November 2007


I made the claim that the support-based OSS business model doesn’t scale. Shaun (of JBoss fame), disagrees.

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Hi Savio,

Funny how your $250M and $500M numbers are where Red Hat was a while ago and where Red Hat is headed shortly. Don’t take silence as implied agreement that open source is waning. Let’s see where Red Hat is over next couple of years and see if you keep raising your numbers.

Anyhow, a couple of things for you to consider before you prance off all happy that the world agrees with you:
1. To get a better comparisions between open source models and proprietary models try multiplying OSS numbers by 5X since subscription business compares against maintenance business. This will get you closer to an apples to apples comparison. This is rough math of course.

2. Red Hat does not have the breath of product offerings as MSFT…or IBM for that matter. So comparing overall company revenues is not fair either. You work for a big gorilla dude…your numbers will always be big….doesn’t necessarily mean you’re better.

3. “The support-only OSS business model does not scale.”. Uhhh…disagree. The subscription model is the gift that gives day in/day out. It takes a while to build up that base, but if you keep renewals at a good level, it’s a very scalable model.

4. As you add more products to the portfolio, you scale since you have more value to offer customers…therefore your convos become more strategic.

Anyhow, I could go on…but maybe I’ll reserve for a blog of my own. ;-)

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Read Shaun’s blog here.

Shaun Connolly from JBoss/Red Hat has a nice summary of Microsoft’s Open Source Strategy. In the post, Shaun states:

“As much as I hate to say it, Microsoft could learn something from IBM’s strategy. They make no bones about it: they work in the open source on piece-part components that they Bluewash into their closed-source products. While it’s not a pure open source business model…it’s clearly an open source strategy.”

I think Microsoft has an OSS strategy.

It’s not the one described in Bill Hiff’s recent interview. That’s the difference between how you run your business, and what you tell the press and competitors. Call me crazy, but I think that Microsoft’s OSS strategy is “Grin and bear it”. Okay, get up off the floor…Grin and bear it is a valid strategy if you know “it” isn’t going to last forever. Yes, OSS is here to stay, but the competitive differentiation that OSS gives to an OSS vendor isn’t infinite. The support-only OSS business model does not scale. I’m made the claim that this differentiation decreases as the OSS vendor starts to grow beyond $250M in annual revenue.

Since I’ve made this claim twice without Matt, Dave, or JBoss/RH readers calling me out, I’m going to guess that they agree with the claim to some degree. I *think* that Marc Fleury believes the same and said so much on the Open Season podcast. I found this on Fleury’s RSS feed (via Google Reader), but it looks like the post itself has been moved?:

“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.”

Imagine that you are at Microsoft and see the competitive differentiation from OSS waning as the competitor grows closer to $500M. Would you rush out and change the business model that created a $50B company?

“Grin, and bear it” – it’s not just a strategy for Toronto Maple Leaf fans anymore ;-)

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 ;-)

I’d love to understand the logic behind this:

“AT&T, a company that once was a poster child for telecommuting, is downsizing its long-running telework program and requiring thousands of employees who work from their homes and other virtual offices to return to traditional AT&T office environments, according to sources.”

AT&T appears to be going in the opposite direction of open source software companies. When you have someone good, why try to make them move if they can be just as effective where they’re living? In some cases, it is more effective to co-locate members or a team, and I seem to recall Interface21 going this route with 3 or 4 sites across Europe & North America. But for the most part, OSS works because you can tap talent wherever they are.

In the words of Thomas Friedman, the world truly is flat when it comes to OSS development.

The formidable Mr. Asay has a nice post on the “remarkable JBoss revenue machine”.

“JBoss’ incredible lead generation led to 7,000+ qualified leads each quarter…..

This means that JBoss could hire “inside” sales people: people who spent most of their time on the phone or email, answering incoming leads rather than scouring the planet for people who would consider buying from JBoss. ….

