June 2007

Via Dana & Matt, The Register reports that the Red Hat Exchange (RHX) “roars like a muted lamb”. The Register’s point is that RHX has met with a lukewarm reception to date.

After reading the following comment from Matt, with his VP of business development at Alfresco hat on, I wonder if The Register story is missing the point.

“So, again, in terms of traffic, it’s not yet on par with Sourceforge and other avenues for us,” Asay said. “But it has been surprisingly fruitful given the number of downloads and trials we’ve had through it. If we had this same ratio of download to trial to conversion on Sourceforge, we’d be IPO’ing tomorrow.”

The open source community really doesn’t need another arena for projects to live and be downloaded from. There are plenty of players in this space (Sourceforge, Apache, Google, Codehaus, etc.). RHX isn’t intended to drive 1M downloads a day, or hundreds of project ratings. These are functions that developers generally do. Enterprise buyers and decision makers are less likely (not unlikely) to play this role.

RHX appears to be where projects graduate to after they’ve proven their chops at Sourceforge et al.

As I see it, RHX is intended to serve the needs of an enterprise decision maker that is already using RHEL and wonders: “okay Red Hat, what else do you recommend I try?” or “what CRM app should I use with RHEL?” Try answering either of these questions at Sourceforge.

The higher conversion rate that Matt alludes to on RHX should be the key metric for evaluating the success of RHX.

It’s based on PHP 5, limiting its use by the majority of PHP developers who don’t like/understand OO programming, or simply, are happy with PHP 4 thank you very much. But the audience seems to be enterprise developers that want to take advantage of the speed of development & productivity that PHP provides. So, PHP 5 was definitely the right choice.

Infoworld reports:

Zend Framework 1.0 will not be the only PHP development framework around as it will share the scene with frameworks like Cake and Prado. But Zend’s is the first framework with support from a corporate entity and relevant contributions from companies like IBM and Google, Zend said.

Gartner’s Mark Driver is quoted:

“The positive aspect [of the framework] is it this is exactly the kind of thing mainstream IT developers are asking for,” Driver said. But traditional PHP developers already have been satisfied with what has been available, he said.

Will the introduction of this ‘enterprisey’ framework have an impact on the adoption of PHP in the enterprise? Peter Yared, based on his previous post, likely thinks it’ll be an uphill battle. And to be honest, so do I. But hey, let the market decide!

Red Hat announced results for its Fiscal 1Q08 quarter ended May 31, 2007. Pretty solid results.

Revenue rose 41% to $118.9 million from $84.0 million. The analyst consensus was $117.12 million.

GAAP net income rose 17% to $16.2 million, or 8 cents a share, from $13.8 million, or 7 cents a share, a year earlier. The analyst consensus was 6 cents a share.

But the stock is down in after hours trading, so here’s the (funny) explanation:

The company reported $52.25 million in non-GAAP cash-flow from operations. Jefferies & Co. analyst Katherine Egbert said that fell short of her forecast of about $55.5 million.

In addition to the shortfall, investor may have been spooked by the fact that the results were otherwise just about in line with expectations, she said.

Red Hat shares have climbed 13 percent since the beginning of May amid hopes it would post strong quarterly earnings.

“The business is healthy. But you just get the sense that there is nothing exciting here,” Egbert said. “There is no explosive metric you can point to. It is boring.”

To add some balance to this post, don’t forget that Oracle grew revenue by 20% in their fourth quarter. We’re talking about growing from a multi-billion base ($4.85B). Not to take anything away from Red Hat’s 41% growth, but as Oracle’s results indicate, Traditional software is doing alright, thank you very much.

PS: My friends in the DB2 side of the business would strongly dispute Ellison’s comments about “taking share from DB2”, especially since the IBM Information Management software division grew 20% in the most recent quarter (1Q07), but hey, who’s counting?

A few weeks ago Slashdot was abuzz with the question Does GPL v3 Alienate Developers? The question was partly driven by William Hurley’s post that questioned the value of GPL v3 in an age where developers seek permissive licenses.

