Open Source Commentary from Navica's CEO, Bernard Golden
August 2006
In This Issue
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Post-Scarcity Software Economics: Support
is the New Marketing
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Navica News
Post-Scarcity Software Economics:
Support is the New Marketing
In his recent address to the Software 2006 Conference, Ray
Lane outlined the miserable state of the software industry:
5,000 private and public companies, of which the top 15 account
for 85% of industry revenues; of that 15, three represent
75% of all profitability, and one (Microsoft) is responsible
for 50% of total industry profitability.
Even worse is the fact that each year venture capital firms
plow another $5 billion into software startups, further increasing
the pile of zombie companies all desperately scrambling to
get the attention of an increasingly inattentive end user
population.
Underlying all of this activity is a blood lust for the single
most thrilling aspect of the software industry: enormous margins.
Margins higher than any other industry ever invented. Margins
so high that successful software companies can spend –
literally – billions of dollars on pointless initiatives
with scant regard for normal returns on capital (can anyone
say MSN?). There's just one problem with 99% of the existing
companies and most of the to-be-funded companies. They're
predicated on something that has disappeared from the software
industry: scarcity.
What is scarcity and why is it important?
Think Perrier in the Sahara desert. How much is a bottle
worth if you've been wandering without water for three days
in 110 degree heat? It's worth every cent in your pocket,
your Visa card credit limit, and every dime you can beg, borrow,
or steal. Scarcity is the perfect meeting of inexhaustible
demand with extremely limited supply. In that perfect meeting
comes the willingness to pay exorbitant amounts to solve a
problem.
For software, that perfect meeting was the substitution of
automated processing for increasingly expensive manual labor.
Accounting software that allowed you to get rid of 50 or 100
or 1000 people needed to shuffle paper and keep ledgers. Database
software that kept track of all the information that used
to go in file cabinets manned by hundreds of clerks. Reporting
software that retrieved information at a moment's notice without
having to employ an entire analysis department. In that world,
software was a bargain, and companies didn't mind throwing
enormous wads of cash at software vendors.
Scarcity is typical of an emerging market like software used
to be. The skills to build a solution are not widely available
and it's difficult to achieve acceptable performance, so it
makes sense to centralize high-priced talent that can focus
on building a capable product (Clayton
Christensen refers to this as the need for an integrated
solution caused by the poor performance characteristics possible
with nascent technology). Furthermore, the capital goods (hardware,
networking, even Silicon Valley office space) required to
create the integrated solution are expensive, so significant
equity investment is necessary to fund creation of the product.
Because the solutions are new and complex, expensive sales
and marketing efforts are required. And, of course, there
is tremendous change as innovation takes place offering whole
new types of products to the marketplace, ensuring that the
latest and greatest is always scarce.
Less recognized is the software scarcity present in the user
base. Here, in a mirror image of the vendor side, is a skill
shortage. Not only in the easily-understood capabilities of
programmers, system administrators, and capacity planners
needed to install, configure, and manage the software, but
in more fundamental capabilities like understanding what the
most appropriate applications for a new technology are; high
ROI scenarios for the technology; how to integrate the new
technology into existing business processes. In other words,
the scarcity on the user side isn't just about specific technical
skills; it's much broader, implying a shortage of general
knowledge about how the new technology can be used at all.
In a world of scarcity, the business practices of the enterprise
software industry make sense: enormous marketing efforts to
educate a potential user base; direct sales outreach via high-pressure
sales people and significant technical pre-sales efforts;
and, above all, a high-margin business model predicated on
early identification of fruitful pipeline opportunities and
big-ticket wins.
Key to all of them is that software must be sold, putting
an emphasis on sales and marketing efforts. To use a football
metaphor, enterprise software goes for the long bomb, looking
for high payoffs. Lesser or low probability opportunities
are discarded in the pursuit of quota-busting deals.
There's only one problem with this scenario: we're no longer
in a time of software scarcity.
On the user side, software is now a regularized process.
With over twenty years of experience in creating and implementing
systems, users are very familiar with software and need much
less hand-holding in terms of education and selection. Most
companies (certainly those of a size to represent quota-busting
deals) have large IT staffs skilled in architecture and design.
So now, instead of seeking guidance from vendors, they are
much more likely to be focused on the lowest price to meet
their self-defined needs. In any case, they're sick of the
vendor-knows-best, sign-here, best-of-luck-with-the-implementation
software business model.
It's on the vendor side, however, that the biggest changes
have happened. The capital costs for software development
have dropped through the floor. A PC robust enough to write
real software is available for $500 today. And the expertise
to write software is no longer scarce. It's everywhere.
