Categorizing OSS customers

I’ve been thinking about this statement from Sun/MySQL’s Marten Mickos:

“There’s a difference between organizations that have more time than money and organizations that have more money than time.”

I coming to realize that OSS users split into three, not two, categories:

• A] An organization that has more time than money
• B] An organization that has more money than time but is used to getting what they need for free and is comfortable enough with OSS to rely on their own skills
• C] An organization that has more money than time

While Marten has grouped categories “B” and “C”, I think it’s important to separate them out. And truth be told, I think category “B” users are more likely to act like category “A” users when a purchase decision to be made. BTW: There is likely an aspect of “how business critical is the application running on OSS” that needs to be overlayed on this user categorization. But that’s for another post.

For OSS vendors, it’s an uphill battle to get a company in category “A” to spend on a product or subscription. On the other hand, nearly all “early stage” paying customers will come from category “C” users. But over time, the growth of users in category “C” who haven’t been converted to customers is outstripped by revenue growth targets that the OSS vendor has. This happens at different points on the revenue curve for different markets (i.e. operating systems vs. app servers vs. content management). I’d venture a guess that the inflection point for most OSS vendors is around $50-100M/year in revenue. From this point forward, the race is on to convert category “B” users into paying customers. Based on my discussion with customers that fall into this category, converting to paid customers is easier said than done. The whole “it’s certified and supported” story falls on deaf ears. These customers have been running the OSS product for years and haven’t found the need for a support contract, so why get one now?

Recently MySQL was in the news for implementing a strategy squarely focused at category “B” users (even if Marten and team wouldn’t classify the move as black and white as I do here). But look around and virtually every leading OSS vendor (SpringSource, Zenoss, MuleSource, etc) has implemented some form of an “incentive” to convert category “B” buyers. In most cases it’s a product that is only commercially licensed or only available to paying customers.

There is absolutely nothing wrong with this strategy. I am actually a fan of it because it’ll drive an order of magnitude more revenue than trusting in the goodness of user hearts (…you know the companies who have money but you’ve taught them they don’t need to spend with you). I’m sure some OSS purists will tell me that I’m wrong. I could very well be. Or maybe their company is still selling into category “C” users? I’d say time will tell, but the shift towards closed-source, or otherwise gated offerings from open source vendors leads me to think I should bet a beer on this one.

What do you think? Is Marten correct, or are there 3 buyer groups as I’ve described?

BTW…I respect Marten’s thinking around OSS enough that being proved wrong at his hands or his thinking won’t leave scars ;-)

 

IBM invests in EnterpriseDB

EnterpriseDB just raised $10M in Series C financing. IBM joined the list of investors including Fidelity Ventures, Valhalla Partners and Charles River Ventures. To date, EnterpriseDB has raised $37.5M (compared to the $39M that MySQL had raised in total after Series C).

EnterpriseDB uses the slogan “The Oracle-compatible database company”. While I wish Andy and the folks at EnterpriseDB the best, the challenge is that Oracle’s high end products aren’t in danger of losing to OSS competition. Next, in the majority of Oracle deals, Oracle isn’t selling a database anymore. They are selling a database, an application server, tools and applications in a joint fashion. It’s difficult for vendors to compete unless they can offer, or partner to offer, the equivalent products. This is bad news for smaller ISVs, especially smaller/regional application ISVs.

EnterpriseDB does have an opportunity to compete, and win, against Oracle in deals where the customer just needs a standalone database (and not all the other Oracle products) that can be utilized with their existing Oracle sills. This isn’t new news to Andy and team. I’m sure some of the new funding will be used to compete with Oracle in this market segment.

I just realized that EnterpriseDB is also targeting MySQL users (news to me!):

“MySQL users know firsthand that MySQL is most effective for read-only environments and the web/edge tier - but not for applications in demanding OLTP environments, requiring enterprise-class reliability, availability, and scalability.

