Earlier this week, the folks from MySQL announced that a.) they’d had a pretty good year, and b.) that they were announcing an extremely low cost site licensing agreement. On the basis of these announcements, there’s been quite a bit of talk of market disruption and the economics of open source. There are few if any software markets that are as rife with would-be contenders as the database market, so I thought it would make sense to look at some of the recent happenings to see what we can learn about market disruption. And as usual, I’ll do it in Q&A fashion.
Q: First off, the disclaimers.
A: There are quite a few in this particular space; MySQL, notably, is a RedMonk customer, as are db4objects, EnterpriseDB, IBM, and Microsoft (though not in the database space). Oracle is not a RedMonk customer.
Q: Ok, how about some definitional work: what do you consider disrupting a market?
A: I like to keep things simple, so I’ll say disruption is simply any factor that significantly alters an established, mature market. In this case, the established relational database market is being reshaped by new entrants, many if not most of whom are based on open source.
Q: Is open source the most disruptive trend in software today?
A: Probably, although Software-as-a-Service (SaaS) would give it a run for its money. And in the world beyond software, Hardware-as-a-Service (HaaS) is likely to be similarly disruptive. In the database space, however, open source is clearly more disruptive. While SaaS database applications like DabbleDB are interesting, they’re certainly not the threat that say a MySQL is.
Q: What evidence would you use to prove that the database market is being disrupted?
A: Well, on the one hand you have both IBM and Oracle releasing free – if not open source – versions of their products. It’s difficult either of those decisions occuring in the absence of significant competiton from open source databases such as MySQL or Postgres. Or consider Oracle’s acqusitions of InnoDB or Sleepycat; both can be considered responses to the opportunity and threat that open source represents.
Speaking of the competiton, they’re all doing fairly well. All three of the previously mentioned open source databases – db4objects, EnterpriseDB, and MySQL – are growing nicely. I linked to the MySQL news already – but not the possibility that they may IPO, but EnterpriseDB had a bang up year as well, and in talking to db4objects’ Christof Wittig yesterday I was told that their new licensing option was driven largely the opportunity to work with volume projects like Fedora, Lucene, Mono, and Spring.
To sum up; the market incumbents are being forced to adapt in order to better compete with the new open source market entrants, and the latter are growing successfully in what has been characterized as a stagnant market. Seems like a text book case of disruption.
Q: You say “seems like” – I take it you’re not convinced?
A: That disruption is occuring? No, I don’t think that’s particularly debatable, and I suspect even the incumbents would admit as much. The question in my mind is rather one of degree: to what extent are the traditional players being disrupted? Because candidly I think the market disruption is too often portrayed as a zero sum game, when at least at the present time that’s far from the case.
Q: What would you offer up as evidence that the IBM’s and Oracle’s of the world are not being disrupted?
A: Well, both players financials over the last 12 months are quite solid – a DB2 sales person told me in the fourth quarter, in fact, that he was ecstatic with their progress. So financially they may be seeing a hit, but they have not precisely been holed beneath the waterline.
But there’s also the inertia within the enterprise. A year and a half ago at OSBC Boston, a panel that included CIOs and CTOs from Citistreet, Fidelity, JP Morgan Chase, NLG, and Priceline.com described the mission critical database as one of two software segments they were not likely to trust yet to open source. Doubtless some of those opinions have changed since, and the EnterpriseDB folks are obviously having success selling to many such CIOs including the folks from Sony Online Entertainment (and many more they can’t disclose publicly), but the folks from IBM, Oracle, and, yes, Microsoft continue to sell databases at a pretty good clip.
Movable Type, the quintessential non-enterprise application – blogging software – that’s making a move back towards the enterprise recognizes this, supporting Oracle 10g in its Enterprise flavor. MySQL acknowledges as much; in his post discussing their site-wide offering that’s clearly aimed at Oracle, Zack says:
Typically, MySQL does not replace the existing legacy databases in organizations. In fact, many of our customers are also users of Oracle, SQL Server and DB2. But they use them in different areas.
In my experience, this is absolutely accurate. The major enterprise applications – the SAPs and so on of the world – run on DB2 and Oracle and will continue to. MySQL’s going after an entirely different – and largely unserved – market with its product and its new licensing.
