December 2007


Red Hat Names Jim Whitehurst, former COO of Delta Airlines, as CEO. Szulik to Continue as Chairman. More here and here.

I missed the Red Hat earnings call as I was more interested in RIM (a good Canadian company with awesome products, and whose stock I’ve been holding for some time now….yes, I’m happy today).

Red Hat beat expectations on quarterly revenue of $135.4M (+28% YTY), and net income of $20.3M (+39% YTY). You can read the transcript of the earnings call here. I used it to CTRL-F for ‘JBoss’ to see if Red Hat would give any details on how well JBoss is doing. Red Hat provided no additional detail other than “JBoss pipeline looks good”. Maybe I missed the memo, but isn’t the pipeline for OSS products always “good”? You have thousands of users who are doing so without paying. The mere hope of converting them to paying customers means your pipeline is “good”. But I digest.

As I commented on Matt’s blog…30% is good (and I shouldn’t minimize how good it is), but are we fooling ourselves thinking that 30% on a ~$500M 12 month revenue base is “proof that OSS changes everything”? Just for a little perspective [1] RIM grew revenues by 100% YTY in the quarter, on a 12 month revenue base of ~$3B. [2] Twelve month stock returns for RHAT, IBM, MSFT, ORCL.

I am more and more convinced that the OSS business model is broken. If we agree that the typical OSS vendor goes though these stages:

Stage 1: Get attention (total downloads is the key measure of success)
Stage 2: Get some revenue (tens of millions)
Stage 3: Get lots of revenue (i.e. > $250 mil)

A Support Subscription business model is the best balance of driving revenue and giving your users free stuff to build brand awareness during Stage 1 & Stage 2. But to get to Stage 3, the support business model does not scale (because people who would have paid to get your product will get your product without paying for it). OSS vendors need to sell products, not support. That is what Red Hat is trying to do (and has been doing very successfully with RHEL). The problem is, in getting to Stage 3, Red Hat (and JBoss) has trained a large set of its users that they can get great software without paying for it.

I wish I had a solution to this dilemma, other than “just use the commercial software business model from day 1″.

I’ve been tracking the “Demise of the traditional software market” for some time now. One more data point from Oracle today.

Second quarter total revenues were up 28% to $5.3 billion, while quarterly net income was up 35% to $1.3 billion.

“In Q1 we reported new software license revenues up 35%, the strongest growth of any quarter in ten years,” said Oracle President and CFO, Safra Catz.

Yes, 35% growth on a few billion dollar base (give or take a few hundred million)…not shabby. Now, before you think, “that’s just acquisition related revenue growth”, keep in mind that new license growth for database and middleware software grew by 28%. The applications business, which would be impacted by Oracle’s acquisitions, grew by 63%.

Oracle didn’t mention anything about Unbreakable Linux during the earnings release conference call. What’s more, no analysts asked about Unbreakable Linux or competition from OSS. The analysts were too busy congratulating Oracle on the quarter.

By now, some of you have read that several analysts downgraded Red Hat due to Red Hat’s execution of the JBoss acquisition. I chose not to blog the story because, well, it’s about the performance of a competitor (JBoss) to IBM WebSphere Application Server.

Matt blogged the downgrade and his belief that JBoss is doing fine. Then things got interesting with comments CNet readers. I’ve clipped a few because they highlighted key points that enterprise vendors should consider before an OSS vendor acquisition. As Roy points out, an OSS acquisition is truly about the people, not the technology, being acquired. In Red Hat’s defense, it was unlikely that JBossians would find the culture at any larger vendor, including RH, to be close to the freedom of the JBoss culture.

Roy:

“They’re looking at the amount of money RHT spent on the JBoss acquisition and the poor revenue return on it. That sorta tends to happen when you destroy the sales and marketing machine JBoss had built.”

Matt:

“I’m not looking for any blame. I’ve yet to see any reason to believe that Red Hat isn’t getting JBoss moving. I know there are plenty of JBossers who have left the company who are happy to dig at Red Hat not loving them enough, but I’m not overly bothered by their outside perspective on what’s going on inside the company.”