In fact, some EnterpriseDB clients continue to run MySQL databases for less demanding applications and turn to us where they’ve “hit a wall” with MySQL. “

I find this quite interesting, and very much in line with what I’ve experienced. No one product is right for ever customer project. Also, a product may be right when you start the project, but it may not be appropriate a year or two down the road.

What do you think, does EnterpriseDB have a brighter future by targeting Oracle users that want “Oracle like features for MySQL prices” or by targeting MySQL users who have “hit the wall”?

 

MySQL Co. Not Big Enough for Some Customers?

Jonathan has a nice post with additional explanations on the MySQL deal, seeing as one or two folks have questioned it. (Note that the second link is for your amusement via Sun’s Simon Phipps blog).

Jonathan writes:

“Where are the revenue synergies?

The more interesting question is “where aren’t the synergies?” Wherever MySQL is deployed, whether the user is paying for software support or not, a server will be purchased, along with a storage device, networking infrastructure - and over time, support services on high value open platforms. Last I checked, we have products in almost all those categories.

In addition, the single biggest impediment to MySQL’s growth wasn’t the feature set of their technology - which is perfectly married to planetary scale in the on-line/web world. The biggest impediment was that some traditional enterprises wanted a Fortune 500 vendor (”someone in a Gartner magic quadrant”) to provide enterprise support. Good news, we can augment MySQL’s great service team with an extraordinary set of service professionals across the planet - and provide global mission critical support to the biggest businesses on earth.”

I can understand the part about synergies for Sun.  But I’m confused that Sun, and/or MySQL believe that the major impediment to MySQL growth was that MySQL wasn’t a big enough vendor to offer enterprise support.

Huh? I guess Red Hat didn’t get that memo. Could something other than vendor size be relevant to a customer’s willingness to pay for enterprise support once an OSS product gets as ubiquitous as MySQL?

 

More thoughts on Sun & MySQL

First off, kudos to Sun for valuing MySQL at this price. The deal represents ~36% of Sun’s Cash & Cash Equivalents (of $2.7B) on hand at the end of their last quarter (Sept. 2007). But considering how cheap debt is these days, Sun could probably fund a portion of the deal through cheap debt.

A reader commented on BEA and MySQL being founded in the same year, but BEA being sold for 8x more than MySQL. True, but BEA has ~$1.5B in revenue versus ~$60M for MySQL. When you take revenue into account, MySQL secured 3x more in acquisition price for every dollar of revenue than did BEA. OSS vendors must be sleeping with dollar signs in their eyes tonight….

Alex Fletcher has a few thoughts on the deal. I found this one most interesting:

“MySQL should help to stimulate the relevance of Sun’s tooling and Enterprise Application Infrastructure. Look no further than Oracle for an example of leveraging market share in the database market to cross-sell middleware.”

Ahh, if only that were true Alex ;-) Oracle has had a really strong position in the DB market for decades, but next to no position in middleware market outside of DBs, (since DBs are a part of the middleware market). This all changed when Oracle got serious about applications. Also, let’s not forget that customers only buy into cross-sell situations if the product being cross-sold is something the customer would have considered. So, I don’t think you can compare Oracle’s strategy/results with Sun’s prospects.

Prediction of why Sun bought MySQL: Look up in the sky, it’s a bird, it’s a plane, no, it’s a MySQL db on a Sun cloud. (This idea comes from Cote).

The fact that Amazon has been so successful with EC2/S3 should be keeping Sun (and IBM) execs up at night. The Cloud computing opportunity is Sun and IBM’s to lose. By acquiring MySQL, Sun gets access to arguably the database of choice for cloud deployments. I’ll be watching with interest to see if Sun invests in MySQL capabilities that are optimized for cloud/virtualized environments.

Thoughts?

 

MySQL Workbench & the Future of the Software Business

Marten Mickos emailed to point out the MySQL Workbench offering (a good FAQ here). As I’ve said before, MySQL gets it.

Why?