Over the long term, I suspect this will prove to be a winning strategy, but it’s one that takes time. Disruption is not an overnight affair.
Q: Why do you think it will be successful?
A: Consider the problem that faces virtually every major software infrastructure vendor in existence at the moment. The startups during the bubble – and I should know, as we worked with many of them – were almost universally deploying on top of quote unquote “enterprise” technologies on the advice of their VC advisors: EMC storage, Solaris for the OS, Oracle for the DB, and so on.
Today, the vast majority of the startups we speak with are running on one LAMP flavor or another, and occasionally Microsoft a la a MySpace. Assuming for the sake of argument that the folks who bought IBM and Oracle in the past will stick with that, but startups eschew those technologies in favor of free and open source alternatives, where does that leave us? The mature, sizable and fairly static market goes to the old guys, while the new and growing market goes to the new guys. Obviously it’s not all that simple, but that’s the worry – or should be – for most of the major software vendors on the planet. While their installed base has and will continue to make them money, it will not give them the growth that Wall Street tends to demand; only access to greenfield, growing markets can do that. And to date, those markets have traditionally been won by open source technologies.
Are there challenges to the market entrants? Certainly.
Q: What kinds of challenges?
A: Well, the very open source tactic (as Mike Olson might call it) employed by purveyors of open source technologies for its advantages in distribution and so forth brings with it costs, namely conversion percentage. I’m on the record as being skeptical of the ability for open source vendors to approach the heights that their closed source competitors have, for two main reasons.
First, there’s the lower margins. MySQL is offering site-wide support for their database for the cost of a single processors worth of Oracle – that’s a significant different in margin, I think we can all agree. Now this isn’t a killer with volume businesses – Microsoft, after all, is selling a product that took them the better part of a decade to produce for a couple of hundred bucks – but it’s imperative that open source businesses cut out the cruft. No Armani-wearing, Ferrari-driving sales reps, as Zack would put it.
Second, there’s conversion percentage. How many of your customers – who have free access to your product – actually become customers? This is a problem that’s attacked in different ways by different firms. MySQL, for example, creates two distributions, Community and Enterprise to emphasize the distinction. EnterpriseDB, on the other hand, holds some features back only for paying customers, as do Sugar, Zimbra, et al. But make no mistake, it’s a problem that needs to be solved, and one that’s especially difficult to handle for businesses making the transition to open source as opposed to those that have grown up that way. If you’re competing with open source products, it’s not enough to merely be open source – you need to be easily obtained and accessed, and yet have a viable strategy to converting those users that might pay you into those that will.
That process, assuming you can navigate it, takes time.
Q: So in essence what you’re saying is that disruption will take time, and even if successful the firms may not be successful to the same degree as their predecessors?
A: Precisely. The evidence abounds that disruption is not an overnight activity in most cases, and on the latter point look no further than the MySQL news. The typical vendor response for the kind of success MySQL has experienced in the marketplace is simple: raise prices. Instead, MySQL did the exact opposite. As Jeremy puts it, “Make no mistake about it, MySQL AB could have actually raised the price of their main product and still sold more.” While Dave’s right that this raises concerns of devaluing the product – we learned that lesson ourselves early: if you’re cheap, everyone thinks of you that way – it also dramatically expands their market opportunity, IMO. And, as Matt notes, lowers the probably of they themselves being disrupted on a pricing basis.
Q: So how are – or should – market incumbents be reacting to the threats of open source rivals?
A: Well, there’s really no single answer. We’ve already seen as mentioned the release of free versions of their products, but from the conversations that I have these are not making much of a dent in the adoption of open source alternatives. Likewise it’s going to be tough to win on a price footing. Recently rumors have circulated that Oracle was considering a can’t-beat-em-join-em scenario, but I’m no more positive on that approach than is Stephe.
Ultimately, I think you compete effectively by having a better product for the market, with differentiated features. Maybe that’s an open source alternative, maybe it’s something SaaS based, maybe it’s something really cool that we don’t even know about. I know if I was IBM, Microsoft or Oracle, I’d be spending a lot of time thinking about why my products – nor those of my competitors, both open source and not – aren’t meeting the needs of customers. That’s the real opportunity.