Dave’s writes about a new report from Standish Group that claims: FOSS is costing traditional vendors $60B in annual revenues.

Having spent 4+ years doing market forecasts, I can think of two key methodologies that Standish used to come up with the $60B figure.

Option A:

  • [1a] Only count revenue that OSS vendors (and products) are generating from the sale of product licenses and/or subscription contracts…i.e. $X
  • [2a] Use an uplift factor, y, to account for total revenue lost (license, services and maybe hardware) .i.e. $Xy
  • [3a] Add up all the $Xy figures and the result is $60B

If Standish used this approach, I’d seriously question the $60B. Remember that IDC (the premier market forecasting firm in the business) has sized revenue from OSS at $1.8B in 2006, growing 26% to $5.7B in 2011. So, we’d be at $2.3B in OSS revenue by YE2007. Take that and multiply by 5x for the services and hardware revenue lost by traditional software vendors, and you get $11.5B. Not chump change, but not $60B either…which is why I don’t think Standish used this approach.

Option B:

  • [1b] If the customer is using an OSS product in production, figure out what a comparable closed-source license cost would have been…i.e. $X
  • [2b] same as [2a]
  • [3b] same as [3a]

The problem with step [1b] above is it assumes that the customer would have, for example, paid for a license of DB2 or Oracle if MySQL or PostgreSQL weren’t available. I believe this to be a bad assumption. The majority of OSS use is in situations where the customer would not have purchased anything because the project did not have sufficient funding. As such, I’d question if there is a “real loss” as Standish claims. It’s an opportunity for OSS vendors to CREATE net new revenue opportunity. In most cases, this is still an opportunity as the overwhelming majority of OSS used in production does not result in $$$ into an OSS vendor’s coffers. In a situation that the customer did in fact pay for the OSS product, and saved $A dollars by using the OSS product, that $A does not disappear. Whatever is saved through the use of OSS is spent elsewhere in the IT organization…. (And traditional vendors see their fair share of this spending).

While I question the $60B figure, I don’t think it’s a negative for the software market. From my experience, OSS has developed new customers far more than it has stolen customers from the traditional software vendors. And when customers save using OSS, they reinvest those savings into other IT projects.