Well, in the eyes of commercial enterprise software vendors, the optimal result is for OSS vendors to stick to their “OSS religious” roots. An incredibly low % of OSS users end up paying for the software/subscription. This means that OSS Vendor A doesn’t have the financial resources to close the feature/function gap vs. Enterprise Vendor B. That’s why growing an OSS business beyond $100M is more difficult than getting to $100M.

Yes, OSS is already competing with enterprise software, and innovating in certain aspects, especially in fast time-to-value and lightweight application scenarios. But if you think that most OSS products are ready to replace their commercial enterprise counterparts in higher-end deployments (hint: where the profits are), then we can agree to disagree. Is OSS growing towards the high end? Absolutely. But commercial enterprise software vendors aren’t standing still. If OSS is to significantly close this gap we’ll need to see a lot more investments in OSS product development. You can’t get this scale of investments through “community contributors”. These investments have to come from a larger % of customers paying for the OSS vendor’s product (or from funds from an IPO).

I believe that MySQL is doing the absolute right thing in delivering MySQL Workbench as an OSS product, with a commercial version that builds on the OSS version.

This is the future of the software market; where vendors use a combination of OSS & commercial products to drive benefits for customers (paying and non-paying). <Note, we’ve been doing this with the IBM WebSphere Application Server business for the past 2 years now and our revenue growth speaks for itself.>

Burning boats is a great survival tip if you’re lost in the wilderness….maybe not for running a software business ;-)

 

Another Reason Why MySQL Gets It

There has been some discussion about MySQL’s recent moves to clarify the targeting between MySQL Community Server & MySQL Enterprise Server. Essentially, MySQL wants to make it clear(er) that Community Server is free and for those of us who are willing to “spend time to save money”. Community Server is the version that will be made available to Linux distros and passed on to customers that use MySQL inside of their Linux distro without support. Enterprise server is for paying customers; those of you willing to “spend money to save time”. The source for Enterprise Server will no longer be publicly available unless you are a paying customer. This is 100% in keeping with the GPL (as you have to provide source to the customers you provide the binaries to). There is nothing that prevents a paying MySQL Enterprise customer from posting the source for the broader community to see/use.

There was also a change in the way new features are applied to future source trees versus the current stable release. This is a good step forward although some users want the ability to apply patches to the current stable release to get new features faster. I guess these users still can, but the official MySQL Community Server will act more “Traditional software like” in its release cycles.

In further explaining the move to clearly differentiate between Community/Enterprise, Kaj Arno states:

“..a successful commercial company behind MySQL fuels the virtuous circle from which the community benefits in the form of new GPL features developed by MySQL AB.”

Marten re-iterates this in comments to Mike Kruckenberg who disagreed with the move:

“I know I am biased, but I also happen to think that it is good for the community when MySQL AB has a well-functioning business model. With the money we make we can produce more GPL software.”

I really like how Marten simplifies these types of decisions. He’s simply saying: “if you want to get a great, free db, then you have to let us, MySQL AB, make money to pay for development, marketing, etc.” If you, as a free user, think this is a bad decision, or that MySQL isn’t acting OSSey enough, then consider the alternative. Imagine if MySQL AB can’t grow or shrinks and you get a lower quality or less function rich free product down the road. Ah! but the community could take over and do a better job than MySQL AB, right? Anything is possible, but we should exclude edge cases and consider what is truly possible/probable. Can the community really do a better job (more cost effectively) than MySQL AB is doing with all of their resources?

Free is great, but for an OSS vendor, somebody needs to be paying or else the OSS vendor’s employees can’t pay their bills! There is no magic here.

PS: I should state: “The postings on this site are my own and don’t necessarily represent IBM’s positions, strategies or opinions.”

 

How much does MySQL make?

Reading Dave’s post on MySQL’s IPO range of $600M - $1B, I started to wonder what type of revenue we’re talking about.

If you have access to IDC’s massive pivot table with Software Vendor revenues (license & support only - services are excluded) split across the 100+ software markets they cover, you can follow along. I can’t use the actual figures because I’d get in trouble with IDC’s copyright office.