I haven’t thought a great deal about whether developers seek permissive licenses. Although, I’m sure the devil is in the details. Developers that just want to get stuff done may want the freedom to utilize code without GPL-viral worry, while developers seeking to build “the next JBoss” may seek GPL-protections.

In any case, I was thinking about “The next Red Hat or Sell to Oracle” strategy that a VC and I had discussed some time ago. I was also reading up on interesting vendors in the middleware market. Then it hit me, will the GPL help or hurt the chances, or size of, an acquisition by a traditional IT vendor?

I can make a case for both sides, and like everything, the answer will likely be “it depends”.

We’ve already seen that the biggest IT vendors can run afoul with their use of GPL’d code. When you consider the generally risk averse nature of larger IT vendors (i.e. larger targets), one could consider GPL’d code as being “more risky” during the acquisition process.

Let’s not forget that the majority of software vendor acquisitions are integrated into the product line of the acquiring vendor. Not only is the product simply added to the product line, often, technology is shared between the acquired product and the products that the acquiring vendor already had. But, integrating GPL’d code (or for that matter, LGPL’d code) with proprietary IP may have a viral impact on the proprietary IP; emphasis on may – I’m not a lawyer and much of this stuff hasn’t been tested in court.

I’ve been told that VCs prefer the GPL over more permissive licenses because the GPL protects against forks, thereby protecting the VC’s investments. I haven’t heard of (m)any OSS vendors changing their license to satisfy a VC’s requirement. But maybe OSS vendors choose the GPL from the get-go with, amongst other things, future VC conversations in mind. Thoughts?

I guess some of the GPL-fear can be circumvented if the OSS vendor has 100% copyright ownership of the GPL’d code. This would require asking 3rd party contributors to assign joint copyrights to their IP. In this scenario, the acquiring IT vendor could license the OSS product under whatever license they’d like.

The fun times that lie ahead for lawyers during due diligence work with OSS vendor acquisition candidates.

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? :-)

Matt and Dave D. are good guys that I respect, but they are also wrong. There, I said it. We Canadians aren’t known for being so blunt, but this needed to be said. I may get a few eggs directed at me, but so be it. You can argue with me, but you’ll have to use your data to argue with my data.

Matt says:

Neanderthal proprietary past. It’s not that this model is bad in some religious sense. But it is bad in how it treats the customer (as a would-be criminal who will steal value if she can). And it is bad in its inefficiency (expensive sales and marketing costs, higher than necessary development costs because it reserves all development – even tertiary development like language backs and “last-mile” configuration/customization, etc.).

Dave D. says:

For how much longer will we continue to pay the taxes, both overt and covert, imposed by the closed-source vendors and their inefficient methods?

Can you accept that all OSS vendors dream of growing to be the “Red Hat” of their respective market?

If so, let’s spend a second using Red Hat to test the truths that Matt & Dave D. tell you to expect. And here’s the thing, it’s not just Matt or Dave D., it’s the whole OSS movement that tells you “this be true”.

I believed these “obvious truths” at one time. Then I had the fortunate experience of working on the Gluecode acquisition, and being the product manager for WebSphere Application Server Community Edition (WAS CE). I had the good fortune of managing WAS CE in the same team that manages the rest of the WebSphere Application Server family of (Traditional software) products. I/we learned a few things. I am still a believer in OSS, but I’ve resisted the second helping of that Kool-Aid (however thirst quenching it may appear).

Do OSS vendors spend less on selling their products than a Traditional vendor would? Yes and no. Yes, when the OSS vendor is working on building its customer base and trying to become a vendor with “tens of millions of dollar” in revenue. No, when the OSS vendor is trying to scale their business to “hundreds of millions” or greater.

The problem with most OSS “obvious truths” is that they are true at a point in time. But when you generalize to the time that the OSS vendor matters in a marketplace to the degree that Red Hat does, the truths don’t hold any longer.

