Open the Door for Open Source Deals

The business models associated with open source software -- code that is open to developers and freely distributed -- are rapidly evolving, but still nascent. Recent events show one thing clearly: there is money to be made in open source. Not content to rest on their laurels while smaller open source players garner market share and revenue, both Oracle (ORCL) and Red Hat (RHAT) recently struck deals that have thus far proven to be wise.

We will no doubt see more open source acquisitions. These acquisitions are more likely to benefit than harm the open source movement and will further disrupt legacy software vendors.

In February, Oracle acquired open source embedded-database company Sleepycat for an undisclosed amount, and in April, Red Hat acquired Java application-server developer JBoss for more than $350 million. While these acquisitions may represent simple examples of consolidation in the software market, they also reflect much deeper strategies -- ones designed to heighten adoption of open source software on a much grander scale, and to take market share away from Microsoft (MSFT).

SUBSCRIPTION BASED. Oracle has been very successful in its long-time goal to own the entire database market, and Sleepycat's embedded database fills a profitable niche that Oracle didn't serve. Oracle now gets to dip its toes in the open source waters with a company that has over 200 million downloads of its core product, a thriving community of developers, and a management team experienced in nurturing an open source ecosystem.

The deal also speaks to Oracle's recognition that revenue can be generated with a subscription support model, common to open source businesses, rather than through upfront license fees.

Red Hat aspires to upend Microsoft's dominance in enterprise computing and therefore needs to offer an equivalent combination of operating system, application server, and database -- commonly referred to as the "software stack." With the JBoss acquisition, Red Hat offers a robust Linux operating system and a Java application server in addition to open source standards, such as the PHP programming language and Apache Web server. Add a database to the mix (or just use the readily available MySQL) and Red Hat holds the same cards as Microsoft.

FRIEND OR FOE?. Interestingly, the open source community was largely in favor of the Red Hat-JBoss combination, citing the advantages of having one vendor of both Linux and the leading Java application server. But Red Hat's acquisition didn't sit entirely well with Oracle, which according to published reports, including one by BusinessWeek Online, had been in talks to buy JBoss previously.

In fact, just a few weeks after the Red Hat deal was announced, Oracle Chief Executive Larry Ellison said he wanted Oracle to control a "full stack," including the Linux operating system, portraying Red Hat as more of a threat than a partner. This is a company that had already embraced Linux and open source; so when Ellison starts talking about open source companies in terms that suggest a threat, it's time for the rest of the market to pay attention.

To the extent that consolidation can continue, it probably will. Right now there are a few successful open source companies such as SugarCRM, MySQL, and JasperSoft that matter to big software vendors, primarily those companies that contribute to the larger enterprise ecosystem. Consolidation will be driven by big vendors that have only certain pieces of the software stack.

COMMUNITY TRUST. But this consolidation is not necessarily bad. It will increase open source adoption as entrenched vendors like Novell (NOVL) and Sun Microsystems (SUNW) figure out better ways to monetize their Suse Linux and OpenSolaris operating systems, respectively, and Oracle and IBM (IBM) offer products on top of Linux and open source applications. Acquisitions from vendors of this caliber also reflect the impact of open source on proprietary competitors, in terms of both revenue and market share.

Open source projects rely on a community of developers and end users for success. The community provides everything from product roadmap input to code donations to testing. It also helps form the basis of sustainability for projects and ultimately the associated business model. Companies which have a two-way dialogue with the community reap rewards not achievable in a closed development model.

BEAUTY PART. So far, both Oracle and Red Hat have done well managing their own communities. These acquisitions are merely extensions of what they are already doing. Some fear that commercial interests will sully the community or put projects at risk. These fears are largely unfounded. Open source development is driven primarily by two things: developers solving complex problems and the embrace of the open source philosophy.

In the end, the beauty of open source is the ability of developers to go online, download some code, and start creating their own application, operating system, or business model. Open source development models have been proven to drive innovation, lower costs, and disrupt markets. Vendors who discount open source as a cheap copycat of proprietary software are missing an enormous opportunity. Those who embrace it are poised for further growth and success.

Dave Rosenberg is principal analyst at Open Source Development Labs, where he analyzes market trends in the Linux and open source software industry. Rosenberg also works as a journalist and is CIO of investment research and shareholder advisory firm Glass Lewis.

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