But, if you take IDC’s estimate of 2006 Microsoft revenue in the operating system market and divide that by Microsoft’s market cap you get 5.3%. If you do the same for Red Hat, you get 5.8%.

Next, take IDC’s estimate of 2006 Oracle revenue in the DBMS market and divide by Oracle’s market cap and you get 7.5%

A lower % means $1 of revenue drives a larger market cap than for a company that has a higher %. If market caps were strictly tied to revenue, you’d see an equal % across all companies. This isn’t the case because market caps are driven by current revenues, expectations of future revenues, brand, cash on hand, the cuteness of the company logo, and phase of the moon.

In any case, if you use $800M as MySQL’s projected market cap (in the mid-range of their IPO range), and the ratios calculated above, you get between $40M and $60M in 2006 database revenue (from licenses & support).

Not chump change (driven by a 747 vs. Toyota approach).

What’s that Zack? Dinner and drinks on your tab? :-)

 

MySQL Rewards Top Contributors

I just read about MySQL’s Quality Contribution Program (QCP) and I have to say it rocks! It’s a great way to build and maintain community.

Essentially, folks who submit bug reports, test cases or code patches get “QA Points”. When contributors reach a certain level of points over the past 12 months, they get a 1 year subscription to MySQL Enterprise Basic, Silver, Gold or Platinum.

I wonder if paying for (a varying level of) expenses related to a MySQL conference would be more of a “prize” :-)

Nice to see that MySQL’s list of leading community contributors isn’t stacked with MySQL employees.

Viewing the above list gave me a reason to revisit this JBoss “community” page. As best as I can determine, 44 of these folks work at JBoss in some fashion and the remaining 42 are not employed by JBoss. Maybe if Bill reads this, he’ll consider asking someone to list the 44 JBoss employees on a separate “JBoss employees” page? A group of great employees don’t constitute a good community. They may constitute a good company, but community takes more than that.

 

Databases: 747s vs. Toyotas

By now, news of MySQL’s $40k/yr for all you can eat MySQL Enterprise Gold is old news.

What really got my attention about the announcement is the way that Zach explains where MySQL is growing:

“Typically, MySQL does not replace the existing legacy databases in organizations. In fact, many of our customers are also users of Oracle, SQL Server and DB2. But they use them in different areas. As Charles Phillips from Oracle said a while back: Oracle and MySQL are both in the transportation business. But Oracle is a 747 and MySQL is a Toyota. Unless you’re very rich, a 747 is not a great commuter vehicle. But admittedly, I would not want to drive cross-country for a meeting in New York. So in most companies, there is room for both solutions.”

Going forward on the message of delivering customer choice is a wicked smart idea. Because, not everybody needs a 747. At the same time, nobody (really) wants a 747 that’s been stripped down to look like a Toyota.

Customers with “747″ requirements (for a given project) are going to use a high-end enterprise database of their choice (DB2, Oracle, SQL Server, etc).

Customers with “Toyota” requirements (for a given project) can choose between MySQL, PostgreSQL, Derby/Cloudscape or Oracle, DB2 and SQLSerer (or other comparable product). Most MySQL & PostgreSQL corporate users (i.e. not folks using MySQL for their personal website or side business selling DVDs (plug for a friend)) don’t pay for MySQL Enterprise.

It’s unlikely that the $40k offer will change their minds. Many of these customers are using 1-5 servers for a given project. If they’re not willing to pay the $2,995/server/year for 1-5 server, they’re not going to pay $40k for an unlimited number of servers. (Note: 14 servers is the breakeven point vs. buying MySQL Enterprise Gold individually). The 80/20 rule applies here as some customers will consider all the uses of MySQL across departments and projects and decide to put down the $40k.

It is likely that the $40k offer will cause folks using Oracle, SQL Server or DB2 for “Toyota” projects to think twice. But in these cases, TCO is going to matter a whole lot more than the cost of a database server. We shouldn’t forget that many of the customers using Oracle, SQL Server or DB2 for “Toyota” projects are doing so because they already have an ELA (Enterprise License Agreement) that lets the customer get their hands on the given software at rates much lower than the published per CPU price. Using current skills (i.e. “we have an Oracle admin already”) is going to matter when comparing database server prices. The MySQL announcement may lead to higher discount requests from customers.

