One of the frequently debated topics concerning open source companies, both at OSCON and more generally, is how they compare in economic terms – or don’t – with their closed source or proprietary counterparts. The most common manifestation of this is the simple question: will we see a billion dollar open source business? Not traditional vendors leveraging open source to make a billion dollars, but a business built solely on open source reach the billion dollar revenue milestone. Before we attempt to answer that using crude but bottom line metrics such as market capitalization – which is impossible in a majority of cases anyway, it’s necessary to understand the fundamental compromise that open source makes.
In return for the massive distribution advantages that accompany its low or no barrier to entry approach, open source often (but not always) concedes up front licensing costs. This is in most cases favorable for customers, as they are free to pay at what Simon calls the “point of value” rather than at project commencement when value is still unproven. The question is whether or not it’s favorable to the businesses that are built on this model. Answer that, and you’ll be a fair ways down the path towards answering the billion dollar question.
The numbers, on the surface, would indicate that the various economic models embraced by open source firms are not in fact favorable to the firms that embrace them. Closed source vendors are typically appalled at the conversion rates of users/customers at firms like JBoss (3%) and MySQL (around 1%, anecdotally, on higher volume) – and those firms are more or less the most popular in their respective product categories. Even with the understanding that these are volume rather than margin plays, there are many within the financial community that remain skeptical of the long term prospects for open source (even as VC’s pour money in in hopes of short term returns). With the exception of Novell, who just made the cut with 2005 revenues of just over a billion dollars (and only a portion of those come from open source), none of the businesses within the LAMP stack (Red Hat/Novell, Covalent, MySQL, Zend, etc) are assumed (most are not public) to have driven revenues of $1B. Contrast those numbers with the revenues from closed source providers such as IBM or Microsoft that measure dollars with double digits followed by a B, and you might conclude that open source is just a flash in the pan because of the economics.
Such an analysis would be superficial at best and irresponsible at worst, however, and you are neither. So you look a little deeper and see that while open source might not (yet) create immense, monolithic wealth, it does benefit customers by lowering pricing and increasing choice. Further, it seems illogical to believe that even if open source can lower certain software acqusition and operating costs, those dollar savings are not invested elsewhere. How many CIOs will go their board and say “I invested in Linux, JBoss, & MySQL and saved us x dollars – please lower my budget accordingly”? You might also see that open source allows vendors to ammortize a number of traditional development, quality assurance and marketing costs, across a wide pool of volunteer resources, lowering the dollars they need to operate (you should hear Alfresco’s Kevin Cochrane talk about the delta in saleperson costs – it’s eye opening).
At the conclusion of these debates it’s common practice to deliver one’s one perspective on the question, for whatever it may be worth, so here’s mine. As stated at OSCON, I believe both that open source has reached and in fact passed the tipping point and is here to stay, and that it has a bright future. At this point, however, I do not expect any of the major pure open source firms to challenge the billion dollar threshold any time soon. The numbers – those that are available, at least – simply don’t support such a conclusion. But neither do I consider that a metric for success. At RedMonk, for example, we make quite a bit less than the analysts that come to us looking for work from time to time. We’re not crying poor – we do just fine – but we have intentionally kept salary expectations and expenditures conservative because a.) it goes with the open source territory, and b.) we expect open source to ultimately have a similar impact on the business of analysis as it does on the business of software. Is that a lack of success, or building for the future? Tough call. Open source in many respects seems to underpin a future in which more people will make less, rather than less people making more. I know which I’d pick.
The lessons that I draw out then are these:
- Forget the B, Focus on the V:
I’d love to be proven wrong and see one of the open source firms rocket past the billion mark, but I’m not going to hold my breath. The history of software, however, whether we’re talking Microsoft or Linux, would seem to indicate that the best approach to wealth creation lies in volume rather than margin. So in that at least, the open source approach is sound. Were I an open source business then, and I suppose in a way we are, I’d focus on growing volume, community, and mindshare rather than the rather abstract dollar metric. It’s good to aim high, as long as you’re pragmatic while you do it.
- Brace Yourself for Impact:
Regardless of what you may think of the economics of open source, they are probably here to stay. Assuming that’s the case, it would probably behoove every software business to ask themselves one simple question: am I prepared? Am I structured to either leverage or weather the open source storm, because if not there are some rough days ahead.
Disclaimer: With the exception of IBM and at times Microsoft, none of the vendors mentioned is a client.