Take Asterisk. It was started by one guy who wrote it as
a side project for his main business which was going to be
Linux support. He needed a phone system, so put together Asterisk.
How does that stack up against the huge development teams
a company like Avaya maintains is part of its unique value?
The expertise isn't even located solely in the US. JasperReports
was written by a guy in Romania. One guy. In Romania.
Far from a scarcity, the world is experiencing a glut of
software. And more gets created every day.
Which means the business proposition for software has to
change. In a time of scarcity, customers are willing to pay
nearly anything – up front – in the hope of solving
their problem. In a time of glut, customers will pay nothing
until it's clear that the software will actually solve their
problem.
In other words, customers will only part with money once
the system is in production. Put another way, since they have
so many choices, until they've actually got one in and running
– and they're dependent upon it reliably working --
they don't need to pay anything.
Which means the primary task for any open source company
seeking to make money from software is to make it as easy
as possible for customers to adopt their software. Reduce
the barrier to adoption. Anything that doesn't contribute
to that is, at best, a distraction, and, at worst, counterproductive.
The rules have changed in the software business. The only
way to make money is to solve real customer problems. And
you don't get paid until you accomplish that task.
So why are open source companies falling back on the same
tired tools from the enterprise software game? The “briefing
opportunities” offered up by PR firms to the jaded trade
press? The thinly-veiled marketing pitches delivered to inattentive
audiences at barely-attended conferences? The elaborate business
development efforts designed to produce “strategic relationship”
press releases not worth the electrons they're carried on?
The mountain-to-Mohammad analyst briefings aimed at obtaining
the coveted “visionary quadrant?”
Just like the old joke about the drunk looking for his car
keys underneath a streetlight, despite having lost them blocks
away, “because it's easier to look here with the light,”
open source companies are pursuing the traditional paths because
they're the ones everyone knows. The individual contributors.
The executive team. The venture capital investors. All encouraged
by the rest of the technology ecosystem – the PR firms,
the conference organizers, the analyst firms, the ... consultants.
Everyone insisting on playing the game by the same rules,
despite the manifest evidence that it's a completely different
game.
So what's an open source company to do? It's clear that business
only comes from people committed to using the product –
and only from a minority of them (estimates of the percentage
of customers using an open source product in production that
actually make some sort of purchase range from one in 10,000
to one in 100). So focusing on those users who download the
product and go on to put it into production is vital.
There's only one problem: There's no way to know which downloads
turn into production users. In the enterprise world it was
easy. Before you gave access to the product, you asked a lot
of questions like “When will you go into production?”
“Do you have budget?”
In the anonymous download world, you never know who's going
to turn into a real prospect. But one thing you know for sure
is that if they can't get into production, you'll never see
a dime. So the single most important marketing task is actually
product support – making it possible for users to get
dependent upon the product.
What does this look like in the real world?
First, make the product as easy to install and configure
as humanly possible. Because we live in a time of software
glut, if a user can't get the product up and running quickly,
they'll move on and download another product. Poor usability
is like throwing marketing leads away.
Second, make all your interactions with the user meaningful.
If you offer webinars, have them deliver actionable information.
This typically means technical information targeted at extracting
maximum value from product use. MySQL does a good job at this;
every week I get an offer to learn things like how to set
up a clustered architecture – key teachings to help
me get more value from their product.
Third, and most important, help people use the product. This
means participating in the support mailing lists and forums
and assisting people struggling with the product. One of the
most disturbing things I've encountered in the past six months
is two different open source companies that refuse to participate
in users forums for their product. They consign non-paying
users to the purgatory of the community, saving their efforts
for commercial users. Their attitude is that non-commercial
users deserve a second-class experience. Besides being unethical
and counter to the ideals of open source, it is completely
bone-headed.
No matter what the business model is, open source-based companies
only get to engage in commercial transactions once a user
is committed to the product.
The world of software scarcity is over. Software glut is
a fact. Open source companies have to focus on making their
product easy to use and helping users get it into production.
That's where revenue lies.
Navica News
You can hear me speak at these upcoming events:
August 14, 1:00 p.m.: LinuxWorld Health Care Day. Panel Moderator:
"Opening Up Healthcare Markets with Open Source"
September 26, 9:00 a.m.: Virtualization Seminar, New York
City
October 26, 1:00 p.m.: "Using Virtualization in Your
Data Center", Data Center Decisions Conference, Chicago
You might be interested in reading my blog posts
at CIO Magazine:
Our Visit to the Intel Museum
I'm from IT and
I'm Here to Help
Net Neutrality
and Hardware Hacking: An Object Lesson in Open Source
Open Source at
the Heart of the Enterprise
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