Dan Farber has collected a range of commentary on two important open source business questions: namely, will open source pummel proprietary software vendors and does it have a long-term future? I guess I find these questions a bit old-fashioned because I do open source software, and watch open source beat proprietary software every single day. I sell into an increasing number and range of enterprises who view open source as a viable, competitive reality. I see it knocking down the doors of every major enterprise on this planet (and several more on Mars). And, importantly, I see it making a lot of money for those selling it.
I'll tackle a few of the misguided criticisms of open source dominance in order that Dan quotes them. (Dan is a super-smart guy, and well-versed in open source. So, I'm not sure if he's citing others to support his own criticisms or if he's just putting them up for me to pillory. Either way, pillory I will. :-)
From Jason Wood:
Application Servers: LAMP is certainly massively popular, but since when have Java server vendors started reeling? Oracle's J2EE app server has become a $1 billion business in just two years, and last time I checked Oracle was still printing money with 40% operating margins. Meanwhile BEA continues to chug along thanks to a refined marketing message around SOA. Ironically, JBoss, the flag bearer for enterprise class open source app servers, is the one struggling. Red Hat (which acquired JBoss recently) just guided to a $0.04 per share negative impact from JBoss in FY07.In response to Jason, the application server vendors are reeling, starting with the weakest of the bunch. This will always be the case: the leading incumbents will continue to add market share even as open source chomps away at the weak sheep in the fold. This is precisely what is happening in the server operating system market today. Windows continues to gain as Red Hat and Novell eat away at the weakened Unix vendors. At some point, Red Hat and Microsoft will go head to head. I think Red Hat/Linux will win. TBD....
So, again, we are seeing the application server vendors start to struggle against JBoss. But keep in mind that it will still be several years before JBoss will be crowned king, just as it took IBM and BEA years to create and own the market. Enterprise markets move slowly. Just look at JBoss' momentum, though, and you'll see the writing on the wall.
As for JBoss being the one hurting, I'm not sure where Jason possibly got that, because the data point Jason notes is not indicative of JBoss' financial health. I know their financials. The company is knocking the ball out of the park. While it's true that the company hasn't been profitable in the last two years (though it used to be), this is a result of aggressive growth, and is normal and healthy. He's describing a universal reality for all software startups: top-line growth with good management eventually leads to bottom-line growth. But not immediately.
Dan then quotes Niel Robertson of Newmerix, who slaps at the "service-based" business models allegedly used by open source vendors:
The problem with this model is that in the long run this makes open source companies look like professional services companies. If their margins start to reflect services companies (10-25% type of thing) then their valuations will go the same direction. This will cause a huge problem for the open source marketI couldn't agree more, Niels, except that I don't know which open source software market you're talking about. Who, exactly, still uses the model you describe? I can't think of any of the leading 20+ vendors who use a services-based model (including JBoss). So, you waste a fair amount of ink on a strawman open source company that doesn't exist.I am actually going to predict that this will happen. I think the market is still infatuated with the growth rate and potential of open source companies from a revenue side but is not considering the profit side (very few are even marginally profitable). Thus service-oriented open source companies are getting valuations that look more like software companies than services companies....
As the market looses [sic] interest in top line growth and rationalizes valuation against the bottom line, the service-based open source companies will either need to find a more classic enterprise software business model which gets them higher margins or accept their services-related fate and the low revenue-multiple valuations that come with it.
What is Red Hat selling? Software. What is the guarantee behind that software? Service. But the company's margins (and valuation) reflect the fact that it is a software company. (It's still shocking to me how poorly understood Red Hat's beautiful business model is.)My own company, Alfresco, has 80%+ margins and is doubling revenues quarter-over-quarter. Yet we're 100% open source. SugarCRM is inking deals with six zeroes behind them at 80%+ margins. They're an open source software company, too.
The problem I have with all of this commentary is that it's just that: commentary. Those of us actually doing open source software companies know that the services model went out several years ago, and that there are handsome profits (yes, profits) to be made today while simultaneously improving value for customers and saving them money. As I presented at OSCON and wrote recently, open source provides a low-cost launchpad to take on incumbent vendors and beat them on its own terms.
I won't go on with Dan's blog, because the more interesting question (one not asked or answered there) is, "What will be the primary bases for competition once everything is more (or less) open source?" Today, I heartily enjoy competing against my slow-learning proprietary opponents. There isn't a thing (besides incumbency, and that does go a long way, though not forever) going in their favor. They have the wrong business model (for customers, who are wising up), the wrong licensing model, the wrong everything. All they have is incumbency, and I'll take pieces out of that quarter after quarter, year after year, until we move into their offices at a lower cost of sale, lower cost of development, and significantly better value for the customer.
It's not about price. It's about value, as Michael Tiemann said at OSCON. Jeff Nolan might be right about proprietary vendors with big warchests being able to win a price war. What they can't win is a value war, because they are structurally incapable of competing well on that ground. I'll take my proprietary competition every single day on value. Already am, in fact.
Now can we go back to more pressing questions like, will Arsenal win today? Let's hope so. That, at least, is in doubt. The software war is not. Open source is already winning. I can't see anything to stem its rising tide.
Posted by Matt Asay on August 8, 2006 10:11 AM
