns continue to discourage some investors and collaborators. One significant issue is that all of the major open source licences disclaim any representations and indemnities, requiring users to work with materials at their own risk.

Other concerns are based on misconceptions. These misconceptions include: (1) all open source materials are subject to the same general rules and licence terms; (2) open source materials must be distributed for free; (3) developers must disclose the source code of any new programs that incorporate existing open source materials; and (4) developers must permit third parties to modify, improve and distribute any new programs incorporating open source.

All Open source Licences Are Not Equal

A wide variety of different licences govern the many open source libraries. The Open Source Initiative currently lists at least 69 different types of approved licences. Each type of licence imposes different conditions upon the use and distribution of programs that incorporate the relevant open source materials.

The most popular early licences focused on advancing the creative and collaborative goals of the open source community, and contained terms that made it impractical to use open source materials in proprietary programs intended for commercial exploitation. However, an increasing number of open source libraries now utilise licences that permit developers to commercialise derivative works.

GNU and the GPL

Significant concerns remain for certain open source licences, including the most common free software licence, the GNU general public licence (GPL). Of the major open source licences, the GPL imposes the most significant impediments to the commercial exploitation of derivative works. The Free Software Foundation developed and administers the GPL, and has popularised the term "copy left" to refer to the structure and goals of the GPL, which was one of the first open source licences.

The GPL encourages collaboration and development among the open source community by making its software - and any works built upon its software - freely available for others to modify and utilise. To achieve this goal, the GPL imposes several licence terms that limit the ability of developers to exercise the exclusive rights that would otherwise be provided under intellectual property law. These terms include an obligation to publicly disclose the source code of any work distributed under the GPL, and to permit third parties to freely modify, utilise and redistribute any works distributed under the GPL.

Significantly, if a developer creates and distributes a new program that incorporates GPL open source materials, the GPL obliges the developer to incorporate and pass through the licence terms of the GPL - without modification - as part of the new work. The terms of the GPL will then pass through to subsequent users. As a result, any new works are "infected" with the GPL in the eyes of some potential collaborators, investors and partners.

Permissive Free Software Licences

Not all open source licences are as restrictive as the GPL, and many popular licences permit developers to utilise open source materials to create proprietary programs. For example, the "Zlib" open source licence governs use and distribution of the Box 2D physics engine used in Angry Birds. Under the terms of this licence, Rovio is not required to disclose the source code of Angry Birds publicly, as might be the case under some licences. Nor is Rovio required to permit the open source community to modify and improve Angry Birds. Instead, the licence politely requests the following very modest consideration:

"If you use this software in a product, an acknowledgment in the product documentation would be appreciated but is not required."

Unlike the GPL, the Zlib licence (and dozens of similar open source licences) permits Rovio to impose its own highly protective licence terms on distribution of Angry Birds, including provisions intended to create and protect economic value. Because these types of licences permit users to impose different (and more business-friendly) conditions upon the distribution of derivative programs, they are frequently referred to as "permissive free software licences."

The most popular permissive free software licences are the Apache 2.0 licence, the MIT licence and the BSD licence. Each of these licences contain unique terms, such as the circumstances in which source code must be disclosed, requirements and restrictions on providing credit to contributors, inclusion of copyright notices, revocability, whether patent rights are included within the licence, prohibitions on bringing claims against the licensor, and other provisions.

The proliferation of dozens of different licences has made it more difficult to determine which licence applies to a particular piece of open source code, making it more challenging to ensure compliance with the applicable licence.

Knowing What You Have

The software and investor communities have become increasingly aware that accurate information about open source usage is highly relevant (and sometimes necessary) when assessing the commercial potential of products and businesses. As a result, it has become common for due diligence inquiries in technology transactions to specifically request this information. Companies planning to obtain financing, or whose eventual goals include a potential sale, merger or other strategic transaction, will benefit greatly by implementing procedures for monitoring open source usage. Conversely, lack of information can deter potential partners, fearful of committing limited resources to projects that may be "infected" by licence terms inconsistent with traditional commercialisation strategies.

Developers can take several actions to minimise the risks of using open source materials in ways that may harm future economic potential, or that may generate unexpected legal claims:

  1. Develop familiarity with the different types of open source licence. As noted, some open source licences are far more business-friendly than others.
  2. Establish a clear policy about open source usage. The lack of any policy about open source usage can be a red flag during a due diligence review, and may lead potential partners to assume that materials have been widely used under undesirable licence terms.
  3. Encourage staff to self-report use of open source materials, and identify where those materials were obtained from. In reality, self-reporting usually generates under-inclusive results, but can help identify major issues before problematic open source materials become integrated into key products.
  4. Conduct an open source audit. Several vendors offer auditing services, and automated scanning tools also exist. Although audits frequently lead to unexpected discoveries, it may be more desirable to discover this information yourself, and to learn about potential problems before products are launched, investors are solicited, or licensors assert legal claims.
  5. If open source materials are discovered that are subject to the GPL (or other licences that make commercialisation difficult), it may be possible to re-engineer programs and systems to avoid the problematic materials, and to replace them with either proprietary materials or with materials from open source libraries that encourage commercial exploitation.

Please let us know if you have concerns about the use of open source software in your organisation, and want guidelines on how to investigate and manage the issue.