The Worth of Open Source? Open Question

The IPO plan of Swedish software company MySQL is eagerly awaited by fund managers, who want more benchmarks to gauge open source's value

by Aaron Ricadela

For all the success of open-source software—developers the world over flock to the code available freely over the Internet—its purveyors able to thrive as public companies are few. Linux operating system seller Red Hat (RHAT) has generated billions in value for investors, but its shares have slipped 3% in the past year amid new competition. Novell (NOVL), which supports a version of Linux, has been criticized for striking a cooperation deal with Microsoft (MSFT) seen by many as a threat to the spread of Linux.

That small community of open-source stocks may soon be widening. MySQL, a fast-growing maker of database software used by some of the Internet's most recognized brands, is preparing to file for an initial public offering, perhaps as soon as late 2007. The offering could value the company at between $600 million and $1 billion, according to sources, and inject some pep into a tech IPO market that's seen only a handful of successful offerings in the past year. Credit Suisse (CS) is a top contender to lead the underwriting of the transaction, BusinessWeek has learned.

Tough Mindset

An S-1 filing by the Swedish software company, which grew more than 50% in 2006, to about $50 million in sales, and broke even for the first time, also could give investors a new yardstick to measure the value of open-source software, which lets users modify its code to suit their needs. "Red Hat really is a bit of a lone wolf out there in terms of public open-source companies," says Jim Zemlin, executive director of the Linux Foundation, a trade group. "Fund managers are clamoring for other benchmarks to measure open-source software companies."

Outside investment and tech circles, though, most people haven't heard of MySQL, which closed an $18.5 million round of funding in 2006 to raise its total venture backing to $39 million from investors, including Benchmark Capital (see BusinessWeek.com, 2/13/06, "MySQL Answers Back With $18.5 Million"). Yet MySQL's fast, inexpensive software is used by such Internet heavyweights as Google (GOOG) and Yahoo! (YHOO), and it's making inroads into more traditional companies. Going public could give MySQL more credibility with brick-and-mortar shops, and furnish it with currency for acquisitions. "The open-source model, as Red Hat has proven, can be extremely profitable," says Kevin Harvey, a general partner at Benchmark Capital, and MySQL's chairman. "It's not a story of profits at first; it's a story of profits you'll generate as you grow."

And MySQL would like to see considerably more growth, even before selling stock to the public. It would do that in part by upping the percentage of paying customers. Of the roughly 11 million copies of MySQL in use, the company only gets paid for about 1 in 1,000, underlining the risks of the business model governing much of open-source software: Give it away for free over the Internet and then charge large commercial users for technical support. "There are many users who will just never, never pay," says MySQL Chief Executive Marten Mickos. "It's not like we can just go in there wholesale and change that mindset." Making matters tougher, Microsoft's affordably priced SQL Server database competes with MySQL. And database software vendor Oracle (ORCL) has made inroads into the small and midsize business market, helping it gain share.

Many Adherents

MySQL, which a few years ago rejected a takeover offer from Oracle, is undeterred by the challenges. "We're working toward an IPO," says Mickos, a sturdy, sandy-haired Swedish Finn who migrated to Silicon Valley in 2003, two years after he became CEO following a series of executive posts in Europe. Mickos, who conducts business fluently in English, German, Swedish, and Finnish, has known MySQL's founders, including Monty Widenius, since 1981, when they studied graduate physics together in Helsinki.