Thursday, March 27, 2008

Commercial Open Source - It's Been Figured Out

Commercial open source has offered a revolutionary business model for enterprise software. Rather than exorbitant high prices, long sales cycles, impossible to install software, systems engineers, and vendor lock-in, commercial open source software is self-service. By the time a customer pays for it, they have already identified a problem, found the open source software as a possible solution, evaluated it, deployed it, and rolled it out to their organization. Commercial open source companies save in recruiting costs by hiring developers who have already found their project and are proven contributors.

The cost of hiring, marketing, distribution, and sales has gone to near-zero, and those savings are passed on to the customer. Traditional, bloated proprietary software can not compete with this model at all, where even their yearly maintenance cost is more than the cost of the commercial open source equivalent.

There have been three commercial open source successes to date: Red Hat, JBoss, and MySQL. By success I mean companies with a lot of customers, a lot of revenue, and a high liquidity event. There are a slew of commercial open source companies with significant traction that are following in their footsteps, including Alfresco, SugarCRM, and Mulesource. All of these companies are all remarkably similar in three critical ways:

- Direct Replacement for a Proprietary Equivalent
- Easy-to-Install Server
- GPL License

Direct Replacement for a Proprietary Equivalent

The successful commercial open source companies all offer direct replacements for existing proprietary software. UNIX operating systems, J2EE application servers, and databases are very quantifiable pieces of software with well known features and benchmarks. The open source up-and-comers that offer content management, CRM, and ESBs are almost as quantifiable and replace well-known, established proprietary software.

The downside to this requirement is that the successful commercial open source projects are frankly not that innovative technically. Startups can innovate on either technology or business model, and open source is clearly a business model innovation. While there are some edge features in Linux/JBoss/MySQL that are not available in Solaris/WebLogic/Oracle, overall these are not products that represent a technical revolution. Before you flame me on this one, contrast the difference between the software that is getting replaced by open source and their predecessors: Solaris/WebLogic/Oracle/etc. were huge technical leaps over VMS/PowerBuilder/Collanet/etc.

We really learned the lesson on this at ActiveGrid, where we put a ton of energy into innovating on top of the LAMP stack, but we were not a direct replacement for an existing product. It is a lot easier to sell JBoss or lightweight Java into a WebLogic shop where they can compare apples to apples, than selling a new way of doing things like the LAMP stack.

Easy-to-Install Server

Servers are traditionally very unwieldy pieces of software that require a lot of planning, expertise, and vendor systems engineers to get installed and working. Marten Mickos told me years ago that the key to MySQL's success was their 15 minute install policy - that users should be able to install the software and be up and running within 15 minutes. Taking what used to be complicated, cumbersome server software and making it a lot easier to install and administer is now a hallmark of successful commercial open source software.

There have been a few open source successes on the desktop like Eclipse and perhaps OpenOffice, but note that no one is making significant money on these, so they are not commercial open source successes. Firefox is bankrolled by Google as a hedge against Microsoft. Software that installs on the desktop is held to a very high standard vs. server software, where installers are usually a bit more sophisticated and forgiving.

GPL License

After the first set of commercial open source successes were all GPL licensed, the next set of companies all switched their licenses to GPL from licenses like MPL+Attribution. The GPL requires that changes to the application be shared, but creative attempts to force the user's work product to be shared have been abandoned, (like MySQL's GPL PHP driver that would force people to either buy the commercial version or share their PHP app). Enterprises are now comfortable with using GPL software and understand they will not have to share their work product, just changes to the open source software itself. Most enterprises are already running Linux, JBoss, or MySQL somewhere, so it is easy to get new software approved that is using the same license. If the license is different, the advocate in the organization who is trying to bring in the open source software has to go through legal review with their compliance office, etc., which is a pain, so they are likely to either shelve the solution for a while or just try using something else.

Getting software into an enterprise has evolved over time. In the 80's and early 90's, enterprises had to pay for every bit. In the late 90's and early 2000's, companies like NetDynamics where I worked gave tooling away for free and charged for servers. Now companies give servers away for free with the GPL license and charge for tooling.

Conclusions

At the beginning of a market, there is a lot of debate as to the right approach. When a market matures and there are successful products, it is hard to argue with their success. Clearly the path to commercial open source success is to target proprietary server software with known features and benchmarks, create a self-service and easy-to-install equivalent, and offer it under the GPL license with a commercially licensed option. There are now numerous companies following this recipe in every niche of enterprise server software.

What's Next?

Software-as-a-Service is a business model that is using open source server software to eclipse open source itself. Rather than deal with deploying and maintaining software at all, it is increasingly appealing to businesses to simply outsource a particular application to a vendor and access it through a web browser. Most of the innovation I am seeing nowadays is in this category, which is taking on both desktop and server software.

2 comments:

Asa Dotzler said...

>Firefox is bankrolled by Google as a hedge against Microsoft.

Google doesn't "bankroll" Firefox at all. Firefox sends traffic to several search search services and those services pay Mozilla for that traffic. Google is the default so it gets the most traffic but there's no charity here on their part, it's not underwriting or "bankrolling" at all.

- A

Peter Yared said...

Asa - I spend most days predominately using Firefox and Thunderbird, and am big fan. Last I heard Mozilla gets 85% of its revenue and is borrowing office space from Google. The rumor mill is that Google pays Apple barely anything for Google searches from Safari, the very thing it pays Mozilla for. So if "bankrolling" is not the word to describe all this, what is?

Regardless, my only point here is that Red Hat, MySQL, and JBoss meet the traditional definition of a successful software company, with avery broad revenue bases from numerous enterprises.