Note to World: There is Money in Commodities

So RedMonk been conversing with Jason Matusow recently about open and shared source and the changing nature of software industry business models. Today meanwhile i met with Byron and Cornelius from SourceLabs. Those two guys are definitely going to make money from open source.

What worries me about Jason’s latest blog about OSS and or shared source is that i see a bit of a strawman. What bothers me is the notion that a software company needs to move “up the stack”.

• starting at the lowest levels of the stack (operating systems) software becomes standardized and commodity implementations become readily available
• software companies must run as far up the “stack” as possible and enjoy the economic opportunities there while they last
• OSS inevitably start nibbling on their toes from below with “good enough” offerings
• the OSS offerings inexorably migrate higher and higher up the stack
• thus, software companies necessarily morph into services companies

Why does the argument bother me? Well i would never advise Coca-Cola to “move up the stack”. Cola is a commodity, and Coke is a brand, and there is money in both. In fact commoditization often benefits the biggest players in an ecosystem (you could argue IBM’s long term strategy is to commodotize all software). But there is still money there. Commodity doesn’t mean free. Have you looked at the price of gold recently? or oil, for that matter? Commodities both, but not free.

I think Jason is possibly underestimating the power of his own company’s brand. I mean Microsoft is more powerful than Marlboro. Its more powerful than GM, for sure. That brand creates margin opportunities that others can’t match.

Commoditization suits IBM because Big Blue knows it can leverage its brand to make good money. Open Source doesn’t mean free, per se. Neither does shared source.

I realize Unix rather kind of punches a hole in my argument, but i tend to think that Linux, in effect, is Unix, at least in terms of being water, sugar and caramel.

As open source software converges with Software as a Service (the Red Hat model) the game is changing.

Enterprises choose transparency but pay for stability. That’s where third parties come in, bearing service packs…

There is money in ongoing management, maintenance and operations. The revenue models here are more Long Tail than Microsoft is used to, but they are still real revenues. I think Jason may be suffering slightly from what Chris Andersen calls “headism” (see previous link).

IBM long ago wised up to the value of the Long Tail of IT economics. That is where services come in. IBM doesn’t make money from old IT systems because of license revenues… Its all the other stuff. No wonder its happy to buy Gluecode.

finally though i want to stress that the definition of service here is quite mutable. Don’t confuse IGS consulting with Microsoft Genuine Advantage. Service and support comes in all different shapes and sizes.

SourceLabs isn’t trying to move anyone “up the stack”. You could argue neither is mySQL. The question is, will major brands be able to charge a premium for their support services. The answer, to anyone that has ever looked at Red Hat’s pricing model, is surely a resounding yes.

Commodity doesn’t mean free. You can only replace so many mainframes. And you can’t do that without services.

So Jason, just because something is a commodity doesn’t mean its free. Surely Martin Taylor taught us that…

Maybe i have completely missed the point, and i am certainly saying in some areas margins will be far lower, but i see that Firefox already has its own VC ecology. Go figure. Not bad for a “free browser”.

And on that final note-that’s another problem with your argument. You assume that open source always copies. We don’t. It can and does innovate too – and that should be far more scary for Microsoft… than toe-nibbling.

I do agree though that all software companies will be (already are!) software and services companies.