In the wake of the billion dollar valuation of MySQL, a number of intelligent folks have been crunching the estimated numbers in search of an equation that makes sense in the context of the market economics and come up wanting (as predicted). Jeff Gould states it most clearly, asking:
But I’m still left wondering, can Sun make MySQL subscription sales rise far enough and fast enough to justify that humongous billion dollar price tag?…Only time will tell. But in my humble opinion, MySQL’s open source business model will make Sun’s road to payback a lot steeper than if it had bought a software company with conventional revenues and profits.
The reference is, of course, to the limitations of the open source business model – presumably the conversion percentage in particular – that limit the economic upside of the vendor. In other words, the fact that MySQL has achieved the often illusory goal of ubiquity is good, the fact that they convert a relatively small percentage of their user base into paying customers dramatically less so.
A piece from Knowledge@Wharton that I’ve been meaning to comment on for some time seemingly agrees, saying “It is a common practice of many companies to focus their attention on grabbing market share from their competitors. But such efforts can actually be detrimental to the firm’s profitability, according to Wharton marketing professor J. Scott Armstrong.” Though it is oriented to more traditional markets and products, citing examples such as the success of Nintendo under the radar of behemoths like Microsoft and Sony, Armstrong is fairly unambiguous on the subject saying, “Competitive-oriented objectives were negatively correlated with ROI” during one study of the subject. If it’s assumed that competitive-oriented objectives is a euphemism for competing for volume or marketshare, it would seem that Armstrong would conclude that MySQL’s ubiquity and immense market presence in no way justified the premium paid.
Which is, of course, entirely possible. But I can’t say that I personally subscribe to that idea. For the simple reason that it’s my belief that volume is the single best predictor of success for software, not to mention the most difficult end to achieve. We’ve seen what volume means before, after all. Volume in operating systems created the single largest and most profitable software vendor on the planet. Volume in search created the single biggest and most profitable advertising firm on the planet. Volume in Linux has created the single largest pure play open source firm on the planet. While MySQL’s model is far less convincing than at least the first two of those examples, I think it’s fair to conclude that – in software, at least – volume is of some importance.
Still, questions of monetization remain – the answers upon which a billion dollars hang. And in spite of the big number, I suspect that neither Sun nor the soon-to-be-Sun folks over at MySQL would claim to have all of the answers in hand at present. But if I was in Sun’s position, I would certainly be taking a hard look at network monetization models; my pet theory for how open source firms generally, if not MySQL specifically, will make the jump from the current plateau to higher profitability and revenues. More money, in other words.
The key to such a model? Google’s got your answer there: volume. MySQL is never going to be a volume presence in the way that Google is, obviously, but as they don’t measure their financial transactions in cents they don’t need to be. If the newly acquired database vendor can build on its nascent network advisory and monitoring services, I think they have the potential to uplevel their revenue profile significantly. And there are few if any open source vendors who can compete with them on their volume or place within the now standard infrastructure.
Whether or not all of that justifies the premium paid remains to be seen, but I think the value of the ubiquity is being consistently undersold, given how difficult it is to achieve.