Seems like a good move from MySQL, but we’ll have to see how it’s received by “Toyota” purchasers.

[The pic is of a Toyota prototype car from Flickr user jswieringa]

 

MySQL IPO and Oracle Unbreakable Support for MySQL?

Matt Aslett writes that Oracle may be considering Unbreakable Support for MySQL and that MySQL Co. is likely to IPO later this year.

When MySQL files for IPO, we’ll get to view their financials. We’ll get to compare their performance metrics against Red Hat (which, until now, has been the only pure-play OSS player with public financials) and traditional vendors. I’m willing to bet that their metrics will be (surprisingly) close to metrics from traditional software vendors.

BTW, in case we’re keeping score, yes, Oracle is already distributing MySQL with their Linux distro. But, Oracle isn’t providing support for the copy of MySQL that you get with Oracle’s Linux distro. Here’s my take on the Oracle support rumor (which could just have been a passing threat in an Oracle/MySQL meeting).

Unbreakable Support for MySQL is likely the first step towards an acquisition:
There’s really little long-term benefit from Oracle providing support to a competitor’s database. In doing so, you’re validating the competitor, and not really doing anything to “bury the competition”. With the Oracle Unbreakable Support for Linux, they’re going after a related market, and failure doesn’t have any direct competitive consequence. Sure failure means that Red Hat gets bigger, but that’s not a big deal (until/unless Red Hat acquires a leading open source database support provider). But failure with the MySQL support would result in a much stronger direct competitor (MySQL Co.).

The more likely option here is for Oracle to buy MySQL. After the acquisition, if Oracle tried to move the user base onto Oracle DB products, add restrictive support conditions, raise prices, etc. then an alternative support provider would have room to grow. Otherwise, MySQL customers would likely continue to get support for MySQL through Oracle. Oracle would need to consider the impact of the MySQL product set on the Oracle DB portfolio. Issues like, customer confusion, pricing, customer negotiation tactics, etc. However, I think Oracle could deal with these issues.

Worried about cannibalization? It’s going to happen to a certain degree, but the alternative is losing business to a competitor without a fight. Oracle can respond by giving customers choice. Cannibalization that occurs will be much, much, smaller than the potential revenue that Oracle can drive using a mixture of open source & traditional software. IBM took this approach with the WebSphere Application Server business (with great success) and Oracle could do the same with their database business.

The result would be two database platforms (MySQL & Oracle DB), which get closer over time, but likely don’t merge (at least for the next 5 years). Customers can choose (remember, choice is good) to use the light-weight MySQL product for a good portion of their needs, and the high-end Oracle DB products for other projects. Let’s not forget that the majority of Oracle DB customers will stick with Oracle DB for products that are already running today (i.e. “if it ain’t broke, don’t fix it”). And when these customers want to use something more light-weight, simpler to use, Oracle has an offering for them. Leave no customer behind!

After the acquisition, Oracle cold shift some of their development efforts away from Oracle DB (except in the high end product category) and put those resources into the Oracle Applications business which is where they want to grow revenue. MySQL products would deliver support stream revenue; very much in keeping with Oracle’s huge maintenance revenue.

Less focus on selling new Oracle DB licenses, and more on selling Oracle DB & MySQL (after acquisition) support would be a big win with Wall Street which looks for steady and continuous revenue. Forget the upfront license cost, and just pay for support & maintenance. Move some development resources to the higher-value offerings. Neutralize a competitor by providing customer choice (with something that a customer wants; not just a crappy offering under the guise of choice). It all sounds interesting. Let’s see how this plays out!

[The image is from flickr user net_efekt - it made me laugh and seemed to be a good way to represent the worry of cannibalization in the face of a serious competitor.]