Open-source companies are long-term businesses that harness the fruits of transparency to capture leads and sell value. Open source depends on effective monetization of Internet traffic, be that website hits, downloads, documentation views, etc.”

These are valid points. My only question to Matt is why JBoss had to shift to the Fedora model if they were driving such remarkable revenues. Saying “Red Hat made them do it” isn’t a good answer ;-)

Some quick math, JBoss had less than $30M in revenue in 2006. At $40k a deal (the mid-point of the middle category of revenue from the graphic on Matt’s post), JBoss would have had 750 paying customers in 2006. At 7k qualified leads a quarter that equals 750 / (4 * 7000) = 3% closing rate. A 3% closing rate is incredibly low. An inside sales rep should drive a 25%+ closing rate from qualified leads. Now don’t forget that some % of those 750 customers are customers renewing from previous years, so the net new closing rate would be even lower. But I digest/digress.

Maybe the issue is when customers get something for free, you’ll attract some buyers, but the majority will be locked into the “free” base price. Growing sales beyond the customers willing to pay for the value your OSS product delivers is challenging.

This is the Catch 22 of OSS.

The OSS business model is great to grow from $0-$50M, but very difficult if you’re trying to get to $100M. Moving to the next step requires something like the Fedora model, where certain products are only available to paying customers. Starting with the Fedora model would alienate your early users and effectively kill your business. Sticking with the non-Fedora alienates your shareholders as the company attempts to grow to $100M+.

Andy McCue at Silicon.com points to a Gartner report that, in many ways, reiterates what we’ve all been seeing.

“Gartner has identified seven major trends converging to change software delivery models, reduce dependence on the giant application vendors and force prices down.

These include business process outsourcing; software as a service (SaaS); low-cost development environments, such as China and India, combined with modular architectures and service-oriented architectures; the emergence of third-party software maintenance and support; growing interest in open source; the rise of Chinese software companies; and the expansion of the Brazilian, Chinese and Indian markets.”

Regarding OSS:

“Although Gartner says open source won’t topple the likes of IBM and Microsoft the analyst believes it will put pressure on traditional software margin structures, particularly in areas such as servers, operating systems, development tools and database technologies.”

I’ve seen customers using OSS as a negotiation tool to get lower prices on commercial enterprise software. This will surely continue.

Captain Obvious, over and out.

I previously questioned Red Hat’s apparent lack of love for Hyperic. Today, Stacey Schneider, Senior Director of Marketing at Hyperic, tipped me off to a joint Hyperic & Red Hat announcement.

Stacey writes:

“Finally today we announced that Red Hat and Hyperic will be working together on the development of a common systems management platform.

……
As you know, back in 2005 was originally OEMed to create JON before the Red Hat acquisition. At the time, the software licensed was still closed and the software has not been upgraded since, rather JBoss and now Red Hat has been updating the software privately. The new project will update the software contributions from Hyperic to its latest software, contribute the additional code written by the JON team, and work jointly to create a roadmap of future features. And of course make it all open source! (GPL v2)

…….

This new open source project is meant to create a repository of common services to be used in future versions of Red Hat and Hyperic products. Both companies will work to maintain, govern and extend management capabilities within the new open source systems management platform project.”

Now, this is very cool news, and a great endorsement for Hyperic technology. The deal appears to position Hyperic as the de facto systems management provider for Red Hat customers. Choice is great, but it can sometimes work against OSS in the CIO’s mind.

The deal is also an endorsement of Red Hat’s community. Long-time readers may remember that I questioned the “endorsement of the JBoss community” when Exadel decided to move their development into the JBoss community. I questioned the endorsement because there had been funds exchanged, making this an acquisition rather than an endorsement of community A vs. community B.

This agreement, may lead to an acquisition in the future, but today, it’s about one independent company agreeing to join forces and communities with another independent company.

Kudos to Hyperic & Red Hat for making this happen.

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