HashiCorp’s License Change: A Strategic Error?

PivotNine has completed an in-depth research report into HashiCorp’s recent licence change to the BSL. Our research paper HashiCorp and the Business of Open Source describes how the Terraform ecosystem is splintering into the HashiCorp Terraform ecosystem on the one hand, and the OpenTofu ecosystem on the other. We describe how this split in the ecosystem may have significant cost and revenue impacts on HashiCorp's business in the medium term.

We draw particular attention to the trends in HashiCorp’s revenue growth, and how its emphasis on growing cloud services revenue is increasing HashiCorp’s cost base. We suggest that this change in cost structure—a strategic choice of HashiCorp’s own making—may have led to the decision to change licence.

Cloud services revenue (12.42% of revenues in 2024H1) has now overtaken licenses revenue (11.34% in 2024H1). Cloud revenues are also growing strongly at an estimated 52% YoY for fiscal 2024¹. All other revenue sources are estimated to grow at less than 21% YoY for fiscal 2024, including support, which makes up the majority of HashiCorp’s revenues (73.22% in 2024H1) and gross profits (77.64% in 2024H1).

Meanwhile, cloud is less profitable. HashiCorp’s costs of cloud, at 41.95% of cloud revenue in 2024H1, are substantially higher than license costs, which grew from 1.48% of license revenues in 2021 to 3.4% of license revenues in 2023H1. By shifting revenues to cloud, HashiCorp has substantially raised its own cost base.

A Strategic Error?

We have determined that it is likely that HashiCorp perceives certain competitors as a significant threat to its cloud services revenues. Specifically, competitors providing services that compete with Terraform Cloud, and which have incorporated the previously open source Terraform project into their offerings.

With its sudden licence change, HashiCorp has created an existential threat to these competitors, forcing them to band together. The result is a unified and motivated competitive bloc, organised around a common purpose. The OpenTofu project is the result.

Unlike most forks, which tend not to survive the initial burst of enthusiasm that surrounds their creation, we believe the specific circumstances here are favourable to the survival of the OpenTofu project. We outline a pathway whereby OpenTofu becomes not just a substantial competitor to HashiCorp Terraform, but could become the dominant version. Just as Kubernetes provides a common platform for numerous competitors to build on, the OpenTofu project could become that platform for Terraform, replacing HashiCorp Terraform as the platform of choice.

While there are significant barriers to the success of OpenTofu, we have formed the view that HashiCorp may have made a significant strategic error with its hasty change of licence for Terraform. There is now a growing, credible alternative to one of HashiCorp’s flagship products. One that did not previously exist, and which could materially affect a major source of revenue and profit growth for HashiCorp.

The presence of OpenTofu may also encourage one or more large cloud providers to launch their own competitor to Terraform Cloud. In the paper we outline how this threat already existed, but that it is now more likely, rather than less.

Ultimately, PivotNine believes that the Terraform ecosystem will benefit from the changes. We suspect that HashiCorp will not, or not as much as it planned. If the OpenTofu project succeeds as we have outlined, it could present a substantial commercial problem for HashiCorp.

Whatever the outcome, this case provides a wealth of educational opportunities about project governance and open source as a business choice.

HashiCorp and the Business of Open Source is available now to PivotNine clients and research subscribers. The report may also be purchased separately.