Volume: Money or Misdirection?

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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.


  1. Despite zany ticker symbols, and other hand-waving, let’s not forget that Sun is primarily a hardware company. I think the MySQL acquisition was about selling more hardware.

    During the dot-com hay days, there was one platform everyone used their hard won VC dollars to backend their online flower boutiques with; Oracle running on Solaris. There was a reason for that, aside from insane sales tactics and a surplus of available VC dollars for licensing (and that it meant you got to throw Oracle and Sun up on your “Valued Business Partners” ppt slide). Sun and Oracle got together to make that platform *scream*. They locked engineers in a room together, told them to play nice, and printed out the subsequent cash.

    In a short amount of time, MySQL will similarly scream on those cores within cores we keep hearing about. Jon’s going to lock that MySQL team in with his existing engineers, and in a year or so, not only is he going to have the software sales associated with any MySQL conversions, he’s also going to have the hardware sales associated with being the premier MySQL platform for all that beautiful open source market share. It’s right out of the Apple playbook (also, fundamentally a hardware company), and it’s fucking brilliant.

  2. I like the mixture of open source and economics!

    I disagree with the first comment here – any vendor in the community could fork and screw up that vision (consider that MySQL is not like Apple on IP).

    Also, consider the volume of the data or applications built for other database products already. Everyone keeps talking about the volume of MySQL instances, but really think of the volume of paid for database solutions. If I can get Database A under GPL from Sun who I’ve never bought a database from… ever, or I can get Database B from Oracle which every vendor has certified to and the Oracle Database is already all over my datacenter… am I really likely to switch?

    My point? The volume of paid, production data out there is locked away in Oracle/DB2/MS SQL. It’s very difficult for companies to move that data. At best, MySQL is targeted at new data, new applications and that will be extremely difficult to capture enough share of to ramp up and provide returns on a billion dollars of cash invested in Jan 2008. The financial model does not work at $1B cash, even if you ascribe to the theory that volume eventually drives participation in the market, driving greater revenue opportunity, other investment options could have offered higher returns over the next 5 yrs…

    Oh, and MySQL already screams on any other hardware gear. Most customers don’t care about performance unless it’s at least 10x. I don’t see how Sun’s processor platforms could ever achieve that (consider x86 and also the POWER6 for instance already kill Sun’s processors). Without Niagara/SPARC to offer a performance advantage, that relegates them to x64 based hardware from AMD and Intel that every other vendor already has. Sun could try filesystem tricks, but so can anyone else – they have the same code Sun does.

    There’s a lot of speculation now, but I think the proof will be 2010 when MySQL is supposed to be accretive… by how much will it be accretive and can that ramp to provide any sufficient payback that would justify any credible financial model… only time will tell. Given they’ve been at this for quite a few years already and not made it work… it will provide an interesting challenge.

    I must admit, this is a very valiant effort to recapture the award from Jeff Gould! A third recount has begun.

  3. […] was reading Stephen O’Grady’s commentary on open source companies and their valuations prompted by the recent acquisition of MySQL by Sun […]

  4. As a business you have two choices
    – Get niche (implying Custom and uniqueness)
    – Get volume (implying commodity)

    if you treat EC2 as a customer of mySQL then focussing on volume’s is a losing game . You will have to work like the GE’s of the world and learn how they do their Turbine business. You might give a prototype free but ultimately you will ask your customer to pay and your sales pitch is going to be based on performance and quality. Price performance ratio requires that neither the numerator or the denominator can be zero for any reasonable comparisons.

    If you treat Enterprise’s and the traditional IT model as your customer then volume is what you want to go for. Now open source as a business is ultimately a market capture strategy. What happens when you have achieved the market share is the question mySQL needs to answer. You cannot suddenly charge charging for your product. I went to the JBoss website recently after about maybe 6 months. I got the feel that there the Buy word on every page. It is ultimately turning into a subscription based product. Same situation – what does a business do when it has got the market share it wanted.

  5. Missed a point :

    I think mySQL should now probably come out with a licensing scheme that somehow make’s scenario one customers pay.

    i.e IF Amazon says that it will provide support contract for mySQL instances. it should be prohibited unless there is a back back to contract with mySQL substantiating it.

    So essentially – resellers of mySQL should be prohibited.

  6. […] not be the sole significant focus of engineering efforts and R&D dollars. In the long run volume wins. Sometimes its better to run with the pack. I also want to point out that innovation capture hurts […]

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