Roy:

“Remember… what was RHT buying? They weren’t buying code (OSS). So they were buying… yep… people! As luck would have it, once the “special” people started leaving, the investment’s downward spiral began. Today it seems the surprise is on RHT.”

Then, a rather long comment from a (likely ex or current) JBossian:

“RH is more concerned with creating policies and initiatives that ran contrary to the spirit which Fleury and his team created – one of openness, caring for their work, and the motto have fun which was present every day till the day RH took over. RH was more concerned with making sure no one on @core used profanity, or communicated anything with anyone about any of the projects we were working on. It became the Borg Collective, and that hardly inspires creative and talented people to keep on doing what they do best.

….

Did JBoss’ers think they were special, sure we did, and we were. We were the trailblazers, doing something innovative, and different. We fought the likes of IBM, BEA who tried to drown and kill us at every turn, and we survived, and even managed to come out on top in many ways. So yes, we are a special bunch, and proud of it. It’s to bad RH management tried to take that feeling away. They are paying the consequences for it now, and there will be more to come.”

Let’s hope that comment didn’t come from Marc speaking in the third person ;-)

Here are three points from Tim Bray’s recent post. They very relevant to OSS. (I added the numbers to delineate his points):

[1] Getting started should be free: Also, it shouldn’t take more than a few days.

[2] Some popular tools will be Open Source: Which raises a question: would you rather provide the popular OSS tools, or compete with them?

Now, monetizing OSS is hard. But on the other hand, monetizing software is hard, always has been. And doing it while you’re competing with Open Source is especially hard.

[3] To make money, give things away: Or as this pony-tailed executive I know says: “Monetization at the point of value.”

There are two kinds of people in the world: those who might do business with you, and those who never will. For the second group, you lose nothing by letting them grab your stuff for free.

The first group is more interesting. On one hand you have the risk that they’ll go ahead and use your product or service without ever paying a penny for licensing or support or indemnification or whatever. On the other, there’s the risk that if you make them pay up front, they’ll try something else that is free-to-try and it’ll be good enough.

Very insightful. Give customers something free that is easy to get started with. Wait for the customers who would likely do business with you to follow through with that intent. And hey, if these customers buy commercial licenses, that’s cool. Don’t sweat the customers who will never pay for ‘value’.

Back in the day, Sun was riding high as a result of its success with Dot Coms. It was all going to be different; brick and mortar customers were laggards that “didn’t get it”, the future was in the hands of Dot Coms. Sun bet on the dot coms and well, you know the rest.

It’s important to revisit that before validating strategies based on “Internet companies” of today.

Jonathan reports the following and Matt uses it to validate his beliefs that OSS is the only way forward and that the support-based business model rocks:

“We held an event a few weeks ago to which we invited a broad spectrum of such customers, one room filled with CTO’s from some of the world’s largest on-line companies (whose brands nearly everyone would recognize – the internet as a social phenomena is in full swing);”

“Not a single company in the CTO room paid for software.”

“In contrast, not a single company in the CIO room allowed free software without a commercial support contract. Not one. Validating the notion that for more mature/diverse companies, the cost of downtime dwarfs the cost of a support contract.”

It’s surprising that Sun/Matt believes that the support business model is vindicated using this information from “Internet CTOs”. I say this considering Red Hat, JBoss and MySQL, the 3 best known OSS brands/companies have all shifted away from a support business model. These vendors are selling software, they may call it something else, but in the words of some British guy, “would a rose by any other name be less tasty?”

Sam Ruby has a knack of making simple statements that convey so much. Here’s an example:

“Standards that Matter are Standards that Ship”

So true. Sam talks about the <video> element in the HTML5 spec and how certain vendors appear to be addressing this spec requirement. This statement caught my attention:

“Fundamentally, Microsoft’s strategy is sound. Ignore standards that you find inconvenient, and focus on producing and enabling the production of content people want.”

This is where OSS can play a role. The appropriate OSS community can implement standards (and specifications) that other vendors find inconvenient. This isn’t new news to any of you I’m sure. But are there differences when we consider an OSS vendor vs. and OSS community?

