Waving the Open Source Banner Isn't Enough

Posted by: Sarah Lacy on November 9, 2005

Matt Asay has an interesting posting about the Ingres spin out. He posits that a serious foray by Ingres finally gives companies a real, competitive database market again. More interesting were his comments about the need for multiple vendors providing specifically open source versions of business software. Really? Is the market there yet?

He writes, "This is a good thing, regardless of Ingres' ultimate success. It will grow MySQL's and EnterpriseDB's revenues, because it will increasingly legitimize the open source database, and it will also drive these open source companies to continuously improve and differentiate themselves. It won't be enough to coast along with the "open source" tagline and expect that, alone, to bring revenues. (Not that either company had been doing so - I'm not making that argument.)"

I will make that argument! I spent months putting together this special report for BusinessWeek Online about where the open source revolution was heading next. And although they wouldn’t come out and say it easily 90% of the young companies I talked to argued their entire value add was being "the" open source alternative to proprietary software. In fact, that's the reason most of these companies are getting funded to begin with. If we enter a world where that’s no longer enough, there are going to be a lot of disappointed VCs and abandoned companies. (Some would argue there will be anyway, but that’s a whole different blog…)

If you agree with Danny Rimer (which not everyone does) that open source startups should only try to replace commodity software at a cheaper price-- how will all these different open source companies compete with one another? Don’t they risk CIOs just throwing up their hands and saying, “Gee, I have no clue which one is better. I’m sticking with the proven proprietary winners.”

Consider Red Hat and Novell. No one wants there to be just one Linux company—well, except maybe Red Hat. But Novell is having a hard time finding its footing in a market that’s growing. OK, there are many who blame the management. But how should they compete with Red Hat in the market? You could argue that Novell is better at supporting corporate environments that have a mix of Linux and Windows. But the two technologies themselves just aren't that different. It really comes down to marketing and partnering, right?

And that's Linux-- perhaps the only truly proven big market for open source software. I'm not saying open source isn't going to revolutionize the software business. It is and has already. And I’m not saying there aren’t dozens of successful businesses to be built. But I think there are serious questions about where the next big open source company is going to come from—even if they have the market to themselves, let alone compete with a half dozen other, say, open source CRM providers.

Is there a category of software big enough, mature enough and frustrating to customers enough to give rise to the next major software powerhouse-- let alone multiple software powerhouses?

Reader Comments

Lindsey Rockwell

November 10, 2005 4:45 AM

How come you never mention Debian and Ubuntu?

Is it because it's all free and thereby
potentially dangerous or is it pure
ignorance?

One of the original reasons for the very
existance of Open Source Software is that
it is NOT a business!

Of course then you don't write about or...?

Regards:
Lindsey

Jeff Minich

November 19, 2005 6:08 PM

Hello Sarah, great questions on evolving open source market. Here’s my take on some of these issues:
BW: More interesting were his comments about the need for multiple vendors providing specifically open source versions of business software. Really? Is the market there yet?

No, not just yet, but it’s very close. According to AMR less than 20% of businesses with under 1000 employees have adopted enterprise applications (CRM, ERP, etc). The question that follows is why haven’t they adopted? The answer is ROI, most of these smaller companies have less at stake when it comes to adoption and are unwilling to make huge investments in technologies that do not have a tangible ROI. Less perceived utility means a lower equilibrium price point in this space. As more low cost open source alternatives enter the market and trusted brands evolve, this segment of the market will adopt enterprise applications. Open source will make its strongest showing, in the short term at least, with new adopters, not businesses looking to switch from existing proprietary applications. The switching costs for those with existing infrastructure likely exceed any cost benefits derived from switching.

BW: And although they wouldn’t come out and say it easily 90% of the young companies I talked to argued their entire value add was being "the" open source alternative to proprietary software. In fact, that's the reason most of these companies are getting funded to begin with. If we enter a world where that’s no longer enough, there are going to be a lot of disappointed VCs and abandoned companies.

You are correct here; there will be a lot of open source/vc roadkill. Many in the current crop of ‘Open Source’ funded companies remind me of the Internet ‘Push’ companies that got funded back in the Web 1.0 heyday. Even though these companies had the whole internet content distribution thing ass-backwards they still got funded because hey who knew? Like ‘Push’ internet companies, the ‘Open Source’ companies who are pushing bits, which are necessarily commoditized by the open source dynamic, rather than best of breed services wrapped around the bits, have the whole business backwards.

BW: If you agree with Danny Rimer (which not everyone does) that open source startups should only try to replace commodity software at a cheaper price-- how will all these different open source companies compete with one another? Don’t they risk CIOs just throwing up their hands and saying, “Gee, I have no clue which one is better. I’m sticking with the proven proprietary winners.”
Or even better, what about a single-source trusted provider for an entire eco-system of open source applications?

CIO’s are not going to want to have to navigate multiple open source startups to add these technologies to their infrastructure. They’re going to look to one trusted provider, companies like SpikeSource for one-to-one enterprise deployments and iRadeon for one-to-many on demand deployments in the SMB space.

BW: But how should they compete with Red Hat in the market? You could argue that Novell is better at supporting corporate environments that have a mix of Linux and Windows. But the two technologies themselves just aren't that different. It really comes down to marketing and partnering, right?

Yes, it does come down to marketing. A trusted brand in open source business applications, a la Red Hat, has to emerge from the marketing and partnering process before widespread adoption takes place. This will be as much a brand war as it is one of technology.

BW: Is there a category of software big enough, mature enough and frustrating to customers enough to give rise to the next major software powerhouse-- let alone multiple software powerhouses?

Yes, think plug and play open source business applications. That is customers go to a provider who can assemble disparate applications, ie CRM, ERP, Accounting, Support Desk, etc, from the open source world and then deliver them in a seamless, cohesive package that eliminates the complexities of a pure open source solution. It’s coming soon to a browser near you….

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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