Think I’m a brainwashed IBM lackey (or insert appropriate description)? Okay, then please explain why Red Hat spends more of their total revenue on Sales, General & Administrative (sales, marketing, advertising, etc), 54% than IBM’s 23%, Microsoft’s 31% or Oracle’s 26%. Next, Red Hat spends 3.1x more on SG&A than they do on R&D. This compares to 3.6x for IBM and 2.1x and 2.0x for Microsoft & Oracle respectively. Oh, and counter to conventional wisdom of OSS not requiring advertising, Red Hat spends nearly 5% of their revenues on advertising, while Oracle spends 0.7% and Microsoft spends 2.8% of their respective revenues. And best of all, since OSS benefits from all this “free work from the community”, it may come as a surprise that Red Hat spends 18% of its revenue on R&D. This compares to 15% for Microsoft and 11% for Oracle.

So there you have it, my data. Bring yours to the table and let’s chat. Or if you want to tell stories of strawberry fields, bliss and OSS “obvious truths”, then let me know so I can pick up a book of childhood fairy tales. We’ll have great fun!

This comment from Stacey (Hyperic) got me thinking…is money a good measure of OSS success?

Before I go on, let me clear something up. My 1.8% comment was not meant to minimize the importance of OSS to the software market or to customers. I disagree with the “world view” that OSS is going to completely revolutionize the software market and lead to the death of Traditional software as we know it. I’m an advocate of OSS & Traditional software living happily together to meet the varying needs of customers. I completely believe that all major software vendors will have an OSS story and a Traditional software story. It’s not a “them vs. us” situation. It’s a “we are them” situation. I’ll fall back on Marten Mickos’ comments from OSBC claiming that there is no OSS business model. That we are all participants in the software market.

Is money a good measure of OSS success? In our free market society, I believe it is. This does not minimize the importance of other measures of success.

Let’s look a little deeper at OSS impact on software spending. I can think of 3 situations:

1. OSS vendor revenue from using OSS with support/license
2. OSS usage erodes Traditional software revenue
3. OSS usage creates new users because of minimized barriers to adoption

Clearly, software revenue shifts from Traditional software to OSS when customers decide to use OSS with support/license. This spending would be counted in the 1.8%.

Next, I accept Stacey’s point about the importance of market spending that OSS erodes from the Traditional software market. But if you ask CIOs about their IT budgets over the past 5 years, most will tell you that they’ve grown. Few will tell you that their budgets have decreased by 26% (i.e. in line with OSS vendor revenue growth predicted by IDC). When a customer decides to use, say MySQL for free over Oracle DB, the savings are generally spent somewhere else in the IT department. In the above example, Oracle loses some revenue, but a large portion of those savings are spent on the backlog of projects that haven’t been funded to date. As a result, another vendor, maybe an OSS vendor, but more than likely (as the size of the software market will attest), a Traditional vendor gets new revenue. This could actually be a situation where the use of OSS drives further spending on Traditional software. I can tell you that we’ve seen this in spades with WebSphere Application Server revenue. Customers like choice, a one size fits all model is really only for sock vendors.

Now, let’s deal with the situation of OSS creating new users who have access to software they previously didn’t have. Again, MySQL users are a great example. Heck, I’m a great example. I would never have used Oracle or DB2 (b/c of complexity, fear, costs – remember, I’m a “hello world” programmer at best), but I do use MySQL for pet projects. Does my use of MySQL represent revenue loss to Oracle, DB2 or SQLServer? One can make the argument that my familiarity with MySQL represents a potential future customer for MySQL. I doubt that is the case, but if I play along, then my potential future spending with MySQL would be represented in the 1.8% also. (Hey, don’t ask me how IDC or other analysts can predict what I, or others, will do in 5 years!)

What’s my point? OSS is very important to users, customers and software vendors. It is however, one component of the software market. Software vendors that accept this reality and build strategies to leverage OSS and Traditional software are the “future” (p=0.8). Gartner customers will recognize this form of pontification :-)

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