An OSS vendor can choose to implement the “inconvenient standard/spec” and use it as a competitive differentiator versus the incumbent vendor. But are there “inconvenient standards/specs” for OSS vendors themselves? If there are, or will be in the future, do we expect OSS vendors to act differently than Microsoft is?

:-) Hey, that’s what Marc’s post says….Marc is becoming an advisor for RIA vendor Appcelerator.

Fleury writes:

“And finally, what sets them apart, at least for me, is that they are friends and a group of my favorite peoples. So let’s go, I will be helping with as much visibility as I can bring them, mainly PR and this blog. They will need visibility. I am helping with messaging a bit, I am helping with the business model a bit but really all I do is listen to them and what they do and then repeat to them what they told me. This advisory thing is easy when the people in front of you know what they are doing.”

From the Appcelerator website, their business model includes professional services, education/training, technical support and an option for commercial licensing as an alternative to the GNU-based OSS code.

Marc says:

“So what sets these guys apart? 1- First of all, 100% Open Source. No one else in the space is 100% OSS. … “

I do find it interesting that Marc points to the 100% OSS angle as setting Appcelerator appart. Considering the following comment from Marc, that I found this on Fleury’s RSS feed around Nov. 26th (via Google Reader):

“I don’t want to come across as the ultimate realist but as far as scalable business models go, we still haven’t found anything better than a proprietary distribution of open source software.”

Marc, I’m with you 100%. There is no shame in making $$ through gated access to some version of your code. If Appcelerator is successful, you’ll be advising them to shift from a Support Subscription business model (where 100% OSS matters) to a Software Subscription business model (where you have some proprietary products).

So why the big focus on “100% OSS”? Well, I know why..you need to be successful with a Support Subscription business model before you can shift to a Software Subscription business model. I just wish the OSS discussion wasn’t always an either/or discussion.

Anywho, best of luck to Marc & his friends at Appcelerator.

Simon (Chief OSS Officer at Sun) talks about Sun’s $1 million dollar grant to Sun controlled FOSS communities.

Net/net: Sun will take $1M and divide it amongst six Sun owned/controlled FOSS communities. The communities will propose how to use the cash to award contributors. Sun will approve these proposals with modifications as required. The program seeks to reward innovation.

Simon states:

“Sun will be announcing a multi-year award program in support of fostering innovation and advancing open source within our open source communities.

….

This year’s participants include OpenSolaris, GlassFish, OpenJDK, OpenSPARC, NetBeans, and OpenOffice.org.”

Yes, the 6 OSS communities are Sun owned/controlled projects. This shouldn’t be a surprise. Sun is a business, and it’s their legal duty to improve returns for shareholders.

I’m not sure why a vendor would have to pay OSS developers to contribute to a project if (A) doing so is not already part of their day job, or (B) the developers isn’t getting more benefit out of the project than they are inputting. I’m all for hiring the top contributors to a given project if they aren’t already paid to work on the project.

This seems awfully like an attempt to use cash to drive interest around projects that may need more interest. Does anyone remember Red Hat/JBoss, MySQL, or other leading OSS vendors doing something similar? I can’t, but I don’t know/remember everything.

The only obvious point, as highlighted by the announcement in Bangalore, is that this cash could help attract developers from emerging countries into Sun controlled OSS projects. But the following statement from Simon suggests that the awards will go to current community members.

“We are wanting to recognise and reward innovation, which we fully expect to come mainly from existing community members including the many already employed to work on software (though not Sun employees since Sun is the sponsor of the awards). It’s about sharing the wealth.”

Maybe I’m over thinking things and it’s “just about sharing the wealth”. Stranger things have happened :-)

Easier said than done…converting your OSS user base. Read on, but that’s the summary of this post.

Joel Jackson of Red Hat said:

“Do you think the genius of OSS is how we sell it? Seriously. How did you get a job blogging on open source my friend.

We already know that to scale in OSS you start off by doing two things: (1) writing great code and (2) getting market share (by selling what you call “Support” subscriptions”). Then, right about the time your OSS company is in Gartner’s upper right “magic quadrant” with the other proprietary companies, you establish a revenue model that try’s to convert much more of your user base (by selling what you call “Software” subscriptions).

Is this what you were trying to educate us on all along?

Come on and say it with me: The real genius in OSS isn’t the way we sell software. It’s the way we develop software and crush the development models of proprietary companies in the process. OSS transforms the way software is developed, distributed and supported. “

Joel, I truly appreciate your comments. Look, I am an OSS fan. But, I don’t subscribe to the “it’ll all work out in the end” line of thinking that seems to be the norm amongst OSS proponents. I *think* that the balanced approach is why I got a ‘job’ blogging about OSS ;-)

I can’t reconcile that OSS is game changing, yet is only estimated to represent < 2% of customer spending in 2011. The fact that 2011 will be 20 years into the life of the commercial OSS market, if you base t=0 is when Red Hat was founded. I keep dropping those numbers to bring some reality to the discussion. Heck, let’s say the <2% is really going to be 4%, or 10% in 2011…is that what we should define as “game changing”? In my opinion no. Is revenue the best measure of OSS success? Maybe not, but for those of us who get paid to work, it’s probably the best measure of success out there.

Joel, I mean no disrespect to OSS proponents that have predicted the end of the commercial software business model as we know it. I like and respect many of them. But I do feel that they trivialize the tough battle ahead for OSS.

Yes, OSS is great if your company is able to (1) write great code and (2) gain share via a Support Subscription business model. But it’s a completely different ball game when you (3) try to convert your user base by selling Software Subscriptions. When you start doing (3) you are competing vs. the commercial software vendors who have been doing this for decades. OSS plays on its home turf with (2), and (1)…but there are also great commercial products out there. The real challenge is for OSS vendors to attain success with (3), namely, converting users into paying customers. Oh, and as you start selling products to do this (under the guise of a service or not), you are playing the commercial software game. It’s a tough game….tougher than OSS proponents make it out to be.

On my previous post about the scalability of the “support subscription” business model, Joel Jackson said:

“I’m confused Savio…what don’t you understand about a software subscription annuity model? $200-500mill today in base revenue could easily be (along with a modest growth rate of new customers, which Red Hat doesn’t seem to have a problem getting) over $1bill in revenue in the near future”

Joel, thanks for bringing up this point. I’m talking about the Support Subscription business model, not the Software Subscription business model. I may not have been clear on the difference in my previous posts.

JBoss provides us with a good example of the two in practice:

Prior to the acquisition, JBoss employed a Support Subscription business model. Anyone could freely get and use JBoss products without paying JBoss a cent. Customers that wanted to call in with technical support questions and receive defect fixes faster, etc. had to pay for these rights. The customer paid for support around freely available products. The customer was clearly paying for a service (i.e. support, not to be confused with professional services a la IBM Global Services or Accenture).

Several months after the acquisition JBoss adopted the “Fedora-model”, or, in layman’s terms, moved to the Software Subscription business model. Customers can only get certain versions of JBoss products by paying for “a JBoss subscription“. This subscription includes technical support and monitoring services (which were part of the Support Subscription business model that JBoss previously employed). The additional access to non-freely available products is what sets this business model apart from the Support Subscription model.

Software Subscriptions has been a component of the commercial software business model for longer than I’ve been alive. FWIW, over 50% of Oracle’s revenues are driven by Software Subscriptions. Software Subscriptions in the commercial software business model give customers access to non-freely available products. The customer has the right to receive technical support & maintenance around these products under the Software Subscription business model.

If you just said, “wait a minute, are you saying the Fedora model / JBoss Subscription is just like the Software Subscription business model that commercial software vendors have been using for decades?” Bingo.

The Software Subscription business model scales because customers are buying products. When a customer stops paying, they no longer have access to the product. Contrast this with the Support Subscription business model where customers can elect to use the product without support, or start with support and move to unsupported if they didn’t make many support inquiries in the previous year.

There is absolutely nothing wrong with OSS vendors employing the Software Subscription business model. It’s the best business model (from a revenue standpoint) that we’ve seen in the software industry. Just don’t tell me that OSS “changes all the rules and has a cherry on top”.

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